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Fiscal Policy

 Fiscal Policy


            “By fiscal policy we denote to government actions afflicting its receipts and outlays which are ordinarily taken as measured by the government’s receipts, its surplus or deficit.”

            “A policy under which the government uses its outlay and revenue programmes to produce desirable effects and avoid undesirable effects on the national earnings, manufacturing and employment.”

            Otto Eckstein defines fiscal policy as “changes in taxes and expenditures which aim at short run goals of full employment and price level stability.”

Objectives of Fiscal Policy

The following are the objectives –

  1. To uphold and accomplish full employment.
  1. To alleviate the price level.
  1. To soothe the development rate of financial system.
  1. To sustain symmetry in the balance of payment.
  1. To endorse the monetary development of under developed nations.

Instruments of Monetary Policy

     Monetary policy through variations in government outlays and taxation profoundly afflicts national earnings, employment, productivity and prices.

     An enhancement in public outlay during depression adds to the total demand for merchandise and services and leads to a large enhancement in earnings thus enhancing consumption and investment outlays of the people.

     Alternatively, a decrease of public expenditure during inflation decreases total demand, national earnings, employment, productivity and prices, whilst an enhancement in taxes is likely to decrease disposable earnings thus decreases consumption and investment outlays.

Therefore government can manage depression and inflationary pressures in the fiscal system by a judicious combination of outlay and taxation programmes.

Compensatory Fiscal Policy

    The compensatory fiscal policy intends at continuous compensating the economy against chronic tendencies toward inflation and deflation by influencing public outlays and taxes.

     It thus, necessitates the adoption of fiscal measures over the long run somewhat than once for all measures at a point of time. When there are deflationary tendencies in the financial system, the government must enhance its outlay through insufficient budgeting and decrease in taxes.

    This is essential to compensate for the lack in private investment and to augment effectual demand, employment, productivity and earnings within the financial system.

     Alternatively, when there are inflationary tendencies the government must decrease its outlay by possessing an excess budget and raising taxes in order to alleviate the fiscal system at the full employment level.

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