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FISCALPOLICY
MeaningofFiscalpolicy:-
Fiscalpolicymeans the use oftaxation and public expenditurebythegovernmentforstabilisationorgrowth.AccordingtoCulbarston, “By fiscalpolicy we referto governmentactions affecting its receipts and expenditureswhichweordinarilytakenasmeasuredbythegovernment’sreceipts, itssurplusordeficit.”Thegovernmentmayoffsetundesirablevariationsinprivate consumptionandinvestmentbycompensatoryvariationsofpublicexpendituresand taxes. Therearetwotypesoffiscalpolicy.Thefirst,andmostwidely-used,isexpansionary. Itstimulateseconomicgrowth.It'smostcriticalatthecontractionphaseofthe businesscycle. Expansionaryfiscalpolicyisusuallyimpossibleforstateandlocalgovernment. That'sbecausetheyaremandatedtokeepabalancedbudget.Iftheyhaven'tcreated asurplusduringtheboom times,theymustcutspendingtomatchlowertaxrevenue duringarecession. Thesecondtype,contractionaryfiscalpolicy,israrelyused.That'sbecauseitsgoal istosloweconomicgrowth.Whywouldyoueverwanttodothat?Onereasononly, andthat'stostampoutinflation.That'sbecausethelong-term impactofinflation candamagethestandardoflivingasmuchasarecession. Thetoolsofcontractionaryfiscalpolicyareusedinreverse.Taxesareincreased, andspendingiscut.Youcanimaginehow wildlyunpopularthisisamongvoters. Thus,it'shardlyeverused.Fortunately,contractionarymonetarypolicyiseffectivein preventinginflation.
ObjectivesofFiscalPolicy:-
1 .FullEmployment: Thefirstandforemostobjectiveoffiscalpolicyinadevelopingeconomyisto achieveandmaintainfullemploymentinaneconomy.Insuchcountries,eveniffull employmentisnotachieved,themainmottoistoavoidunemploymentandto achieveastateofnearfullemployment.Therefore,toreduceunemploymentand under-employment,thestateshould spend sufficientlyon socialand economic overheads.Theseexpenditureswouldhelptocreatemoreemploymentopportunities andincreasetheproductiveefficiencyoftheeconomy. Inthisway,publicexpenditureandpublicsectorinvestmenthaveaspecialroleto
playinamodernstate.Aproperlyplannedinvestmentwillnotonlyexpandincome, outputandemploymentbutwillalsostepupeffectivedemandthroughmultiplier process and the economy willmarch automatically towards fullemployment. Besidespublicinvestment,privateinvestmentcanalsobeencouragedthroughtax holidays,concessions,cheaploans,subsidiesetc. 2 .PriceStability: Thereisageneralagreementthateconomicgrowthandstabilityarejointobjectives forunderdeveloped countries.In a developing country,economic instability is manifestedintheform ofinflation.Prof.Nurksebelievedthat“inflationarypressures areinherentintheprocessofinvestmentbutthewaytostopthem isnottostop investment.Theycanbecontrolledbyvariousotherwaysofwhichthechiefisthe powerfulmethodoffiscalpolicy.” Therefore,indevelopingeconomies,inflationisapermanentphenomenawhere thereisatendencytotheriseinpricesduetoexpandingtrendofpublicexpenditure. Asaresultofriseinincome,aggregatedemandexceedsaggregatesupply.Capital goodsandconsumergoodsfailtokeeppacewithrisingincome. Thus,theseresultininflationarygap.Thepricerisegeneratedbydemandpull reinforcedbycostpushinflationleadstofurtherwideningthegap.Theriseinprices raisesdemandformorewages.Thisfurthergivesrisetorepeatedwage-pricespirals. Ifthissituationisnoteffectivelycontrolled,itmayturnintohyperinflation. Inshort,fiscalpolicyshouldtrytoremovethebottlenecksandstructuralrigidities whichcauseimbalanceinvarioussectorsoftheeconomy.Moreover,itshould strengthenphysicalcontrolsofessentialcommodities,grantingofconcessions, subsidiesand protection in theeconomy.In short,fiscalmeasuresaswellas monetarymeasuresgosidebysidetoachievetheobjectivesofeconomicgrowth andstability. 3 .ToAcceleratetheRateofEconomicGrowth: Primarily,fiscalpolicy in a developing economy,should aim atachieving an acceleratedrateofeconomicgrowth.Butahighrateofeconomicgrowthcannotbe achieved and maintained withoutstability in the economy.Therefore,fiscal measuressuchastaxation,publicborrowinganddeficitfinancingetc.shouldbe usedproperlysothatproduction,consumptionanddistributionmaynotadversely affect.Itshouldpromotetheeconomyasawholewhichinturnhelpstoraise nationalincomeandpercapitaincome. InthisconnectionitissignificanttoquotetheviewsofMrs.Hicks,whoobserved, “nowthatfiscalpolicyhasbeendevelopedasanestablishedeconomicfunctionofa government,everycountryisanxioustogearitspublicfinanceinpursuitofthetwin
Similarly,luxuriousitems,whichareconsumedbythehighersection,maybesubject toheavytaxation. 6 .EconomicStability: Fiscalmeasures,toalargerextent,promoteeconomicstabilityinthefaceofshort- runinternationalcyclicalfluctuations.Thesefluctuationscausevariationsinterms oftrade,making the mostfavourable to the developed and unfavorable to the developingeconomies.So,forthepurposeofbringingeconomicstability,fiscal methodsshould incorporatebuilt-in-flexibilityin thebudgetarysystem so that incomeandexpenditureofthegovernmentmayautomaticallyprovidecompensatory effectontheriseorfallofthenation’sincome. Therefore,fiscalpolicyplaysaleadingroleinmaintainingeconomicstabilityinthe faceofinternalandexternalforces.Theinstabilitycausedbyexternalforcesis correctedbyapolicy,popularlyknownas‘tariffpolicy’ratherthanaggregativefiscal policy.Intheperiod ofboom,exportand importdutiesshould beimposed to minimizetheimpactofinternationalcyclicalfluctuations. Tocurbtheuseofadditionalpurchasingpower,heavyimportdutyonconsumer goodsandluxuryimportrestrictionsareessential.Duringtheperiodofrecession, governmentshouldundertakepublicworksprogrammesthroughdeficitfinancing.In nutshell,fiscalpolicyshouldbeviewedfrom alargerperspectivekeepinginviewthe balancedgrowthofvarioussectorsoftheeconomy. 7 .CapitalFormationandGrowth: Capitalassumesacentralplaceinanydevelopmentactivityinacountryandfiscal policycanbeadoptedasacrucialtoolforthepromotionofthehighestpossiblerate ofcapitalformation.A newlydevelopingeconomyisencompassedbya‘vicious circleofpoverty’.Therefore,abalancedgrowthisneededtobreakdownthevicious circlewhichisonlyfeasiblewithhigherrateofcapitalformation.Onceacountry comesoutoftheclutchesofbackwardness,itstimulatesinvestmentandencourage capitalformation. 8 .ToEncourageInvestment: Fiscalpolicyaimsattheaccelerationoftherateofinvestmentinthepublicaswell asinprivatesectorsoftheeconomy.Fiscalpolicy,inthefirstinstance,should encourageinvestmentinpublicsectorwhichinturneffecttoincreasethevolumeof investmentin private sector.In otherwords,fiscalpolicyshould aim atrapid economicdevelopmentandmustencourageinvestmentinthosechannelswhichare consideredmostdesirablefrom thepointofviewofsociety. Itshouldaim atcurtailingconspicuousconsumptionandinvestmentinunproductive channels.Intheearlystagesofeconomicdevelopment,thegovernmentmusttryto
buildupeconomicandsocialoverheadssuchliketransportandcommunication, irrigation,flood control,power,ports,technicaltraining,education,hospitaland schoolfacilities,sothattheymayprovideexternaleconomiestoinduceinvestment inindustrialandagriculturalsectorsoftheeconomy.
