Fiscal Policy | Definition & Objectives

Fiscal policy is a branch of public finance which concerns itself with the raising of revenue through taxation and other means and the level and pattern of government expenditure that are needed to achieve a desired economic objectives.

In other words, it deals with decisions on the appropriate mix of raising revenue through taxation etc and government expenditure level and pattern that would achieve a desired macroeconomic goal.

OBJECTIVES OF FISCAL POLICY

Fiscal policy seeks to achieve desired national economic objectives just as monetary policy does; and so the objectives of fiscal policy are fully in agreement with that of the monetary policy and they include the following:

  • Relative stability in prices
  • High rate of or full employment
  • Promoting economic growth and development
  • Balance of payments equilibrium
  • Stable exchange rate
  • Equitable income redistribution
  • Increase rate of investment

Relative stability in price:

Fiscal policy aims at price stabilization by counteracting inflation and deflation. Expansionary fiscal policy (reduced taxation and increased expenditure) counter deflation while contractionary fiscal policy (increased taxation and reduced expenditure) is used to counter inflation.

High rate of or full employment:

Full or high rate of employment can be achieved by expansion fiscal policy, but it an eagle eye on its inflationary effect.

Promoting economic growth and development:

Another objective of fiscal policy is the attainment and sustenance of a high rate of growth of national product with its accompanying attitudinal and structural change i.e. economic development.

Balance of payment equilibrium:

Both taxation and government expenditure can be used to pursue and achieve a favorable or equilibrium balance of payments. Different type of taxes can be used to discourage imports (import duties etc), and promote export (tax holidays, low or zero export duties).

Stable exchange rate:

This may be achieved by avoiding fundamental disequilibrium in the country’s balance of payments situation through effective fiscal policy measures, as suggested in balance of payments equilibrium above.

Equitable income redistribution:

Progressive taxation and government expenditure on welfare services can be applied to attain equity in income distribution as well as social justice.

Increased rate of investment:

Fiscal policy can be directed at raising revenues for investment in certain key sector of the economy, which the multiplier effect will increase economic growth.

It can easily be seen from these objectives that fiscal policy does not only concern itself with aggregate effects of government expenditure and taxation on income, production and employment but also with the manner in which all the different elements of public finance, while still primarily concerned with carrying out their duties (as the first duty of a tax is to raise revenue), may collectively, be geared to promote the aims of the economic policy.

Therefore the crux of a good and effective fiscal policy lies in keeping its ingredients like expenditure, debt management, and the likes in a proper balance so as to achieve the best possible result in terms of the desired economic objectives.

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