FISCAL POLICY

Fiscal policy refers to the regulation of the level of government spending, taxation and public debt. The government uses its’ expenditure and revenue programs to generate desirable effects and avoid undesirable effects on the national income, production and employment.  It is the most important macroeconomic tool in the hand of government for intervention in the economy which the economists now consider essential in the matter of defeating recession or inflation or promoting and accelerating economic growth

During a depression fiscal policy should help in increasing demand by increasing government expenditure and undertaking public projects. This will provide employment to more people. The government can also increase its expenditure on subsidies to producers of mass consumption goods in order to enhance consumer spending. In the same manner the government can reduce its tax rates to stimulate consumption and investment.  Thus, a policy of deficit financing assists in a great manner for removing unemployment. In the times of inflation, the aggregate demand is greater than the aggregate supply of goods and services. It is, therefore, required that the government reduce its own expenditure and attempt to curb private spending by increasing taxes.

In developing countries, taxation, the Government expenditure and borrowing have to play an important role in accelerating economic development. In fact, fiscal policy is a potent tool in the hands of the Government through which it can realize the objectives of development. 

OBJECTIVES OF THE FISCAL POLICY:

The objectives of fiscal policy differ from country to country in different situations.

1. In a developed economy operating either at the level full employment or near full employment the goal of fiscal policy is the maintenance of full employment.
2. In a developing economy the main focus of fiscal policy has to be the promotion of economic growth, economic stability and reducing economic inequalities.
3. Fiscal policy aims to achieve full employment and stability in the economy. Economic stabilization implies the elimination of inflationary pressure in the economy.
4. The principal objectives of fiscal policy in a developing economy are: 

• Mobilize resources for economic growth, especially for the public sector. 
• To promote economic growth in the private sector by providing incentives to save and invest.  
• To restrain inflationary forces in the economy to ensure price stability, and 
• To ensure equitable distribution of income and wealth so that fruits of economic growth are fairly distributed.