Fiscal Policy – Definition, Objectives and Techniques

The term fiscal has been derived from the greek word fisc, meaning a basket to symbolize the public purse. Fiscal policy thus means the policy related to the treasury of the government.

Fiscal policy is a part of general economic policy of the government which is primarily concerned with the budget receipts and expenditures of the government. All welfare projects are completed under this policy .It also suggests measures to control economic fluctuations which may become violent and create great upheavals in the socio-economic structure of the economy. It also outlines the influence of resource utilization on the level of aggregate demand through affecting the level of aggregate consumption and investment expenditure.

Definitions of Fiscal Policy

According to U. Hicks “Fiscal policy is concerned with the manner in which all the different elements of public finance, while still primarily concerned with carrying out their own duties, may collectively be geared to forward the aims of economic policy.”

According to Arthur Smithies “Fiscal policy is a policy under which the government uses its expenditure and revenue programmes to produce desirable effects and avoid undesirable effects on the national income, production and employment.”

According to Culbarston, “By fiscal policy we refer to government actions affecting its receipts and expenditures which ordinarily as measured by the government’s receipts, its surplus or deficit.”

Objectives of Fiscal Policy

There are following objectives of fiscal policy :

  • Development of Country: Every country has to make fiscal policy for development of Country. With this policy , all work like govt. planning and proper use of funds for development functions is done. If govt. does not make fiscal policy, then it can happen that revenues are misused without targeted expenditure of Government.
  • Employment: Getting the full employment is also the objective of fiscal policy. Govt. can take many actions for increasing employment. Government can fix certain amount which can be utilized for creation of new employment opportunities for unemployed people .
  • Inequality: In developing country like India, we can see the difference one basis of earning. 10% of people are earning more than Rs. 100000 per day and other are earning less than Rs. 100 per day. By making a good fiscal policy, govt. can reduce this difference if govt makes it as its target.
  • Fixation of Govt. Responsibility: It is the duty of Govt. to effective use of resources and by making of fiscal policy different minister’s accountability can be checked.

Techniques of Fiscal Policy  

1. Taxation Policy  

It is one of the powerful instruments of fiscal policy in the hands of public authorities which greatly affects changes in disposable income, consumption and investment. Taxation policy is relates to new amendments in direct tax and indirect tax. Every year Govt. of India passes the finance bill. In this policy govt. determines the rate of taxes. Govt. can increase or decrease these tax rates and amend previous rules of taxation. Govt.’s earning’s main source is taxation. But more tax on public will adverse effect on the development of economy.

  1. If Govt. will increase taxes, more burden will be on the public and it will reduce production and purchasing power of public .
  2. If Govt. will decrease taxes, then public’s purchasing power will increase and it will increase the inflation.

Govt. analyzes  both the situation and will make his taxation policy more progressive .

2. Govt. Expenditure Policy  

There are large number of public expenditure like opening of govt schools, colleges and universities, making of bridges, roads and new railway tracks. For the above projects govt has paid large amount for purchasing  and paying wages and salaries, however all these expenditures are paid after making govt. expenditure policy. Govt. can increase or decrease the amount of public expenditure by changing govt. budget. So, govt. expenditure is technique of fiscal policy by using this, govt. use his fund  first on very necessary sector and other will be done after this .

3. Deficit Financing Policy  

If Govt.’s expenditures are more than his revenue, then govt. should have to collect this amount. This amount is deficit and it can be fulfilled by issuing new currency by central bank of country. But, it will reduce the purchasing power of currency. More new currency will increase inflation and after inflation value of currency will  decrease. So, deficit financing is very serious issue in the front of govt. Govt. should use it, if there is no other source of govt. earning .

4. Public Debt Policy

If Govt. thinks that deficit financing is not sufficient for fulfilling the public expenditure or if govt. does not resort to deficit financing, then govt. can take loan from  world bank, or take loan from public by the way of issuing govt. securities and bonds. But it will also increase the cost of debt in the form of interest which govt. has to pay on  the amount of loan. So, govt. has to necessarily make solid budget for this and after taking into consideration the amount which is taken as debt. This policy  can also use as the technique of fiscal policy for increase the treasure of govt. Internal sources of debt include market loans, compensation bonds, 15 year’s annuity certificates, small private savings through various saving schemes. External sources includes in borrowing from the external market, from international institutions such as the World bank, IMF, IDA etc and the governments of other countries.

5.Budget

Fiscal policy operates through the budget. Thus it is also called budgetary policy. The term budget is derived from a French word “Bougette” which means a leather bag or a wallet used to carry financial papers. The budget of a nation is a useful instrument to assess the fluctuations in an economy. Different budgetary principles have been formulated by the economists, prominently known as the annual budget, cyclical balanced budget and fully managed compensatory budget.

Stances of Fiscal Policy

The three possible stances of fiscal policy are neutral, expansionary and contractionary. The simplest definitions of these stances are as follows:

  1. A neutral stance of fiscal policy implies a balanced economy. This results in a large tax revenue. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.
  2. An expansionary stance of fiscal policy involves government spending exceeding tax revenue.
  3. A contractionary fiscal policy occurs when government spending is lower than tax revenue.

However, these definitions can be misleading because, even with no changes in spending or tax laws at all, cyclical fluctuations of the economy cause cyclical fluctuations of tax revenues and of some types of government spending, altering the deficit situation; these are not considered to be policy changes. Thus, for example, a government budget that is balanced over the course of the business cycle is considered to represent a neutral fiscal policy stance.

Methods of Funding

Governments spend money on a wide variety of things, from the military and police to services like education and healthcare, as well as transfer payments such as welfare benefits. This expenditure can be funded in a number of different ways:

  1. Taxation
  2. Seigniorage, the benefit from printing money
  3. Borrowing money from the population or from abroad
  4. Consumption of fiscal reserves.
  5. Sale of fixed assets (e.g., land).

All of these except taxation are forms of deficit financing.

Limitations of Fiscal Policy  

  • The fiscal policy has achieved a mixed success in mobilization of resources. The defective tax system, limited base of direct taxes, exemption of agriculture from direct taxation, evasion of taxes, inefficient and corrupt tax collection machinery are some of the causes of poor tax collection in the country. Another cause of poor resource mobilization is the low share of non-tax revenue in the total revenue receipts.
  • Inflation of India is increasing rapidly after issuing new notes for payment of govt. of expenses and in this inflation, prices of necessary goods are increasing very fastly. Living of poor people has become difficult due to this. So, these signs show the failure of Indian fiscal policy.
  • Govt. fiscal policy has failed to reduce the black money. Even large amount of  past minister is in the form of black money which is deposited in Swiss Banks.
  • After taking loan from world bank under the fiscal policy’s debt technique, govt. has to follow the rules and regulations framed by world bank and IMF. These rules are more harmful for developing small domestic business of India. These organizations are inter related with WTO and they intend to stop Indian domestic Industry.
  • After expending large amount for generating new employment under fiscal policy, rate of unemployment is increasing fastly and big lines on govt. employment exchange can be seen generally in working days. Database of employment exchanges are full from educated unemployed candidates .
  • The direct taxes are the main instruments of the fiscal policy. The rise in the rates of direct taxes result in the reduction of the disposable income of the people. The indirect taxes contribute more than four-fifths of the tax revenue. Taxes on commodities, sales taxes ,excise duties, customs etc. add to the prices of commodities. Increase in the rates of sales taxes and excise duties immediately cause a rise in the price level.

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