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.
