Fiscal Policy

Definition: Fiscal policy refers to the government’s use of taxation and spending to influence the economy. It’s a key tool for managing economic growth, controlling inflation, and addressing social and economic inequalities.

To mobilise additional resources into socially necessary lines of development
To achieve and maintain economic stability
To stabilize the price level.
To maintain the growth rate of the economy.
To maintain equilibrium in the balance of payments.
To raise the standard of living of the citizens of the country.
To reduce extreme inequality in income and wealth
To provide the necessary incentives to the private sector for its healthy growth. etc.

Taxation:
- Revenue generated through direct taxes (income, corporate tax) and indirect taxes (GST, excise, customs duties).
- Purpose: Increase or decrease disposable income to control inflation or stimulate growth.
Government Expenditure:
- Revenue Expenditure: Routine expenses like salaries and subsidies.
- Capital Expenditure: Investments in infrastructure and public assets.
- Purpose: Boost demand or curb fiscal deficits.
Public Borrowing (Deficit Financing):
- Borrowing to cover the gap between revenue and spending.
- Impact: Stimulates economic growth but can lead to inflation and debt accumulation.

Expansionary Fiscal Policy:
- Objective: Stimulate economic growth during periods of economic slowdown or recession.
- Tools Used: Increase in government spending, reduction in taxes, and offering subsidies to boost demand.
- Effect: Leads to higher government expenditure and a larger budget deficit. It encourages consumption, investment, and job creation.
Contractionary Fiscal Policy:
- Objective: Control inflation and reduce the fiscal deficit during periods of economic boom.
- Tools Used: Decrease in government spending, increase in taxes, and reduction in subsidies.
- Effect: Reduces aggregate demand in the economy, controlling inflation and stabilizing prices. It helps bring down the fiscal deficit but can also slow economic growth.
Neutral Fiscal Policy:
- Objective: Maintain a balance between government spending and revenues, without stimulating or contracting the economy.
- Tools Used: Moderate adjustments in taxes and spending, maintaining fiscal discipline.
- Effect: Aims for balanced budget management without significantly altering economic conditions.