Use Of Fiscal Policy

What is fiscal policy?

It is the expenditure and revenue policy of the government to accomplish the desired objectives. At the time of excess demand, the main priority of the fiscal policy is to reduce the aggregate demand in the economy by adopting various means.

The main tools of fiscal policy are:

• EXPENDITURE POLICY: (reduce expenditure) in a situation like that of excess demand, government should reduce its expenditure on public works such as roads, buildings, rural electrification, irrigation works , thereby reducing the money income of the people and their demand for goods and services. Since the budget deficit is due to increase in expenditure of the government, the reduction leads to increase in its revenue, thus improving the deficit.

• REVENUE POLICY: (increase taxes) the other pivotal part of the fiscal policy is the revenue policy which is expressed in terms of taxes. During inflation, government should raise taxes especially on rich people because taxation withdraws purchasing power from the tax payers. Care should be taken that measures adopted to raise revenue should be disinflationary and at the same time have no harmful effects on production and savings. When the government expenditure increases, aggregate demand of an economy increases by the same amount.

• PUBLIC BORROWING: (increase it) additionally, government should resort to large scale public borrowing to mop up the excess money with the public. Excess demand is due to the excess money available with the people. Therefore, increase in public borrowing would result in downscale of the demand.

•  DEFICIT BORROWING: (reduce it) deficit financing is the printing of new notes by the central bank. In case of excess demand in the economy, deficit financing should be reduced by a large amount which will reduce government ability to spend which in turn will decrease demand in the economy.

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