What is the meaning of fiscal policy? To put it in simple words, to generate revenue and to incur expenditure, the government structures a fiscal policy or also called as the budgetary policy. In other words, the word fiscal policy is associated with the expenditure and the revenue of the government.
There is a flow of expenditure from the government to the economy and vice versa, the fiscal policy becomes the deciding factor on the size and pattern of the flow of expenses. Fiscal policy can be further explained as the policy of the government with regards to taxation, public expenditure and public spending.
In underdeveloped countries the need or importance of a good fiscal policy is at a high priority. In a democratic set up direct methods are not accepted, the states have to play an active and essential role. Therefore, the need for indirect methods of regulation arises. The government thus uses the powerful tool of fiscal policy to achieve its goal of development, maintaining healthy employment opportunities, economic stability and ensure permanency in growth.
The objective of fiscal policy is quite different for developed countries as opposed to developing countries. For the developing countries the main purpose of the fiscal policy is to quicken the rate of capital formation and investments for the pure purpose of development and growth.
Whereas in developed countries, the main objective of the fiscal policy is to maintain stability.
Although the long run goal of any fiscal policy is to maintain stabilisation by moderating short run economic fluctuations.
The principle objective of fiscal policy and its advantages are –
Taxation – resources need to be mobilised so that there can be funds for financing the development programs in the public sectors. The tax policy should be such that can be focused towards effective deployment of all available resources and can be used in the implementation of other development efforts. It is the most effective in the total quantum savings in an economy.
Development of the private sector – policies can direct investment in necessary stations, both in public and private sectors, with incentives attached, may accelerate economic growth. Policies should be such that all available resources should make their way into the necessary and needed development opportunities.
Ensure Economic Stability & Curb Inflation – fiscal policy should be designed with the thought that it is the tool, a powerful instrument, to deal with a situation of inflation. One effort in this is to design a robust tax system which counters economic disruptions.
To remove Economic Inequalities – so that the benefits of development can be equally shared by all inhabitants of an economy, the income should be appropriately distributed, it is a fundamental part of economic development. This endeavour can be achieved by proper application of taxes. Welfare schemes, where we increase public expenditure for the less privileged class, can be promoted.
Full Employment – to achieve higher rate of growth, fully employed resources is desirable, this will increase the productivity capacity of the economy. Now to increase employment, the government should direct the state expenditure towards providing social overheads, and encourage investments so that production increases. States should indulge in local public community development, which will eventually involve more labour and less capital per head.
Capital Formation – There are many economic theories that suggest that the best amount of capital formation becomes a key factor to economic growth, especially in developing countries. Taxes, transfer payments, rebate, subsidies etc…, are known to benefit the economic growth by increasing the capital formation.
Once the objective of fiscal policy is implemented, based on the nature of requirement in any economy, the success purely depends upon, how effectively, timely measures are put in place, and ensuring effective administration during the implementation phase.