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Fiscal Policy

The deliberate manipulation of the national budget to achieve desired social and economic aims is called fiscal policy.

Aims and Effects of Fiscal Policy

a) Maintain Stability

Recession or depression  923_types of budget.png Deficit budget (Expansionary Fiscal Policy)

By lowering tax rates or increasing government expenditure or both would lead to an increase in purchasing power and aggregate demand.

Inflation  923_types of budget.png Budget surplus (Contractionary Fiscal Policy)

By increasing taxes or reducing its expenditure would lead to a lowering of incomes and hence a fall in aggregate demand and prices levels.

b) Attain Equitable Income Distribution

The higher income group could be taxed at a progressive rate and the tax revenue could be used to promote the welfare of the lower income group. E.g. provision of free education, subsidised health care and low-cost housing and social welfare payments.

c) Achieve Balance of Payments Equilibrium

To discourage imports, the government could impose tariffs or tax incentives (e.g. lower corporate tax) could be given to export – oriented industries to encourage exports.

d) Achieve Economic Growth

Government expenditure incurred in improving quality of its factors of production ( e.g. training scheme to upgrade skills of workers ), its infrastructure, its health care facilities or in participating in certain economic activities, could lead to increases in production capacity and its national income.

Limitations of Fiscal Policy

a) Inflexible nature of government spending.

• Projects are normally long-term in nature

b) Major changes in taxation cannot be carried out at regular intervals.

c) Time lag involved between identification of problem and when measures take effect.

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