Fiscal policy, also known as Budgetary policy relates to two important issues. These are:
- The items on which the government should spend
- How the government should raise resources to finance its expenditure?
The answer to the first question will depend on the priorities of the government to solve various economic, social and other problems that a country face. For example, if there is a constant threat of attack from another country, the government has no choice but to spend more on defence. If there is a threat of outbreak and spread of an epidemic, the government has to spend more on health services. If the government had taken loan in the past, it has to spend more on interest payments.
On the second question the government has to consider various ways to raise resources. Should the people be taxed more? Which section of the people to be taxed more? Which commodities are to be taxed? How much the government should borrow? From whom should it borrow and in what form? The answers to these questions are to be found in the policy objectives of the government.
The fiscal policy is concerned with the raising of government revenue and Government Budget increasing expenditure. To generate revenue and to increase expenditures, the government finance or policy called Budgeting policy or fiscal policy. The major fiscal measures are:
- Public Expenditure – Government spends money on a wide variety of things, from the military and police to services like education and health care, as well as transfer payments such as welfare benefits.
- Taxation – Government imposes new taxes and change the rate of current taxes. The expenditure of government is funded by the imposition of taxes.
- Public Borrowing – Government also raises money from the population or from abroad through bonds, NSC, Kisan Vikas Patra, etc. 4. Other Measure – Other measures adopted by the government are:
(a) Rationing and price control
(b) Regulation of wages
(c) Increase the production of goods and services.
Difference between fiscal and monetary policy
(Source: economicshelp.org)
Types of fiscal policy
(Source of infographic: freepik)
Objectives of Fiscal policy
- To promote economic growth: Government promotes economic growth by setting up basic and heavy industries like steel, chemical, fertilizers, machine tools, etc. It also builds infrastructure like roads, canals, railways, airports, education and health services, water and electricity supply, telecommunications, etc. that foster economic growth. Both basic and heavy industries and infrastructure require huge amount of investment which normally the private sector does not take up. Since these industries and infrastructure facilities are essential for economic growth in the country, the burden to set up and develop them falls on the government.
- To reduce income and wealth inequalities: Government reduces inequalities in income and wealth by taxing the rich more and spending more on the poor. Further, it provides for the employment opportunities to poor that help them to earn.
- To provide employment opportunities: Employment opportunities are increased by the government in various ways, One, jobs are created when it sets up public sector enterprises. Two, it provides subsidies and other incentives like tax holidays, low rates of taxes etc. to private sector that encourage production and employment. It also encourages setting up of small scale, cottage and village industries by people which are employment oriented. This it does by providing them tax concessions, subsidies, grants, loans at low rates of interest, etc. Finally, it creates jobs for poor when it undertakes public works programmes like construction of roads, bridges, canals, buildings, etc.
- To ensure stability in prices: Government ensures stability of prices of essential goods and services by regulating their supplies. Hence, it incurs expenditure on ration and fair price shops that keep sufficient stock of food grains. If also subsidizes cooking gas, electricity, water and essential services like transport and maintains their prices at low level affordable to the common man.
- To correct balance of payments deficit: The balance of payments account of a country records its receipts and payment with foreign countries. When payments to foreigners are more than receipts from foreigners, the balance of payments account is said to be in deficit. Quite often this deficit is caused when a country imports more than it exports. Consequently, the payments on imports to foreigners are more than the receipts from exports. In such a situation, to reduce the deficit in balance of payment account, the government discourages imports by increasing taxes on them and encourages exports by increasing subsidies and other export incentives. However, it should be noted that tax on import is not a popular measure now as it is treated as an obstacle to free flow of goods and services between countries.
- To provide for effective administration: Government incurs expenditures on police, defence, legislatures, judiciary, etc. to provide effective administration
