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Fiscal policy


Fiscal policy is an additional method to determine public revenue and public expenditure.

In present times, every nation has become attentive to devising an effective fiscal policy to ward off troubles that are being faced due to economic uncertainties.

It has gained immense importance in recent times. The essential components of fiscal policy are taxes, public expenditure and public debts.

Arther Simithies, a reputed economist and budget expert, holds that fiscal policy enables government to make use of its expenses and revenue plans to create positive effects and drive away negative impacts on the national income, employment and production.

With the help of fiscal policy, the government of any nation desires to achieve following goals:
  • Stability in price level
  • Enhanced consumption rates
  • Increased employment
  • Equitable income distribution
  • Growth in capital and resources
  • Level of inflation

Objectives of fiscal policy


The objectives of fiscal policy may be regarded as follows

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.

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.

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.

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.

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.

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 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.


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