Lesson 5:
Fiscal Policies
Introduction
• Fiscal policy refers to the budgetary policy and it works
through the government budget.
• Fiscal policy is the government’s policy on the generation of
its resources through taxation and/or borrowing, as well as
the setting of the level and allocation of expenditures.
• Any type of fiscal policy move ultimately affects the
government budget and hence its impact falls on the
economy.
• The government of any country collects different types of
taxes and also spends on different heads in a given year.
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Objectives of Fiscal Policy
• It is the objective of the government to pursue and
maintain sound fiscal policy. This is possible through
the establishment of an efficient, equitable and
progressive revenue system. Moreover, the
government is committed to adopt a spending
strategy consistent with the macroeconomic
development targets and sectoral priorities.
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Components of Fiscal Policy
There are three components of fiscal policy:
1. Revenue Policy
Revenues of the government include both domestic and external
revenue, and borrowings. Government's policy in raising
revenues is rooted on the "ability to pay” concept. Revenue
generation must be equitable and efficient. It must be
administratively feasible to implement, and projections should
be realistic. Revenues can be raised administratively or
legislatively.
There are two objectives why government raises revenues. One is
to increase or raise revenue collections and second for regulatory
purposes.
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Components of Fiscal Policy
2. Expenditure Policy
Basically, the government views expenditures as a tool for
effectively implementing public policy. Funds are disbursed for
the efficient delivery of services to the public and to help in
economic growth by supporting priority sectors. The government
allocates funds in the most efficient and effective way to ensure
rational and equitable resource allocation.
3. Debt Management Policy
It is the policy of the government to attain a manageable debt
level. This is one where the country can afford to pay its maturing
liabilities as scheduled.
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Instruments of Fiscal Policy
Fiscal policy is based on a fundamental idea that it can
influence the total level of aggregate spending which further
influence the income of the economy, corporate bodies and
individuals.
1. Budget
2. Taxation
3. Public Expenditure
4. Public Works
5. Public Debt
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The of Fiscal Policy in Economic Development
The following important roles to be played by fiscal policy for
ensuring rapid economic development and growth in
developing economies:
• To increase the rate of capital formation so that economic
growth could be accelerated.
• To encourage saving and investment.
• To check sectoral imbalances so that regional disparities
can be removed.
• To check extravagant and superfluous consumption.
• To reduce income and wealth inequalities.
• To raise standard of living of the country as a whole and
to uplift the poor section of the community.
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“While monetary policy can
contribute to growth by supporting a
durable expansion in a context of
price stability, it cannot reliably
affect the long-run sustainable level
of the economy's growth.
― Jerome Powell,― 12
