Fiscal Policy

Fiscal policy is the revenue and expenditure policy of the government. It is also called as the budgetary policy of the government. Through its revenue and expenditure policy, situation of  ---

inflation ( excess demand ) and deflation ( deficient demand ) 

is checked and controlled by varying the size and composition of revenue as well as of expenditure. Fiscal policy leads to the growth and stability of the economy. Fiscal policy is the policy of the government which includes components like taxation, public expenditure and public borrowing. Following are the principal instruments of fiscal policy which, when used in a proper combination to achieve the best possible results in terms of the desired economic objectives like.

Maintaining economic stability

High employment

And, accelerating economic growth

Components / Instruments of Fiscal policy:

Following are the principal components of fiscal policy.

a) Government expenditure:

Government expenditure or Public expenditure refers to the expenses incurred by public authorities (central, state and local bodies) for its own maintenance as also for the satisfaction of collective needs of the citizens and for promoting their social and economic welfare.It is the principal instrument of fiscal policy. The government of a country incurs various types of expenditure, mainly:

i) Expenditure on public work programmes like construction of dams, bridges, roads etc.

ii) Expenditure on education and welfare programmes (old age pension etc).

iii) Expenditure on defence and law and order.

iv) Expenditure on subsidies to the producer for encouraging production.

b) Taxes:

Taxes are compulsory payment made to government by the household and the producing sector without any corresponding direct return of services or goods by the government to the taxpayer. This is the major source of revenue for the government.

c) Public borrowing/ public debt:

In modern times, borrowing by the government has become a normal method of government finance along with other sources of public finance like taxes, fees, etc. Borrowing by the government leads to public debt i.e. loans raised by the government from within the country or from outside the country. The government may borrow from individuals, business enterprises and banks, etc. It is in the form of issuing securities, government bonds and bills.

d) Deficit Financing:

The policy of meeting deficit between government expenditure and revenue through the creation of new money. In India, deficit financing means borrowing by the government from the RBI. The RBI lends money to the government by issuing more currency. Additional currency causes additional purchasing power in the economy.