The word fiscal is derived from the word Fisc which means treasury therefore fiscal policy deals with the matters of treasury or public finance. Fiscal policy refers to the government policy of public expenditure and taxes. Fiscal policy plays an important role in determining the stability of an economy because it affects the level of income and employment in a country. For example income and employment increases with increase in government expenditure and vise versa.
Objectives of Fiscal Policy
Following are some of the important objective of fiscal policy.
Desirable price level
The main purpose of fiscal policy is to maintain desirable price level in the country. It means that there should be mild change in the general price level for long period of time. If the prices are increasing rapidly then it will affect different sections of society such as fixed income groups, consumers, working classes, farmers etc. On the other hand if prices are falling, then business community suffers due to shrinking of their profits.
Desirable Level of Consumption
With the help of fiscal policy government can adjust the consumption habits of the people and can also maintain a certain desirable level of consumption. If government wants to encourage or discourage the consumption of a commodity it can do so by simply changing its market price. The market price of a commodity can be changed by increasing or decreasing the sales tax or excise duty on the commodity.
Desirable Level of Employment
Both developed and developing countries try to achieve full level of employment because it reflects a dynamic growth in the economy. This desirable level of employment can be achieved with the help of fiscal policy. For example developed countries can attain the full level of employment by increasing their expenditures under the assumption that the capital expenditure in the private sector remains constant. This will increase the aggregate demand due to which the level of employment will be increased. On the other hand developing countries can increase employment opportunities by increasing its expenditures through construction of new dams, roads, bridges, rail-lines etc.
Desirable Level of Income Distribution
Equal distribution of wealth is very important for the socio and economic development of a country. In case of unequal distribution of wealth, the lower class of society suffers more. Government can check the unequal distribution of wealth through progressive taxes in which the rate of tax rises with the rise in size of income. In this way government can increase the rate of direct taxes so that the upper class of society pays more out of their high income. The amount collected from such taxes can be used in various sectors such as education, health care, etc so that the low income groups of society could be benefited.
Economic Growth and Development
Achieving a desirable level of economic growth and development is the first priority of all developing countries. Therefore in order to achieve this level of economic growth, a large part of the developmental expenditure is done out of the deficit financing. Government increases the financial resources internally as well as externally to boost the investment opportunities. Similarly it provides various incentives such as tax concessions to the entrepreneurs and Multi National Companies for this purpose. Government can achieve a high rate of economic growth and development if all these measures are carried out through fiscal policy.
Equilibrium in the Balance of Payments
The position of balance of payments of a country has close relation with the overall economic situation of a country. If the value of total imports exceeds the value of total exports there will be disequilibrium in the balance of payments. This disequilibrium in balance of payments can be corrected with the help of fiscal policy. Government can use fiscal policy to promote the exports and reduce the imports. It can do so by increasing the import duties and reducing export duties along with providing various subsidies to the exporters.