By fiscal policy we mean, the government’s tax efforts, public expenditure and public borrowing. Through these the government can effectively encourage consumption, investment and savings habits and also restrict them. For example, suppose there is inflation in a country. Inflation implies that the people have high purchasing power and so they demand goods. To curb this, the government may raise the personal tax and also the corporate tax. Similarly, by altering its expenditure on various public projects, the government would be able to influence the prevailing economic condition. Public borrowing involves government issuing bonds and encouraging common public and other institutions to buy them. By this, the government would be able to bring down the level of purchasing power in the economy and control the inflation.
The following are the objectives of fiscal policy:
- Maximization of the aggregate saving is the first objective. Tins are achieved by encouraging people to reduce the current and future consumption. Specifically the attempt is to bring down and control the conspicuous consumption of the rich people. The government can impose taxes on them and can provide the basic necessities of life to the poor class on low rate. In this way by providing incentives, savings can be increased.
- Maximization of capital formation is the second objective. Through this objective the country can try to achieve an accelerated economic growth. This will help the country to overcome the stagnation and achieve a higher rate of economic growth.
- The third objective is to divert the available resources from the less productive to most productive purposes.