INTRODUCTION• Fiscal policy – Refers to the government’s efforts to use its spending, taxes, transfer payments to smooth out the business cycle and maintain full employment without inflation to promote full employment, price stability and economic growth. – Use of the government budget to achieve the macroeconomic objectives.• Government policies may be able to help the economy achieve full employment and therefore reduce insufficiency.
Roles of Fiscal Policy• To help stabilize short run fluctuations in the economy.• Helps counter impact of crisis that mitigates the impact of global slowdown on the domestic economy.• Promoting economic development.
Objectives of Fiscal Policy• Economic development & growth - by creating conditions for increase in savings and investment also mobilize resources for economic growth, especially for the public sector.• Employment - by encouraging the use of labor- absorbing technology.• Stabilization - fight with depressionary trends and booming (overheating) indications in the economy.• Reduction of disparities of income - By reducing the income and wealth gaps between the rich and poor.• Price stability - employed to contain inflationary and deflationary tendencies in the economy.
Limitations of Fiscal Policy• Formulation of an appropriate fiscal policy requires reliable forecasting of the target variables.• The overall effect of changes in the policy instruments, like, changes in government spending and taxation is determined by the rate of dynamic multiplier.• A decision and execution lag in case of discretionary fiscal policy makes both working and efficiency of fiscal policy shrouded with uncertainty.
Limitations of Fiscal Policy• Effectiveness of fiscal policy in underdeveloped countries is severely limited by: i. Low levels of income ii. Small proportion of population in taxable income groups iii. Existence of large non - monetized sector iv. All pervasive corruption and inefficiency in administration especially in tax collection machinery.
Types of Fiscal Policy1. Expansionary Fiscal Policy – An increase in government expenditures for goods and services – A decrease in taxes – Some combination of the two• Contractionary Fiscal Policy – A decrease in government expenditures for goods and services – An increase in net taxes
• The goal is to reduce unemployment by increasing aggregate demand and expanding real output. Therefore the tools would be an increase in government spending and/or a decrease in taxes.• This would shift the AD curve to the right increasing real GDP and decreasing
• The goal is to reduce inflation by decreasing aggregate demand. Therefore the tools would be an decrease in government spending and/or an increase in taxes.• This would shift the AD curve to the left decreasing inflation, but it may also cause some unemployment.• Apply during economic boom to curb possible inflationary pressure. Hence, the government may run a budget surplus in that situation.
Fiscal Policy Vs. Monetary Policy Fiscal Policy Monetary Policy• Fiscal Policy is managed by • Monetary Policy is maintained by Central Bank.Govt. • Deals with money supply control of,• Deal government policy (iv)The supply of money,that attempts to influence (v) Availability of money,the direction of the (vi) Cost of money or rate of interest, in order to attain a set of objectiveseconomy fiscal allowances. oriented towards the growth and stability of the economy.