What is a fiscal policy?

The main objective of the fiscal policy is to strike a balance in the economy while at the same time maintaining a better growth rate.

Nov 18, 2018 02:11 IST India Infoline News Service

The economy of a country is based on many factors and policies that its government formulates. While the central bank makes and amends the monetary policies and deals with the supply of money in the economy, the central government decides on the fiscal policy and deals with taxation-, revenue-, and expenditure-related decisions.

When the government formulates or even makes amendments to existing taxation and revenue policies, then the economy of the country is ultimately affected. Fiscal policies impact and set the guidelines for the central bank’s monetary policy.

The fiscal policy clearly defines the revenue collected via different sources such as direct or indirect taxes and other non-tax revenues, as well as the expenditure incurred in sectors such as defense, infra, public welfare, etc..

To this effect, when the revenue generated is higher than the planned expenditure, a nation is in surplus. On the other hand, when expenditure outweighs revenues generated from different sources, then it a case of deficit.

Objectives of a fiscal policy

The main objective of the fiscal policy is to strike a balance in the economy while at the same time maintaining a better growth rate. This is done by investing in welfare sectors such as education, healthcare, among various other sectors of the economy, to create more employment.

The overall motive of the policy is to increase the GDP of the country and elevate the living standards of people. For this reason, the fiscal policy emphasizes on regulating inflation and price rise.

Effects of a fiscal policy

A fiscal policy is often formulated according to the political agendas of the ruling party. Most often, the fiscal policy has its maximum effect on the middle-class, which forms the largest population in the country’s demographics.

Expenditure-related decisions also have their own set of impact on people. If the expenditure is focused on giving subsidies, then the population belonging to lower economic groups gets more benefits than the middle- or upper-class. On the flipside, if the expenditure is made on projects that generate employment opportunities, it has a positive effect on the middle-class of the economy.

Large-scale industrial and commercial projects benefit the upper-class most. while also impacting the middle-class in some ways.

This way, the composition of expenditure is strategized to create a balance while formulating the fiscal policy.

Resources of a fiscal policy

The main resources of the fiscal policy are taxes, which are levied in a direct and indirect manner.

Taxes affect the people in two ways: firstly, they are the ones who end up paying more when taxes are raised. Secondly, the revenue generated from taxes is spent mostly on developmental projects that are targeted to serve all people of the country.

In a nutshell

While the monetary policy deals with the flow of money in an economy, the fiscal policy lays the foundation for the direction of monetary flows in the country. The main aim of fiscal policies is to promote development at maximum capacity, while at the same time regulating inflation for a well-balanced economy. 

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