Fiscal Policy: Definition, Objectives, Tools, Types

The term “fiscal” has been derived from the Greek word ‘fisc’ for basket which symbolised the treasury or the public purse. It simply means the exchequer or the government treasury. Fiscal Policy is an instrument of economic policy which is used to reallocate resources to achieve objective of economic growth, employment generation, poverty alleviation, price stability etc. it has multi-dimensional role of providing social justice, full employment, economic stability and growth. It is mainly concerned with the revenues and expenditures of the government.

Objectives of Fiscal Policy

The fiscal policy is formulated to fulfill the following objectives:

  • Resource mobilization to increase the rate of investment and capital formation in order to augment the rate of economic growth.
  • Achieve equitable distribution of income.
  • Increase in employment opportunities
  • Maintaining the price stability

Fiscal Policy Tools

The tools or instruments of fiscal policy are:

  • Taxation: The government levies tax on private earnings to provide various services to the citizens. The government levies taxes like income tax, corporation tax, customs duties, wealth tax, property tax etc.
  • Public Expenditure: The public expenditure diverts funds from government to the people for productive and welfare purposes.
  • Public Debt: The government borrows fund for various activities. Public debt management includes functions like floating of government loans, payment of interest and redemption of debts. The public debt comprises of internal and external debt. Internal debt includes market loans, bank temporary loans by way of treasury bills issued to RBI and commercial banks

fiscal policy

Fiscal Policy Types

There are two types of fiscal policy:

  1. Expansionary Fiscal Policy: The policy that stimulates economic activity through increase in government spending, transfer payments, or tax cuts is called Expansionary Fiscal Policy. The goal of expansionary fiscal policy is to bring the economy up to its full employment level
  2. Contractionary Fiscal Policy: The policy that reduces economic activity through reduction in government spending, transfer payments, or increases in taxes is called Contractionary Fiscal Policy

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