Professional Documents
Culture Documents
A government uses fiscal policy to adjust its spending and tax rates to monitor and influence the performance of the country. The
fiscal policy is based on Keynesian economics, which is a theory by economist John Maynard Keynes. As per the theory, a
government can play a major role in influencing productivity levels in an economy by adjusting the tax rates and public spending.
So, the fiscal policy helps in controlling inflation, addressing unemployment along with ensuring the health of the currency in the
international market. Now that we know what is fiscal policy, let’s understand its objectives and types.
Taxation includes taxes on income, property, sales, and investments. On the one hand, more taxes means more income for the
government, but it also results in less income in the hand of the people.
Public spending includes subsidies, transfer payments, like salaries to a govt. employee, welfare programs, and public works projects. Those who
get the funds have more money to spend.
Here also, the government has the same tools at its disposal – spending and tax cuts. But, they are used differently – taxes are raised while the
spending is reduced. One can easily imagine how unpopular such measures will be among the voters.
A BALANCED APPROACH
A government always faces a risk that more spending and lower tax rates could fuel inflation. This happens because more money in
the economy pushes the consumer demand up, eventually leading to a fall in the value of money. This means that it now takes more
money to buy a product or service, whose value is not changed.
So, it is very important for a government to monitor its fiscal policy constantly. And, if there are any signs of inflation going out of
control, the government must address it accordingly.