Fiscal Policy

• The policy of government pertaining to public

revenue, public expenditure and public debt is
known as fiscal policy.
• Government revenue can be classified as tax
and non - tax revenue. government
expenditure refer to plan and non-plan
expenditure.
• In other words, it refer to the instruments by
which a government tries to regulates or
modify the economic affairs of an economy
keeping in view certain objectives.
Objective of fiscal policy in a
developing economy
 Full employment.
 Price stability.
 To accelerate the rate of economic growth.
 Optimum allocation of resources.
 Equitable distribution of income and wealth.
 Economic stability.
 Capital formation and growth.
Instruments of fiscal policy
1) Taxation.
Taxation is a powerful instrument of fiscal policy
in the hand of public authorities which greatly
effect the changes in disposable income
consumption and investment. An anti depression
tax policy increase, disposable income of
individual, promotes consumption and
investment. Obviously there will be more funds
with the people for consumption and investment
purposes at the at the time of tax reduction.
2) Public expenditure
The appropriate variation in public
expenditure can have more direct effect upon
the level of economic activity than even taxes.
The increased public spending will have a
multiple effect upon the level of income,
output and employment.
3) Public debt
Public debt is a sound fiscal weapons to fight
against inflation and deflation. It brings about
economic stability and full employment in an
economy. The government borrowing may
assume any of the following forms – currency
mentioned as under :
a)Borrowing from Non – bank Public.
b) Borrowing from the banking system.
c) Drawing from treasury.
d)Printing of currency notes.
4) Budget
Budget is an annual procedure to decide how
much public spending there should be in the
year ahead and what mix of taxation should be.
in budget government can spent on those
sectors where it wants more growth, and can
reduce the spending on those sectors which
are automatically performing well.
5) Deficit financing
A budget deficit occurs when public spending
exceeds public revenue, to overcome this
problem government may print new notes. As
new notes are printed, it results in net
addition to the circular flow. Thus this form of
public borrowing is said to be highly
inflationary.
6) Public works
J. M. Keynes has highlighted public works
program are as the most significant anti –
depreciation device.
They include expenditure on roads, railways,
schools, parks, airports, post-offices, hospitals,
irrigations canals etc.
Problems or limitations of fiscal
policy
A. Policy lag.
There is generally some interval between the
time when a particular action is needed and
the time when a fiscal measure has impact
left. This time interval comprise three type
of lags.
1) Recognition lag.
This is the interval between the time when
action is needed and when it is recognized
that action is needed.
2) Administrative lag.
This is the interval between the time when
need of an action is recognized and time
when action is actually taken.
3) Operation lag.
The interval between when action is taken
and when it has its impact on income and
employment is known as the operation lag.
Others
1) Forecasting.
2) Correct size and nature of fiscal policy.
3) Inadequacy of fiscal measures
4) Adverse effect on redistribution of income.
5) Hardship in underdeveloped countries.
6) Administrative problems in democratic
countries.