Those in favor of the tax argue that tax cuts allow businesses to hire more staff. Reduction in burden foreign debts: The main object of fiscal policy is to have a good alternative of foreign loans in the form of domestic resources. It also may encourage them to save, leaving less of their take-homepay for trips to the store. The logic is when all else fails the government needs to step in to spur economic activity in order to avoid a recession or depression. It rarely works this way.
The individuals who have control over the budget are referred to as the fiscal authority. It may be through increase in taxation or reduction in government expenditure or both. C + I+G represent consumption, investment and government expenditure the total spending function before the budget is introduced. About the Author Heather Skyler is a business journalist and editor who has written for wide variety of publications, including Newsweek. This is because money collected through taxes fall below the targeted amount due to corruption, tax evasion, etc. Fiscal policy through variations in government expenditure and taxation profoundly affects national income, employment, output and prices. Here also, the government has the same tools at its disposal — spending and tax cuts.
During the period of recession, government should undertake public works programmes through deficit financing. Fiscal policy must be designed in such a way that relative price stability— rather than absolute stability— constitutes the objective. So this is more effective in controlling inflation by raising taxes because high rates of taxation will reduce disposable income of individuals and businesses thereby curtailing aggregate demand. John Maynard Keynes developed Keynesian Theory, which called for government intervention to correct economic instability. And, if there are any signs of inflation going out of control, the government must address it accordingly.
As a result, fiscal policy fails to be a powerful and therefore a useful stabilization policy. But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services which are socially desirable. It is the scarcity of capital that causes underdevelopment. Therefore, fiscal policy must be designed to be performed in two ways-by expanding investment in public and private enterprises and by diverting resources from socially less desirable to more desirable investment channels. Expansionary fiscal policy, in which government boosts its spending to stimulate the economy, may crowd out private sector investment, according to Professor Greg Mankiw, a Harvard economist and former White House adviser. It should aim at curtailing conspicuous consumption and investment in unproductive channels.
The federal government hired millions, putting people back to work. The rate of growth should be such that it can be maintained for a long time. This is because fiscal policy facilitates the capital formation. Following are the main objectives of fiscal policy in the development countries. Thus, by raising the rate of capital formation in these countries, a higher and rapid economic growth can be brought about. This can increase the cost of creditand mortgages that may make consumers think twice about purchases.
He argued that a country may not reach the goal of full employment if it attaches too much importance to price stability. Inflation should be curbed and deflation should be avoided. The roles and objectives of a fiscal policy in different states vary. There have been debates over which is more effective — tax cuts or spending. So, it is very important for a government to monitor its fiscal policy constantly.
Under automatic fiscal policy stabilizers, there occurs an automatic change in tax receipts and expenditures with the changes in income. Some areas are more developed while the others are less developed. In this way, fiscal policy is a powerful weapon in the hands of government by means of which it can achieve the objectives of development. Central banks oversee monetary policy. . The Government should attempt through appropriate measures to reconcile he two conflicting Objectives of rapid growth and social justice in a judicious manner. Welfare schemes, where we increase public expenditure for the less privileged class, can be promoted.
Fiscal policies take longer to implement, so if an economic downfall is foreseen, new policies have to be decided on as soon as possible. Keynes presented his ideas in a book called The General Theory of Employment, Interest and Money, published in 1936. Balance of Payments Using fiscal policy measures government tries to promote exports to earn foreign exchange. Chelliah recommends that fiscal policy must aim at the following for attaining rapid economic growth: i Raising the ratio of saving s to Income y by controlling consumption c ; ii Raising the rate of investment: iii Encouraging the flow of spending into productive way; iv Reducing glaring inequalities of income and wealth. The following fiscal measure may help reducing the inequalities of income and wealth in the society.
Administrative delay Fiscal measures may introduce delay, uncertainties and arbitrariness arising from administrative bottlenecks. Fiscal policy in these countries aims at diverting resources from unproductive sectors to socially necessary lines of development. The expansion of investment opportunities will certainly accelerate the rate of economic growth. Fiscal policy as ineffective anti-cyclical measure Fiscal measures- both loosening fiscal policy and tightening fiscal policy- will not stimulate speedy economic growth of a country, when the different sectors of the economy are not closely integrated with one another. To improve distribution of income and wealth in the community for lessening economic inequalities The national income should be properly distributed so that the fruits of development are fairly shared by all people.