Fiscal policy comprises a mix of budgetary instruments that government use to target
economic objectives of the country. It is the use of government spending and taxation to influence the economy.
The objectives of the fiscal policy are: the achievement of economic growth, distributive justice, price stability and full employment.
Fiscal policy is the policy of government related to its own expenditure and taxes in order to influence the aggregate demand (AD). The government employs either expansionary or contractionary fiscal policy. Expansionary fiscal policy via increase in government expenditure or reduction in taxes would increase the aggregate
demand whereas contractionary fiscal policy via reduction in government expenditure
and raise of taxes would reduce the aggregate demand. Changes in the level, timing
and composition of government spending and taxation have an important effect on the
economy.
The fundamental objective of fiscal policy in a developing economy is to achieve rapid economic growth and development. This could be achieved by mobilizing the resources to the desired channels of investment and optimally allocate the resources to socially desirable goods and services.
Distributive justice is an important objective of fiscal policy. It relates to the redistribution of income and wealth. Tax and transfer policies offer an effective measure of implementing distributional adjustments of fiscal policy.
Inflation and deflation are two instability situations in the short run. Fiscal policy is
the key instrument in the hands of the government to achieve all round stability and
prosperity. It is a tool through which the economic resources could be allocated in
the best possible way and maintains full employment with relative price stabilization.
The government makes every possible effort to achieve full employment in the country through effective fiscal measures either by increasing government expenditure or by reducing taxes or the combining the two measures.
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