Fiscal Policy

By : Neha Dhyani

Updated : Mar 27, 2022, 16:29

The government's revenue and expenditure policies are dealt with under Fiscal Policy. The term fiscal comes from the word "fisk," which signifies "public treasury" or "government finances."

During a recession, for example, the government may opt to spend more on infrastructure projects, social welfare programs, and corporate incentives, among other things. The goal is to assist in making more productive money accessible to individuals, freeing up some income for consumers to spend elsewhere, and encouraging companies to invest.

Fiscal Policy Goal

The goal of Fiscal Policy is to increase government income while also increasing government spending. The government finance or policy known as Fiscal Policy is used to produce income and increase spending. The following are the important fiscal measures:

Expenditure by the government- The government invests money in a range of activities, including the police and the military, as well as amenities like healthcare and education and social spending like public assistance.

Imposition of Taxes- The government introduces new taxes and alters the rates of existing taxes. The government's expenditures are compensated for by the levy of taxes.

Borrowing From Public- Kisan Vikas Patra, Bonds, and other government-issued instruments are used to collect funds from the public at large or from overseas.

Why is Fiscal Policy in the news?

The Union Budget's Fiscal Deficit Target has been updated. Finance Minister has set the fiscal deficit at 6.8 percent of GDP for 2021-22 in the Union Budget 2021-22. By 2025-26, the government wants it to be below 4.5 percent. The initial budget deficit target for 2020-21 was 3.5 percent.

Objectives of Fiscal Policy

Helps to foster economic growth- The government encourages economic growth by establishing fundamental and heavy industries such as steel, chemicals, fertilisers, and industrial machinery, among other things. It also constructs infrastructures that promote economic growth, such as highways, bridges, trains, education and health facilities, water and energy supply, telecommunications, and so on.

Both basic and major industries, as well as infrastructure, require significant investment, which the private sector typically does not provide. Because these sectors and infrastructural facilities are critical for the country's economic progress, the government bears the responsibility of establishing and developing them.

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Diminishes disparities in income and wealth- The government minimises income and wealth disparities by taxing more on wealthy people and spending much more on poor people. Furthermore, it gives underprivileged people job possibilities that enable them to earn money.

Create opportunities for employment- The government expands employment possibilities in a variety of ways. One, when it establishes public sector firms, it creates jobs. Two, it gives incentives and other benefits to the private sector, such as tax holidays, reduced tax rates, and so on, to boost output and employment. It also encourages individuals to start small-scale, cottage, and rural enterprises in order to create jobs. This is accomplished by giving them tax breaks, incentives, subsidies, and low-interest loans, among other things. Finally, when it conducts public works projects such as road construction, bridges, waterways, and buildings, it produces jobs for the poor.

Ensures Price Stability- By controlling the supply of necessary commodities and services, the government promotes price stability. As a result, it spends money on rationing and fair-priced stores with an adequate supply of food grains. It also subsidises cooking gas, water, electricity, and other basic services like transportation, keeping their costs low enough for ordinary people to pay.

Elements of Constitute Fiscal Policy

India's Fiscal Policy is divided into three parts:

  • Government Receipts
  • Government Expenditure
  • Public Debt

Is there a distinction between monetary and Fiscal Policy?

To fulfil the county's economic goals, the government employs both fiscal and monetary policy. A country's central bank is in charge of monetary policy. The Reserve Bank of India is responsible for monetary policy in India. Money, currencies, and interest rates are all a part of monetary policy. The government handles the Centre's taxing and expenditure through its Fiscal Policy.

Fiscal Policy is important in raising the rate of economic growth in both the public and private sectors in India. Fiscal Policy, through taxes, aids in the mobilisation of significant resources for the funding of its myriad programmes. It also contributes to increasing the savings rate by providing the private sector with sufficient incentives to grow its operations. The goal of Fiscal Policy is to reduce inequity in the distribution of wealth and income.

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FAQs on Fiscal Policy

Q1. In India, who controls the Fiscal Policy?

The Fiscal Policy is established by the Ministry of Finance.

Q2. What are the 3 different kinds of Fiscal Policy?

Fiscal Policy is classified into three categories:

  • Neutral policy
  • Expansionary policy
  • Contractionary policy

Q3. What are some of the examples of Fiscal Policy?

Tax cuts and enhanced government expenditure are two primary elements of expansionary Fiscal Policy. Both of these strategies aim to boost aggregate demand while also driving to budget deficits or draining surpluses.

Q4. What are the 5 limitations of the Fiscal Policy?

The 5 limitations of the Fiscal Policy are:

  • Changing spending levels
  • Predicting the future
  • Delayed results
  • Political pressures
  • Coordinating Fiscal Policy