The classical economists were of the view that the economy
automatically moves towards full employment in the long run. They ruled out the
possibility of over production and hence unemployment in the long
period. The role of the government in the economy, according to the classical
economists, should be the minimal.
The J. M. Keynes in his famous book,
"General Theory of Employment, Interest and Money", disagreed with the views of the classical economists
that the economy has the tendency to move towards full employment in the
long run.
He was of the strong view that the government must interfere in economic matters to achieve full employment, to prevent
inflation and to promote rapid economic growth. In order to achieve the macro economic goals, he stressed that the government must step in
and use government expenditure and taxes for changing the size of
national income and the tempo of aggregate economic activity in
the country. The use of deliberate changes in government expenditure and or
taxes to achieve certain national economic goals is called Fiscal Policy.
Fiscal policy thus is the deliberate change in government spending and taxes
to stimulate or slow down the economy. In the words of F.R. Glahe:
"By
fiscal policy is meant the regulation of the level of government expenditure and
taxation to achieve full employment without inflation in the economy".
J. M.
Keynes describes fiscal policy as the steering wheel for the aggregate
economy.
Objectives/Goals of Fiscal
Policy:
The objectives of fiscal policy differ with the state of development in the
country. In advanced countries of the world, the goal of fiscal policy may be
the maintenance of full employment without inflation. In developing countries,
the objectives of fiscal policy may be to achieve maximum level of employment
and reduction in economic inequalities. However, the main goals of fiscal policy
are in brief as under:
(i) Removing
Deflationary Gap:
J. M. Keynes is of the view that fiscal policy can play a major role in
lifting the economy out of depression and closing the deflationary gap. When the
economy is in depression, it is faced with rising unemployment, falling income,
severe declining investment and shrinking of economic activities. The
government, by undertaking public works programme, increases its expenditure
which helps in raising the level of aggregate demand out employment in the
economy.
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