Meaning of Fiscal Policy

The policy adopted by the government of a country for economic stabilization and sustainability is called fiscal policy. It is concerned with ensuring the economic growth and development of a nation through government receipt and expenditure. In other words, fiscal policy is the policy concerned with public receipt, public expenditure, public borrowing and taxation to achieve desired economic results for the welfare of the nation. It is playing around with two variables: government spending (G) and taxation  (T) to achieve growth and stability in national output, employment, production, social development, public welfare etc.

Key Definitions

Defined By	Definition
J.M. Keynes	“Fiscal policy is a policy that uses public finance as a balancing factor in the development of the economy”
Arthur Smithies	“Fiscal policy is a policy under which the government uses its expenditure and revenue programs to produce a desirable effect and avoid undesirable effect on the national income, production and employment”
Otto Eckstein	“Fiscal policy is the changes in taxes and expenditures which aim at short-run goals of full employment and price-level stability”

From the above discussion and definitions:

• Fiscal policy can be understood as a policy adopted by the government for macroeconomic growth, stability and sustainability of a country.
• It is concerned with government spending to expand the national income, employment, production, efficiency etc. of a country.
• It is a  wholesome policy deciding upon desirable effects with avoidance of undesirable effects in the economy through changes in government spending and taxation policy.
• Fiscal policy is concerned with public receipts, public expenditure and public debt of a country aimed towards the accomplishment of desired economic goals of a country.

Types of Fiscal Policy

Fiscal policy is a policy adopted for the economic upliftment and development of a country. It has to be taken to facilitate different political visions, international commitments and economic cycles. Of a country. Thus, there are different types of fiscal policies to address these different situations. The different types of fiscal policy have been explained below:

1. Expansionary Fiscal Policy

Expansionary fiscal policy is adopted at the time of economic depression. It is concerned with expansion or increase in government spending. In other words, the policy that increases aggregate demand by increasing government spending and lowering taxes is called expansionary fiscal policy. Due to expansionary fiscal policy government budget deficit increases or budget surplus decreases. Thus, an expansionary fiscal policy adopted is directly reflected in government budget status.

2. Contractionary Fiscal Policy

Contractionary fiscal policy is adopted by the government during inflationary pressures. This type of fiscal policy is focused on the reduction of government spending and increase in taxes. In other words, the fiscal policy was adopted to reduce aggregate demand by reducing government spending and increasing taxes. Such policy reduces the budget deficit and increases the budget surplus. Thus, the adoption of such a policy is visible in the deficit or surplus status of the budget of the government.

Instruments of Fiscal Policy

There are different instruments of fiscal policy. These instruments are crucial in the formulation and implementation of fiscal policy. These instruments of fiscal policy are mentioned below:

1. Budget: The budget of a country is an essential instrument of fiscal policy. It is the estimated statement of revenue and expenditure for the coming fiscal year. There could be three types of budgetary policy. The first one is a balanced budget policy in which total revenue equals total expenditure. Another type of budgetary policy is deficit budget policy in which total expenditure is more than the total revenue. Similarly, the third type of budgetary policy is a surplus budget policy in which the total spending is less than the total revenue. Deficit budget policy is adopted during depression or deflation whereas surplus budget policy is adopted during inflation or prosperity.
2. Taxation: Taxation is another key instrument of fiscal policy. It is concerned with the increase or decrease in tax rates. When the tax rate is increased, the disposable income, consumption and investment decrease and vice versa. The tax rate should be increased during inflation and reduced during the deflation period.
3. Government Expenditure: Government expenditure includes public expenditure including defense, public welfare, wages and salaries of public servants, investment in infrastructure, transfer payment, subsidies etc. Government expenditure injects money into the economy which increases the aggregate demand of the economy. During economic deflation and depression, the government increases its expenditure. On the other hand, government decreases its expenditure during inflation or prosperity.
4. Public Borrowing: Public borrowing refers to the amount borrowed from different sources. public borrowing can be done from internal (government bonds/bills or borrowing from the central bank)  sources and external (international organizations and foreign government) sources. It is a crucial instrument of fiscal policy to fight against inflation or deflation. The government’s decision of financing budget deficit through borrowing should be such that it ensures economic stability and attainment of full employment level in the economy.
5. Public Works: Public works are also an important instrument of fiscal policy. It includes works such as the construction of roads, railway, parks, school, hospitals, buildings etc. The larger and more rigorous the public works, the larger will be the fund transfer to the liquidity system and public of the country and vice versa. 

Objectives of Fiscal Policy

A fiscal policy is designed and developed for the effective allocation and distribution of economic resources of a government. It aims for the economic growth and stability of a country. Moreover, it has different objectives which have been discussed below:

1. Economic Growth and Development: Fiscal policy aims for rapid economic growth and development of a country. This aim can be attained through effective financial resources mobilization by the government of a country. The financial resource of a country can be mobilized through means of taxation, public saving and private saving.
2. Efficient Allocation of Financial Resources: A government has to allocate its financial resources efficiently for both developmental and non-developmental activities The government should also try to ensure that the financial resources are allocated for the generation of goods and services which are socially desirable. Therefore every country designs fiscal policy in such a manner to encourage the production of desirable goods and discourage those goods, which are socially undesirable.
3. Full Employment: one of the key objectives of fiscal policy is to increase employment opportunities and avoid unemployment or employment situations. To do so, the government expenditure should be directed to the development of social and economic overhead like education, health, drinking water, irrigation, road, communication, electricity etc. Expenditure in such areas increases the employment opportunity and increases the production efficiency of the economy in the long run.
4. Price Stability: Another key objective of fiscal policy is to achieve price stability in the economy. Price stability means control over inflation or deflation. However, price stability does not mean a constant price level as some price level is always desirable in a developing economy. The inflation in the economy can be controlled with the help of contractionary fiscal policy. On the other hand, the situation of deflation can be controlled with the help[ of expansionary fiscal policy.
5. Reduction of Inequality of  Income and Wealth Distribution: Fiscal policy also aims to achieve equity or social justice through the reduction of income inequalities among different sections of society. Direct tax such as income tax is charged high on the high-income group and vice versa. Indirect taxes are charged high on luxurious or semi-luxurious goods which are more likely to be consumed by the upper class and the upper-middle class. The government of any country invests a large part of its tax income in poverty reduction programs to reduce income and wealth inequalities in society.
6. Capital Formation: Capital formation is a key need of any economy, especially in the case of emerging economies. Without capital formation. economic development and growth are not possible. That’s why the fiscal policy has to be designed in a manner to perform to function as of expanding investment in the public as well as the private sector.
7. Balanced Regional Development: Fiscal policy has another objective of bringing about balanced regional development in a country. There are various incentives from the government for setting up projects in backward areas such as food subsidies, tax holidays and tax concessions.
8. Development of Infrastructures: Economic growth and development are possible only with the development of infrastructures in a country. Such development of infrastructures is possible only by collecting revenue from taxes by the government. Such collection of revenue by the government for the development of infrastructures can be done with the help of fiscal policy.
9. Reducing Deficit in the balance of Payment: Different measures for reduction of the deficit in the balance of payment can be done through fiscal policy. This includes measures such as exemption of income tax, excise duties, other taxes etc. to encourage export or export-oriented industrialization. This helps in correcting the unfavorable balance of payment situation of a country.
10. Economic Stability: Not to forget, economic stability is also an important objective of fiscal policy. Different economic outcomes such as unemployment, inflation, deflation, depression etc. cause instability of the economy. Such economic instability can be dealt with by the government through fiscal policy. The fiscal policy type to be used depends upon the economic situation of the country. Thus, through the right fiscal policy (expansionary or contractionary) economic stability is created in the economy.