November 12, 2018

Fiscal Policy - Meaning and Its Objectives

November 12, 2018

When government receives revenue, it has to spend. For receiving and spending this revenue, the government structures a fiscal policy which is also called budgetary policy. So, the fiscal policy belongs to the revenue and expenditure of the government. It plays an important role in determining stability of an economy. The objectives of fiscal policy are quite different for developed and developing countries. For developing countries, the main aim of fiscal policy is to increase the rate of investments for the purpose of development and growth. While for developed countries the main objective of the fiscal policy is to maintain stability.  Following are the common objectives of fiscal policy.


Full Employment

The first and foremost objective of fiscal policy is to achieve and maintain full level of employment. Unemployment reduces the level of production, and hence the level of economic growth. So, the government is making every possible effort to increase employment in the country. The government increases its expenditure through construction of bridges, roads, new dams etc.  These expenditures help to create more employment opportunities and increase the productive efficiency of the economy. In rural areas, domestic industries can be encouraged by providing them training, cheap finance and equipment. Besides public investment, private investment can also be encouraged through lower tax, concessions, cheap loans, and subsidies.  

Price Stability

Price belongs to inflation. The inflation is the rate at which the prices of goods and services increase in an economy over a period of time. Increase in the rate of inflation reduces purchasing power of people. For example, if a man buys petrol daily 1 liter in a year at Rs. 100. After a year the inflation rate increases 10 percent. Now he will have to pay Rs. 110 for 1 liter of petrol.  If prices are increasing then it will affect different sections of society. Conversely, if prices are falling then business community suffers. So, the objective of fiscal policy is to control and maintain the prices of goods and services in a country.

Economic Growth

The objective of fiscal policy should be to achieve an accelerated rate of an economy.  The policy of taxation should focus on development efforts such as dams, railways, electricity, schools, roads etc. They improve the infrastructure of the country. An improve infrastructure is useful to further boost up the economic growth of the country. The best amount of capital formation is a key factor to economic growth. For economic growth, the three important factors, such as taxation, public borrowing and deficit financing should be properly managed.

Equal Distribution of Wealth

Equal distribution of wealth is crucial for socio and economic development of a country. The aim of the fiscal policy is to reduce income inequalities among different sections of the society. When wealth is unequally distributed, the lower class of a country suffers more. It is the responsibility of government to assess the unequal distribution of wealth through progressive taxes in which the rate of taxes increases with the increase in income.  In this way the government can rise the rate of direct taxes and can collect more income tax from upper class of the society which will be used for the benefit (health, education, housing etc.) of lower class.

Reducing Deficit in Balance of Payment

Balance of payment is another factor for the economic growth of a country. When the value of total exports exceeds the value of total imports the balance of payment will be deficit. In order to correct the deficit in the balance of payment the government   use the fiscal policy. By using fiscal policy, the government attempts to encourage exports. The exports can be encouraged through exception of income tax on exports earnings, reduction of central excise duties and customs, reduction of sales tax etc.


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