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Home Fiscal Policy Fiscal Policy With Reference to Underdeveloped Countries

 

Fiscal Policy With Reference to Underdeveloped Countries:

 

What is Fiscal Policy/Budgetary Policy?

 

Fiscal policy also called budgetary policy is a powerful instrument in the hands of the government to intervene in the economy. Fiscal policy relates to a variety of measures which are broadly classified, as: (a) taxation, (b) public expenditure and (c) public borrowing.

 

Fiscal policy is considered an essential method for achieving, the objectives of development both in developed and underdeveloped countries of the world.

 

Definitions of Fiscal Policy:

 

Fiscal policy has been defined in a number of ways. According to Samuelson:

 

"Fiscal policy we mean the process of shaping taxation and public expenditure in order to (a) help dampen the swings of the business cycle and (b) to contribute to the maintenance of a growing high employment economy".

 

In the words of Arthur Smithees:

 

"Fiscal policy under which the government uses its expenditure and revenue programs to produce desirable effects and to avoid undesirable effects on the national income, production and employment"?

 

Roger defines fiscal policy as:

 

"Changes in taxes and expenditure which aim at short run goals of full employment and price level stability".

 

Role of Fiscal Policy:

 

The role of fiscal policy in less developed countries differs from that in developed countries. In the developed countries, the role of fiscal polity is to promote fall employment without Inflation through its spending and taxing powers. Whereas the position of the developing countries is very much different. The LDC's (Less Developed Countries) or backward countries are caught in a vicious circle of poverty.

 

The vicious circle of low income, low consumption, low savings, low rate of capital formation and therefore low income has to be broken by a suitable fiscal policy. Fiscal policy in developing countries is thus used to achieve objectives which are different from the advanced countries.

 

Objectives of Fiscal Policy:

 

(i) To mobilize resources for financing development.

 

(ii) To promote economic growth in the private sector.

 

(iii) To control inflationary pressure in the economy.

 

(iv) To promote economic stability with employment opportunities.

 

(v) To ensure equitable distribution of income and wealth.

 

Fiscal Policy Measures/Weapons:

 

The main fiscal policy measures/tools which are used to achieve the above objectives are now discussed in brie:

.

(1) Resource Mobilization for Financing the Development Programs in the Public Sector:

 

(a) Taxation. Taxation is an important instrument for fiscal policy. It is widely used to mobilize the available resources for capital formation in the country. There are two type of taxes which are levied to transfer funds from private to public use (i) The direct taxes are levied on the income, profits and wealth of the people who have potential economic surplus. (ii) The indirect taxes such as excise duty, sales tax etc., are imposed mostly on goods which have higher income elasticity of demand. The moping up of surplus resources through taxation is an effective means of raising resources for capital formation. A rise in tax rates causes a reduction in aggregate demand for three reasons (i) it reduces consumption (ii) It reduces investment and (iii) it reduces net exports. A fall in the tax rates has the opposite effect.

 

(b) Tax on farm income. Agriculture sector is another important source of revenue which can be tapped for capital formation. With the use of improved methods of cultivation, the agricultural production has fairly increased. It is, therefore, justified that this largest sector of the economy should be brought under progressive tax net. The government will not only raise large amount of revenue but also remove the disparity between agriculture income and non agriculture income for tax purpose. Tax should promote equity whether It is from agriculture or not agriculture.

 

(2) Promoting Development in the Private Sector:

 

In a mixed economy, private sector constitutes an important part of the economy. While framing fiscal policy, the interests of the private sector should not be ignored. The private sector should make significant contribution to the development of the economy. The fiscal methods for stimulating private investment in developing countries are:

 

(a) Tax on national saving certificates and other approved forms of saving be exempted from taxation, this will encourage private savings.

 

(b) The rates of return on voluntary contribution to provident fund, insurance premium etc., be raised for incentive to save.

 

(c) The retained profits of the public companies should be taxed at preferential rates or exempted from taxation. This move will boost private investment.

 

(d) Private investment can also be stimulated by giving tax holidays or relief from tax for some specified period of time to certain selected industries.

 

(e) Rebates and liberal depreciation allowances can also be granted to encourage investment in the private sector.

 

(3) Restraining Inflationary Pressure in the Economy:

 

One of the important objectives of fiscal policy is to use taxation as an instrument for dealing with inflationary or deflationary situations. In developing countries there is a tendency of the general prices to go up due to expenditure on development projects, pressure of wages on prices, long gestation period between investment expenditure and production etc. Fiscal measures are used to counter act the inflationary pressure. Tax structure is devised in such a manner that it mops, up a major proportion of the rise in income. Government also tries to reduce its own spending and achieve budgetary surplus. If helps in reducing inflationary pressure in the economy.

 

(4) Securing Equitable Distribution of Income and Wealth:

 

A wider measure of equality in income and wealth is an integral part of economic development and social advance. The fiscal operations if carefully worked out can bring about a redistribution of income in favor of the poorer sections of the society. The government can reduce the high bracket incomes by imposing progressive direct taxes. For raising the income of the poor above the poverty line and narrowing the gap between rich and poor, the government can take direct investment on economic and social overheads.

 

(5) Promoting Economic Stability with Increased Employment Opportunities:

 

The ultimate objective of economic development is to increase conditions of employment and to provide rising standard of living.

 

Summing up, the principal aim of the fiscal policy in underdeveloped countries is to provide incentives for promoting saving and investment and thereby high rate of economic growth.

Relevant Articles:

What is Fiscal Policy
Principles/Tools of Fiscal Policy
Fiscal Policy With Reference to Underdeveloped Countries
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money
 

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