Fiscal policy is defined as the policy under which the government uses the instrument of taxation, public spending and public borrowing to achieve various objectives of economic policy.
Significance of Fiscal Policy
1. Economic Management: Governments use fiscal policy, including taxation, to stimulate economic growth during periods of recession or cool down an overheated economy during periods of inflation. For instance, cutting taxes during an economic downturn can boost consumer spending and business investment.
2. Redistribution: Fiscal policy can be used to redistribute wealth and reduce income inequality. Higher-income individuals pay a larger percentage of their income in taxes which is aimed at more equitable distribution of wealth.
3. Price Stability: It enables the use of taxation and public expenditure to regulate prices in order to control inflation.
4. Employment Generation: One of the core purposes of fiscal policy is to create sustainable jobs to stimulate consumption expenditure in the economy. Through various policies and schemes, government tries to promote employment-generating economic activities/
5. Regulation: It helps to control behaviours (e.g., on harmful substances). For example, governments may implement taxes to discourage certain behaviours or activities, such as taxes on tobacco and alcohol to reduce consumption.
6. Public Goods: It funds essential services and infrastructure. These include infrastructure projects like roads and bridges, public schools, healthcare, and law enforcement.
Components of Fiscal Policy
1. Government Receipts: Money received by the Government.
2. Government Expenditure: Money spent by the Government.
3. Borrowing: Money taken as debt by the Government to meet the shortfall.
Spread the Word