P O L I C Y TO AC H I E V E M AC RO E C O N O M I C
OBJECTIVES
FISCAL POLICY
MEANING
Fiscal policy is the set of principles and decisions of a government regarding the level of
public expenditure and mode of financing them. It is about the effort of government to
influence the economys output, employment and prices by altering the level of public
expenditure, taxation
and public debt.
Arthur Smithies points out, 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.
The significance of this policy was not at all recognized by economists before the publication
of Keyness General Theory of Employment, Interest and Money. Keynes gave the concept of
fiscal policy new meaning and operation of the public finance a new perspective. He made it
clear that taxation, public spending and public debt are the effective instruments of public
policy capable of determining the level of output and employment.
The importance of fiscal policy in modern economies arises from the fact that the State under
democracy is called upon to play an active and important role in promoting economic
development and providing a vast number of essential public utilities and services like
drinking water, sanitation, civic services, primary education, public health, social welfare,
defence, etc. Most of these goods are characterized by the property viz. non-marketable; that
it cannot be sold in the market to the consumer.
But payment has to be regulated in another way, through taxation. yet another role, whereas
in developed economies, it aims at maintaining economic stability. In underdeveloped
economies, desirous of achieving rapid economic development, the function of public finance
is to promote
rapid economic development of the country, besides maintaining economic stability.
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Taxation can be a most effective means of increasing the total quantum of savings and
investments in any economy where the propensity to consume is normally high.
2. To promote development in the private sector
In a mixed economy, private sector forms an important constituent of the economy. In spite of
the growing importance of the public sector in accelerating the process of economic
development, the interest of the private sector cannot be neglected. Therefore rebates, reliefs
and liberal depreciation allowances may be granted to boost the private sector.
3. To bring about an optimum utilization of resources
The above objective can be achieved through proper allocation of resources. We must direct
investment in the desirable channels both in the public and private sectors by providing
suitable incentives.
Productive resources are, within limits capable of being used in variousmust find their way
into the socially necessary lines of development.
4. To restrain inflationary pressures in the economy to ensure economic stability
The fiscal policy must be used as an instrument for dealing with inflationary or deflationary
situations. One way to achieve this is to devise a tax structure, which will automatically
counter the economic disturbances as they arise. The second is to make changes in the tax
system in order to deal with inflationary or deflationary situations. In countries like India, it is
through the direction of the public expenditure rather than taxation that more effective action
can be taken to remove the effect of a deflationary spiral. In terms of inflation, anti-
inflationary taxes such as excess profit tax and commodity taxes on articles of both general
and luxury consumption can be imposed.
6. To obtain full employment and economic growth
The fiscal policy to achieve full employment and to maintain stable price in the economy has
been developed in the recent past. The ineffectiveness of monetary policy as a means to
remove unemployment during the Great Depression paved the way for the development of
fiscal policy in achieving this objective. For accelerating the rate of growth, allocation of
higher proportion of the fully employed resources is needed. Those activities increase the
productive capacity of the
economy. Therefore fiscal policy is used through its tax instrument to encourage investment
and discourage consumption so that production may increase. It is also necessary to increase
capital formation by reducing the high income tax on personal income. To increase
employment, the state expenditure should be directed towards providing social and economic
overheads. The state should undertake local public works of community development
involving more labour and less capital per head.
Other Limitations
Large scale underemployment, lack of coordination from the public, tax evasion, low tax base
are the other limitations of fiscal policy.
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