Fiscal Policy Meaning, Definition, Objectives, Types

Fiscal Policy Meaning, Definition, Objectives

Table of Content:-

  1. Meaning of Fiscal Policy
  2. Definition of Fiscal Policy
  3. Objectives of Fiscal Policy

Meaning of Fiscal Policy

The fiscal policy represents the government policy related to tax and expenditure. It is a type of economic policy which controls and regulates the tax system, expenditure, borrowings and public debt management within a country. The main focus of fiscal policy is on the flow of money in a particular economy.

The monetary flow process is initiated by the private sector which is generally transferred to the government. The government utilises these funds for the welfare of the economy. The private sector uses taxation as a channel for diverting funds to the government, and these funds go back to the economy through public expenditure.

Another important concern in fiscal policy is public debt management which demands careful attention. Governmental loans, interest payments and retirement of matured debts, all come under public debt management. Fiscal policy, thus, proved to be very essential for the national economy.

The role of fiscal policy differs according to the requirements of a country. Developed countries use fiscal policy as a tool to increase employment and maintain economic stability. While underdeveloped countries we fiscal policy to boost economic growth.

Definition of Fiscal Policy

According to Buchler. “By fiscal policy is meant the use of public finance or expenditure, taxes, borrowing and financial administration to further our national economic objective.”

According to Arthur Smithies, “Fiscal policy is a policy under which government uses its expenditure and revenue programmes to produce desirable effects and avoid undesirable effects on the national income, production, and employment”.

Objectives of Fiscal Policy

The main objectives behind the determination of various fiscal policies are explained below:

  1. Effective Mobilisation of Resources for Development
  2. Public Savings
  3. Effective Allocation of Financial Resources
  4. Price Stability and Inflation Control
  5. Balanced Regional Development
  6. Capital Formation
  7. Infrastructural Development
  8. Taxation
  9. Private Savings
  10. Reducing to qualities of Income and
  11. Wealth
  12. Employment Generation
  13. Controlling the Deficit in Balance of Payment
  14. Increasing National Income
  15. Foreign Exchange Earnings

1) Foreign Exchange Earnings

With the help of different types of fiscal measures such as exemption of sales tax, exemptions of income tax on export earnings, etc., exports are highly encouraged. Different fiscal advantages are provided to import substitute industries with the help of this foreign exchange. The foreign exchange is saved with the help of import substitutes and earned by exports. It thus resolves the problem of balance of payment.

2) Infrastructural Development

To attain higher economic growth, the government gives greater importance to the infrastructural development of the country. The required revenues for the government are generated by various fiscal methods such as taxation. Under these infrastructural development projects. only some portion of the generated revenue is invested. As a result, all the sections of the economy are promoted and developed.

3) Increasing National Income

Increasing the national income of any country is the main function of any fiscal policy. This is true as capital formation is supported by fiscal policies. Economic growth is a result due to these policies which in turn provide higher rates of GDP growth and an increase in national and per capita income of the nation

4) Capital Formation

Increasing the capital formation rate is also one of the main objectives of fiscal policies in India. The rate of capital formulation is increased to increase the rate of economic development. These policies encourage savings, and thus, foster the economic development of the country. Due to capital deficiency, an underdeveloped country finds itself in a vicious circle of poverty. The fiscal policies must be designed effectively so that savings can be encouraged and spending can be reduced for improving the rate of capital formation.

5) Price Stability and Inflation Control

Price stability and controlling inflation are the main objectives of fiscal policies. The attempts are made by the government to control inflation by reducing fiscal deficits, productive and efficient utilisation of resources, tax saving schemes and so on.

6) Employment Generation

With the help of effective fiscal policies, a lot of efforts are being made by the government to improve the situation of employment level in the country. Both direct and indirect employment opportunities are being created by investing in infrastructure. More investments are been dedicated to small-scale industries (SSI) by offering lower taxes and duties which as a result provides employment chances.

7) Effective Allocation of Financial Resources

The Central and State Governments have made a lot of efforts towards achieving effective allocation of financial resources. The allocation of these activities takes place for both development as well as non-development activities. Development activities include expenditure on infrastructure, railways, roads, etc., and non-development activities include expenditure on defence, interest payments, subsidies, etc. However, it must be ensured by all fiscal policies that the products and services required by society are produced without any interruption by facilitating these activities with the proper allocation of financial resources.

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8) Reducing Inequalities of Income and Wealth

By reducing the income inequality which prevails in various segments of society, the objective of fiscal policy of attaining social equity is tried to be accomplished. Higher taxes are applied to the rich segment of the population, while lower tax rates are imposed on the weaker sections of society.

In the case of luxury or semi-luxury products, which are mainly consumed by the upper-middle class and upper-class people, higher indirect taxes are imposed. Also, various Poverty Alleviation Programmes are financed by the government for improving poverty in the country. The required funds for each programme are accumulated from taxes.

9) Balanced Regional Development

Ensuring a balanced regional development is another main focus of fiscal policies. A lot of incentive programmes are being initiated by the government so that the investments can be directed towards the backward areas of society. Concessions in taxes and duties in the form of tax holidays, cash subsidies, finance at lower interest rates, etc., are some of the provisions.

10) Controlling the Deficit in the Balance of Payment

Various fiscal measures such as the exemption of central excise duties, income tax exemption on export earnings, sales tax exemptions, octroi, customs exemptions, etc., are provided by fiscal policies to promote more exports. By facilitating various fiscal advantages to import substitute industries, having higher custom duties on imports and so on, foreign exchange is also preserved.

The problem of balance of payment can be resolved by the foreign exchange which is saved with the help of import substitutes and earned by exports. Either by providing subsidies to export or having higher duties on imports, the unfavourable balance of payment can be rectified.

11) Private Savings

Different types of financial resources can be raised from private sectors and households through the government with the help of efficient fiscal policies such as tax benefits. Government borrowings in the form of issues of government bonds, treasury bills, deficit financing, loans from foreign, domestic players, etc., can be used for mobilising resources.

12) Effective Mobilisation of Resources for Development

Accomplishing high developmental and economic growth is the main purpose of fiscal policies. Effective mobilisation of financial resources is an essential requirement for ensuring high economic and development growth. Both the central and state Indian governments use fiscal policies for the mobilization of financial resources.

13) Public Savings

Resource mobilization can be achieved through controlling public expenditures and boosting the surpluses of public sector firms, aided by public savings.

14) Taxation

The government can use both direct taxes and indirect taxes to mobilize resources with the help of effective fiscal policies. In India, taxation is one of the most effective methods of resource mobilization.

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