Fiscal Policy

Fiscal policy is the means by which a government adjusts Its spending levels and tax rates to monitor and influence nation's economy.

[t is a policy under which government uses its expenditures and revenue program to produce desirable effects and avoid undesirable effects in the national'income production and unemployment.

Objectives of Fiscal Policy

1. Optimum allocation of economic resources.

The aim is that fiscal policy should be so framed as to increase the efficiency of productive resources.
To ensure this, the government should spend on those public works which give the maximum employment. .

2. Equal distribution of wealth and income.

Fiscal policy should aim at equitable distribution of wealth and income. It means that fiscal policy should be so designed as to bring about reasonable equality of incomes among different groups by transferring wealth from the rich to the poor.

3. Price stability .

Another objective of fiscal policy is to maintain price stability. Deflation leads to a sharp decline in business actively . On the other extreme, inflation may hit the fixed income classes hard while benefiting speculators and traders. Fiscal policy has to be such as will maintain a reasonably stable price level thereby benefiting all sections of society sections of society.



4.Full Employment.

The most important objective of fiscal policy is the achievement and maintenance of full employment because t through it most other objectives are automatically achieved. Fiscal policy aimed at full employment envisage the direction of tax structure, not with a view to raising revenue but with a view to noticing the effects with specific kinds of taxes have on consumption, saving and investment.

Instruments of Fiscal Policy.

1:Public Debt
2:Taxation
3:Budgetary surplus
4:Budgetary deficit

Public Debt refer to borrowing by a government from within the country or from abroad, from private individuals or association of individuals or from banking.

It can be classified in three ways:


> Internal and external
 > Productive and unproductive

> Short term and long term

Internal public debt
When the government borrows from within the country be it from citizens or financial institutions or the central bank, called internal borrowing.

External public debt

When the government borrows funds from international market be it any financial institutions or any nation in particular, called external public debt.

Productive debt

The debt that is expected to create assets which will yield income sufficient to pay the principal amount and the interest on it is known as productive debt.

Unproductive debt

On the other hand, unproductive debt is the debt that is raised for financing unprodtictive assets or heavy unproductive expenditures. Such a debt is a deadweight debt.

Short term loans

The loans which are to be repaid within a period of one year called short term loans. The loan provided usually is for a limited amount. And it is used to fulfill short term needs of the government.

Long term loans

The loans which are to be repaid after a period of one year called long term loans. The loan provided here can be for a huge amount. It is very helpful for the long term projects.



2: Taxation

Tax is a legal compulsory payment paid to the government by the people. It is common and effective way for the government to influence the aggregate demand in the economy. There are two types of taxes.

 Direct tax
Indirect tax

Direct Tax: it is the tax where the imposition and payment of tax is on same person. For example, income tax, property tax.

Indirect Tax: lt is the tax where the imposition and payment of tax is on different persons. For example, sales tax, service tax.

During the time of inflation (when aggregate demand is more than aggregate supply) the government increases the tax rates and may also impose new tax rates. This would result in reduction in the money supply in the economy and will control the inflationary gap.

3 : Budgetary surplus and Budgetary deficit

Budgetary surplus: It is a situation where the revenue earned by government is more than the expenditure. The surplus amount is used for repayment of loans or can be kept as a reserve for the future. It can also be used to make desired purchase that were delayed and for the development of the economy. It is a sign that the government is running the economy efficiently.

Budgetary deficit: It is a situation where the revenue earned by the government is less than its expenditure. At this time the government reduces its expenditure on public welfare, increases taxe rates and may also opt for borrowings. The surplus from previous years can be used. It is a sign .that the government is not running efficiently.