FISCAL POLICY

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Fiscal Policy as an Economic Stabilization Measure

Fiscal Policy refers to the various decisions undertaken by the government regarding public expenditures and revenue.

Fiscal Policy is a direct government intervention in the economic processes of an economy.

All the sub fiscal policies can be broadly categorized as being either ‘Public Expenditure’ or ‘Public Revenue’.

The fiscal policy’s sub-policies are:

The Taxation structure – through this fiscal tool the government is able to raise resources on a non-quid-pro-quo basis.

Public Debt – this helps the government to raise resources on a quid-pro-quo basis.

The Annual Budget of the government – this is a policy statement that directs all economic activities for the accounting year.

Deficit Financing – wherein the government can order its Central Bank to release additional money equivalent to the size of the deficit in its budget.

A wide range of public expenditures – covering productive items (like: irrigation projects, industrial investments, EOC and SOC) and unproductive items (like: welfare measures and general administrative expenses).

TYPES OF FISCAL POLICIES:

Expansionary Fiscal Policy – Increase in public expenditure
Improvement in the income generating capacity in the economy, due to Positive Multiplier Effect

Contractionary Fiscal Policy – Fall in government’s expenditure
Reduction in the income generating capacity in the economy
Reverse Multiplier Effect.

Impacts of Expansionary Fiscal Policy (CROWDING OUT EFFECT)

Higher government expenditures
Increase in aggregate demand (via govt’s demand and multiplier effect)
Increase in incomes
Increase the demand for money
Increased demand in the money market (supply of money remaining constant)
Increase in the rate of interest
Reduction in Private investment expenditure
Reduction in the aggregate demand

Impacts of Contractionary Fiscal Policy



References: Chapter 25 McGraw-Hill Companies, UK, 1997 A Short Course of Economics Chapter 6 The McGraw-Hill Publishing Companies, London, 1993 McGraw-Hill International Editions, Singapore, 1990 Gupta R.D. Keynes and Post Keynesian Economics Chapter 41 Kalyani Publishers, New Delhi , 1984 A Wiley / Hamilton Publication, USA, 1976 Lipsey R An Introduction to Positive Economics Chapter 39 Oxford University press, Oxford, 1996 Oxford University press, Hong Kong, 2000 Mukherjee S. Modern Economic Theory – 3rd Edition Chapter 24 Part 18 Wishwa Prakashan, New Delhi, 1996. Galgota Publication, Delhi, 1984 Sloman J. Prentice – Hall, UK, 2000 Stiglitz J & Driffil J.

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