Limitations to fiscal policy

Limitations to fiscal policy:

Although the fiscal policy has a significant place in economic development and in specific, in the stepping up of saving and investing both in public and in private sectors, it has the limitations shown below:

1) Size of fiscal measures:

The budget is not a simple statement of receipts and returns of the government. It describes and shapes the economic structure of any country. Whenever the budget forms a small portion of the national income in developing economies, fiscal policy can’t have the desired force on the economic development. Direct taxation at times becomes a tool of restricted applicability, since the huge majority of the people are not covered by it. Moreover, whenever the net tax revenue forms a smaller part of the national income, fiscal computes will not step up the sagging economy needing massive help.

2. Fiscal policy as ineffective anti-cyclical measure:

Fiscal computes-both loosening fiscal policy and tightening fiscal policy- will not rouse speedy economic growth of a country, whenever the various sectors of the economy are not closely integrated with one other.  The action taken by the government might not always have the similar effect on all the sectors. Therefore we might have for instance the recession in some sectors followed by an increase in prices in other sectors. The increasing purchasing power via deficit financing, a policy advocated by J.M.

Keynes in the year 1930s might not have the effect of refreshing the recession hit economies, however merely outcome in a spiraling increase in prices.

3. Administrative delay:

Fiscal computes might introduce delay, uncertainties and randomness arising from administrative bottlenecks. As an outcome, fiscal policy fails to be powerful and thus a helpful stabilization policy.

Other Limitations:

Big scale underemployment, lack of coordination from the public, tax evasion, and low tax base is the other restrictions of fiscal policy.

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