Fiscal Policy refers to the policy of the government under which the instruments of taxation, public expenditure, public borrowing are used to achieve various objectives of the economic policy.
Objectives of Fiscal Policy :
Basic objective of fiscal policy for developed countries are as follows.
1. Economic stability :- It is an important objective of a sound fiscal policy. It means the level of economic activities are maintained at a stable level so that there is no fluctuations in output, employment and price. stability means price stability also, so that the situation of inflation should be curbed and deflation should be avoided.
2. Full employment :- J.M Keynes regarded fiscal policy as an instrument to attain and maintain full employment in the economy.. To achieve this goal he suggested that public expenditure has to be incurred in a planned way to finance public work programmes and provide social security measure so that the persons who are willing to work at the existing wage rate are able to get work.
Objectives of fiscal policy for underdeveloped countries.
1. Economic growth:- It is a process of increase in the real per capita income of the country over a long period of time. Rapid economic growth is the fundamental objective of the fiscal policy To achieve this objective fiscal policy mobilizes the resources into the productive channels.Govt. encourages the private sector investment and promotes investment into socially desirable channels.
2. Equity :- In a welfare state fiscal policy should be used as an effective means of achieving the goal of equity i.e. making the distribution of income & wealth equitable. Taxation is a very important tool to achieve the goal of equity. It can be done in the following ways:
(i) The Government should spend more on social security schemes
(ii) Govt should spend more in setting up industries in backward regions. the tax system should be made progressive
(iii) Items of luxury should be taxed heavily and the items of necessities should be subjected to low tax
3. Attaining external equilibrium :- It means equilibrium of balance of payment it means export of the country should be equal to the import of the country. To achieve this objective fiscal policy is used to do some changes in the taxation policy of the country regarding imports and exports. Import should be taxed heavily and export should become cheap by reducing taxes.
Instruments of fiscal policy :
1. Public Revenue (Taxation):- It is not only used as a source of revenue to the government. But also for achieving other objectives such as to reduce income inequalities, mobilization of resources and to check price fluctuations etc.
2. Public Expenditure:- By raising or reducing the volume of expenditure govt. may divert the economy to the desired ends. eg:- In the time of inflation by reducing public expenditure govt. can reduce the level of aggregate demand and thereby price rise can be cheeked. deflation can also be checked with the help of it.
3. Public borrowing :- Nowadays public borrowing by the govt. has become a normal feature of public finance along with other sources like taxes , fines etc.
Fiscal policy to control inflation :
1. Increase in the tax burden:- during inflation govt. increase the burden of direct tax so that purchasing power of people should reduce. Which will lead to fall in the aggregate demand and consumption expenditure and the price will also reduce.
2. Reduction in public expenditure:- The govt. spending may be reduced with no change in taxation this will also reduce the purchasing power of people and the price also decrease.
3. Increase in the domestic borrowing :- Government may borrow funds from public so that the excessive purchasing power from the people should be taken away. It will reduce the consumption expenditure along with the prices.
4. Reduction in budget deficit:- Budgetary deficit should be reduced so that govt.should not follow the policy of deficit financing to finance it. because deficit financing is most of the time inflationary in nature
The counter cyclical fiscal policy is adopted to save the economy from the pressure of inflation .
Fiscal policy & equity :
To achieve the objective of equal distribution of income and wealth the following types of fiscal measures should be adopted.
1. Progressive taxation :- This system can be a great measure in this regard it means heavy taxes should be imposed on the rich and the poor people should be exempted from the taxes.
2. Tax on Luxury: - Heavy taxes can be imposed on luxuries and essential commodities of daily use which are largely consumed by the poor should be subjected to lower taxes.
3. Expenditure on social welfare:- This should be increased for eg:- free medical care, education, subsidies, housing foods etc similarly expenditure on social security schemes like pension, sickness benefits, unemployment relief should be increased.
4. Development of backward region :- govt. should set up more industries in the backward regions of the countries this will reduce regional disparities.