Fiscal Policy

Fiscal Policy Defination of Fiscal Policy: Fiscal policy is an additional method to determine public revenue and public expenditure. In the recent years importance of fiscal policy has increased due to economic fluctuations. Fiscal policy is an important instrument in the modern time. According to Arther Simithies fiscal policy is a policy under which government uses its expenditure and revenue programme to produce desirable effects and avoid undesirable effects on the national income, production and employment. Objectives of fiscal policy: The objectives of fiscal policy may be regarded as follows;

1. To achieve desirable price level: The stability of general prices is necessary for economic stability. The maintenance of a desirable price level has good effects on production, employment and national income. Fiscal policy should be used to remove; fluctuations in price level so that ideal level is maintained. 2. To Achieve desirable consumption level: A desirable consumption level is important for political, social and economic consideration. Consumption can be affected by expenditure and tax policies of the government. Fiscal policy should be used to increase welfare of the economy through consumption level. 3. To Achieve desirable employment level: The efficient employment level is most important in determining the living standardof the people. It is necessary for political stability and for maximization ofproduction. Fiscal policy should achieve this level. 4. To achieve desirable income distribution: The distribution of income determines the type of economic activities the amount of savings. In this way, it is related to prices, consumption and employment. Income distribution should be equal to the most possible degree. Fiscal policy can achieve equality in distribution of income.

5. Increase in capital formation: In under-developed countries deficiency of capital is the main reason for under-development. Large amounts are required for industry and economic development. Fiscal policy can divert resources and increase capital. 6. Degree of inflation: In under-developed countries, a degree of inflation is required for economic development. After a limit, inflationary be used to get rid of this situation. Instruments of Fiscal Policy: 1. Public expenditure 2. Taxes 3. Public debts The above mentioned instruments are used by the public authorities to achieve desirable level of production, consumption and National Income. During inflationary trend more and more taxes are levied on the community. In this way, purchasing power of the people can be decreased and desirable price level is achieved. During inflation public expenditure is decreased so that all in production may decrease high prices and increase the value of money. During deflationary period taxes are reduced and public expenditure is increased. In this way incentives to invest are increased and national income begins to rise. For economic development public debts are necessary. In under developed countries, due to insufficient resources economic development is not possible. Public loans are drawn internally and externally. The above mentioned methods are called budgetary policy of the government. This policy can increase national income, production level and maintain full employment level.