Fiscal policy Meaning, objectives

21/01/2021 2 By indiafreenotes

Fiscal policy is an integral part or organ of public finance. In ordinary words, fiscal policy refers to a policy that affects macroeconomic variables, like national income, employment, savings, investment, price level, etc.

Fiscal policy is “a policy under which the government uses its expenditure and revenue programmes to produce desirable effects and avoid undesirable effects on the national income, production and employment.”

Fiscal policy means the use of taxation and public expenditure by the government for stabilization or growth of the economy. According to Culbarston, “By fiscal policy we refer to government actions affecting its receipts and expenditures which ordinarily as measured by the government’s receipts, its surplus or deficit.” The government may change undesirable variations in private consumption and investment by compensatory variations of public expenditures and taxes.

The use of such fiscal policy measures may be grouped into two:

(i) Those which operate automatically: Popularly known as automatic or built-in stabilizers

(ii) Those which are discretionary in the sense that the government takes deliberate action to manage aggregate demand popularly called discretionary fiscal policy.

  • Automatic or Built-in Fiscal Policy:

Automatic fiscal policy is a change in fiscal policy that is triggered by the state of the economy. Note that this kind of fiscal policy adjusts automatically and, hence, no explicit action by the government is needed.

Under automatic fiscal policy stabilizers, there occurs an automatic change in tax receipts and expenditures with the changes in income. During depression, as unemploy­ment rises, income declines. As a result, tax receipts of the government decline. On the other hand, government expenditures rise.

Thus, tax receipts and expenditures have certain stabilizing forces that are automatic. There does not occur any deliberate action on the part of the government to influence aggregate demand. Once the change in economic activity takes place, receipts and expenditures change automatically.

  • Discretionary Fiscal Policy:

On the other hand, discretionary fiscal policy is a policy action that is initiated by the authority. This type of fiscal policy may be used by the government rather deliberately.

Deliberate policy changes to influence the level of economic activity may be called discretionary fiscal policy. Discretionary fiscal policy entails a change in the government budget. Government deliberately alters tax schedules and various expenditure programmes.

The fiscal policy is designed to achieve certain objectives as follows:

  1. Employment Generation: The government is making every possible effort to increase employment in the country through effective fiscal measures. Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on small-scale industrial (SSI) units encourage more investment and consequently generate more employment. Various rural employment programmes have been undertaken by the Government of India to solve problems in rural areas. Similarly, self-employment scheme is taken to provide employment to technically qualified persons in the urban areas.

(a) To capture the excessive purchasing power and to curb private spending:

(b) Compensate the deficiency in private investment through public investment;

(c) Cheap money policy or lower interest rates to attract more and more private entrepreneurs.

  1. Development by effective Mobilisation of Resources: The principal objective of fiscal policy is to ensure rapid economic growth and development. This objective of economic growth and development can be achieved by Mobilisation of Financial Resources. The central and state governments in India have used fiscal policy to mobilise resources.

The financial resources can be mobilised by:

  1. Taxation: Through effective fiscal policies, the government aims to mobilise resources by way of direct taxes as well as indirect taxes because most important source of resource mobilisation in India is taxation.
  2. Public Savings: The resources can be mobilised through public savings by reducing government expenditure and increasing surpluses of public sector enterprises.
  3. Private Savings: Through effective fiscal measures such as tax benefits, the government can raise resources from private sector and households. Resources can be mobilised through government borrowings by ways of treasury bills, issuance of government bonds, etc., loans from domestic and foreign parties and by deficit financing.
  4. Increases National Income: it’s the strength of the fiscal policy that is brings out the desired results in the economy. When the government want to increase the income of the country then it increases the direct and indirect taxes rates in the country. There are some other measures like, reduction in tax rate so that more peoples get motivated to deposit actual tax.
  5. Reduction in inequalities of Income and Wealth: Fiscal policy aims at achieving equity or social justice by reducing income inequalities among different sections of the society. The direct taxes such as income tax are charged more on the rich people as compared to lower income groups. Indirect taxes are also more in the case of semi-luxury and luxury items which are mostly consumed by the upper middle class and the upper class. The government invests a significant proportion of its tax revenue in the implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society.

(i) Direct physical control.

(ii) Increasing the rate of existing taxes.

(iii) Introduction of new taxes,

(iv) Public borrowing of non-inflationary nature,

(v) Deficit financing.

  1. Price Stability and Control of Inflation: One of the main objectives of fiscal policy is to control inflation and stabilize price. Therefore, the government always aims to control the inflation by reducing fiscal deficits, introducing tax savings schemes, productive use of financial resources, etc.
  2. Balanced Regional Development: there are various projects like building up dams on rivers, electricity, schools, roads, industrial projects etc run by the government to mitigate the regional imbalances in the country. This is done with the help of public expenditure
  3. Reducing the Deficit in the Balance of Payment: some time government gives export incentives to the exporters to boost up the export from the country. In the same way import curbing measures are also adopted to check import. Hence the combine impact of these measures is improvement in the balance of payment of the country.
  4. Development of Infrastructure: when the government of the concerned country spends money on the projects like railways, schools, dams, electricity, roads etc to increase the welfare of the citizens, it improves the infrastructure of the country. A improved infrastructure is the key to further speed up the economic growth of the country.
  5. Foreign Exchange Earnings: when the central government of the country gives incentives like, exemption in custom duty, concession in excise duty while producing things in the domestic markets, it motivates the foreign investors to increase the investment in the domestic country.