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.