What is Fiscal Policy: Nature and Objectives

Meaning and Definition of Fiscal Policy

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,borrowing and public debt management within a country. The focus of fiscal policy is on the flow of money in a particular economy. The process of monetary flow is initiated by the private sector which is generally transferred to the government. The government utilises these funds in the welfare of the economy. Private sector uses taxation as a channel for diverting funds to government, and these funds is go back to the economy through the public expenditure. Another important concern in fiscal policy is public debt management. Government loans, interest payment and retirement of matured debts, all come under public debt management. Fiscal policy, thus, proved to be very crucial for the national economy.

According to Buehler___” 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”.

Nature of Fiscal Policy

  1. Rationalization of product classification codes: A very welcome change brought about for administrative convenience is the adoption of a rational standard product code structure for indirect taxes. The change has related in reduce disputes and litigations about product classification.
  2. Common Accounting Year for Income Tax: Taxation policy has adopt standard accounting year for the purpose of income tax. The change is intended to reduce the malpractice and raise tax revenues.
  3. Long-Term Fiscal Policy: Since 1986 budget, the government of India has introduced long-term fiscal policy to provide greater certainties in its budgetary policies and to improve the over all environment of business.
  4. Impact on Rural Employment: Generation of employment has been an important objective of fiscal policy. The government of India has introduced new employment schemes like Jawahar Rozgar Yojana or strengthened the existing schemes like Integrated Rural Development Program or National Rural Employment Program.
  5. Black Money: Unaccounted money has been a constant feature of India’s economy. Fiscal measure have generally failed to reduce the creation of black money. Schemes like Voluntary Disclosure, Bearer Bonds or Indira Vikas Patra have marginal impact on the incidence and growth of black money.
  6. Reliance on Indirect Taxes: The tax policy is increasingly becoming regressive in nature by large dependence on indirect taxes like excise duty or custom duty as compared to that on direct taxes like income taxes,corporation tax,capital gains tax,etc.
  7. Inflationary Potential: With large budget deficits, indirect taxes, shortages,black money and rising money incomes, inflationary trends in economy has been remarkable. The fiscal policy instead of being a cure of inflation has become the cause of Inflation.

Objectives of Fiscal Policy

  1. Development by effective Mobilization of Resource: The principal objective of fiscal policy is to ensure rapid economic growth and development. This objective of economic growth and development can be achieved by Mobilisation of financial resources. The financial resources can be mobilised by: Taxation,Public savings and Private Savings.
  2. Efficient Allocation of Financial Resource: The central and state government have tried to make efficient allocation of financial resources. These resources are allocated for Development Activities which includes expenditure on railways, infrastructure,etc.
  3. Price Stability and Control of Inflation: One of the main objective of fiscal policy is to control inflation and stabilise price. Therefore, the government always aims to control the inflation by reducing fiscal deficits, introducing tax saving schemes,productive use of financial resources,etc.
  4. Employment Generation: The government is making every possible effort to increase employment in the country through effective fiscal measure. Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on small-scale industries (SSI) units encourage more investment and consequently generate more employment.
  5. Balanced Regional Development:
  6. Reducing the Deficit in the Balance of Payment:
  7. Capital Formation:
  8. Increasing National Income:
  9. Development of Infrastructure:
  10. Foreign Exchange Earnings: It encourage more exports by way of fiscal measures like,exemption of income tax on export earnings, exemption of sales tax and control,etc. Foreign exchange provides fiscal benefits to import substitute industries. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem.

Instrument of Fiscal Policy

1. Taxation: These are mainly two types of taxes: Direct and Indirect.

  1. Direct Taxes: Taxes which are charged directly from the income or wealth of an individual.
  2. Indirect Taxes: Taxes which are charged from individual’s expenditure or outlay. For effective taxation system, balance between direct and indirect taxes should be maintained.

2. Public Expenditure: It is a instrument of fiscal policy which deals with government spending for public welfare,wages and salaries of government employees, public health and security, investment and allowances,etc. Which the expandable resources, it is vital to design the composition of public spending. The final effect of public spending depends on the well-designed public expenditure.

3. Public Borrowing: Fiscal policy of any economy uses public borrowing or debt management as a tool to manage surplus liquidity available with public. The change of level of consumption and investment makes policy is able to divert resources from unproductive to productive, resulting in economic growth of the country. This instrument is also used to develop funds for welfare projects like modernization of railways, methods for power generation and introducing irrigation schemes.