Fiscal policy refers to the income and expenditure policy of the government. It is the policy that involves the use of government expenditure, taxation, government borrowings and public work to affect the level and growth demand, national output and employment. According to Aurthun Smithies “Fiscal policy is a policy under which government uses its expenditure and revenue to produce desirable effect and avoid undesirable effect in the national income, output and employment.
So, fiscal policy is the policy for the government revenue, government expenditure and borrowing to meet the targeted goals.
The main objectives of fiscal policy are:
- Development by effective mobilization of resources.
- Efficient allocation of financial resources.
- Reduction in inequalities of income and wealth.
- Price stability.
- Sectorial Balance.
Instrument of fiscal policy
There are different instrument of fiscal policy which are highlighted below.
Budget:
Budget is a financial that which shows the estimated income and expenditure of the government for a given period of time.
Balanced Budget: Income = Expenditure.
Surplus Budget: Income >Expenditure.
Deficit Budget: Income < Expenditure.
Taxation:
Tax is a powerful instrument of fiscal policy. The increase rate of taxation greatly effect on the disposable income, consumption and investment and decrease in rate of tax will increase on disposable income, consumption and investment. Therefore, the rates of tax have ultimately effect on effective demand.
Public Expenditure:
Government has classified government expenditure under broad headings.
Current Expenditure:
It is the day to day expenses of the government which is also known as short term expenditure. It constitutes consumption expenses, office expenses, service and product expenses, subsidy expenses, social security expenses, interest payment and refund expenses and other miscellaneous expenses.
Capital Expenditure:
It is the expenditure made by the government on various Socio economic infrastructure which is related to long run expenses on the developmental program. Building construction, civil works, purchase of plant and machinery, capital research and consultancy and capital formation are some example.
Financing Expenditure:
Expenditure under the heading of financing includes the expenses of government for providing loan, principle of repayment, interest of internal and external borrowings.
Public Borrowing:
It is the sound fiscal instrument to fight against inflation and deflation which is very important factor to maintain economic stability. The government makes decision to finance their budget depreciate through internal and external borrowing.
Public Works:
Keynes highlighted the importance of public works which is also significant instrument of fiscal policy. Public works such as building, road, maintenance of railway track and other related infrastructure development. It also increase the public welfare in long run such policy is very effective during depression phase.
