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Unit 14: Macro Economic Policies: Fiscal Policy

development in country. It expands internal market, reduces unessential imports, counteracts Notes
inflationary pressure, provides incentives for desirable development projects, and increase the
total volume of savings and investment. For all this government adopts appropriate taxation,
budgetary expenditure and public borrowings policies.
Fiscal policy is the projected balance sheet of the country, prepared by Chief Finance Officer of
country that is finance minister of the state. Public finance is the study of generating resources
for the development of country and about allocation of resources. Fiscal policy is implemented
through Budget, which is statement of state's revenue and expenditure. In this unit, you will
learn about various instruments of fiscal policy and its transmission.

14.1 Objectives of Fiscal Policy

Fiscal policy is budgetary policy. It is the policy of the government in respect of its annual
taxation programme, public expenditure and public debt programmes. A budget is an annual
financial statement of the government which includes estimated expenditure planned for the
coming year and estimated revenues to be raised through taxes and other revenue sources such
as surplus of public enterprises over the year. Fiscal policy thus, refers to a policy under which
the government implements its expenditure, revenue and other programmes during a year to
produce favourable distributional effect and avoid undesirable effects on national income and
employment. The objectives of fiscal policy are summarily stated below:

Mobilization of resources through deploying relevant fiscal instruments
Ensuring high rate of capital formation
Reallocation of resources to ensure the achievement of nation's socio-economic objectives
Balanced regional growth
Increased the employment opportunities

Achievement of equity objective through appropriate use of fiscal instruments.
Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three
possible stances of fiscal policy are neutral, expansionary and contractionary:

A neutral stance of fiscal policy implies a balanced budget where G = T (Government
spending = Tax revenue). Government spending is fully funded by tax revenue and overall
the budget outcome has a neutral effect on the level of economic activity.
An expansionary stance of fiscal policy involves a net increase in government spending
(G > T) through rises in government spending or a fall in taxation revenue or a combination
of the two. This will lead to a larger budget deficit or a smaller budget surplus than the
government previously had, or a deficit if the government previously had a balanced
budget. Expansionary fiscal policy is usually associated with a budget deficit.
A contractionary fiscal policy (G < T) occurs when net government spending is reduced
either through higher taxation revenue or reduced government spending or a combination
of the two. This would lead to a lower budget deficit or a larger surplus than the government
previously had, or a surplus if the government previously had a balanced budget.
Contractionary fiscal policy is usually associated with a surplus.

Self Assessment

State whether the statements are true or false:

1. Fiscal policy aims for a balanced regional growth.

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