MEANING AND ROLE OF FISCAL POLICY IN STABILIZATION OF ECONOMY

• MEANING  AND ROLE OF FISCAL POLICY IN STABILIZATION OF ECONOMY
• MACRO ECONOMICS/PUBLIC FINANCE/BUSINESS ENVIRONMENT

• MEANING

1. RELATED TO REVENUE,EXPENDITURE AND DEBT OF THE GOVERNMENT FOR ACHIEVING A SET OF DEFINITE OBJECTIVES.
2. THE TERM FISC IN ENGLISH MEANS TREASURY. POLICY RELATING TO TREASURY GOVT EXCHEQUER IS CALLED FISCAL POLICY.

• LIPSY AND STENIER,”FISCAL POLICY IS DEFINED AS THE CONSCIOUS ATTEMPTS OF THE GOVT TO ACHIEVE CERTAIN MACRO GOALS OF POLICY BY ALTERING THE VOLUME AND PATTERN OF ITS REVENUE EXPENDITURE AND BALANCE BETWEEN TWO”
• OBJECTIVES

1. FULL EMPLOYMENT:-AIMS AT MAINTAINING FULL EMPLOYMENT SITUATION IN COUNTRY BY INCREASING AGGREGATE DEMAND BY INCREASING GOVERNMENT EXPENDITURE AND REDUCING TAXES SO THAT PRIVATE SECTOR IS INDUCED TO SPEND MORE.
2. PRICE STABILITYY:IN CASE OF INFLATION,FISCAL POLICY SEEKS TO REDUCE AGGREGATE DEMAND BY REDUCING PUBLIC EXPENDITURE AND INCREASING DIRECT AND INDIRECT TAXES . IN THE EVENT OF FALLING PRICES OR DEFLATION,FISCAL POLICY SEEKS TO INCREASE AGGREGATE DEMAND BY INCREASING PUBLIC EXPENDITURE AND LOWERING THE RATE OF TAXATION
3. REDUCTION IN ECONOMIC INEQUALITY:ECONOMIC  INEQUALITIES ARE SOUGHT TO BE REMOVED THROUGH APPROPRIATE FISCAL MEASURES. TO ACHIEVE THIS PROGRESSIVE TAXES SYSTEM IS ADOPTED
4. ECONOMIC DEVELOPMENT:IN UNDER DEVELOP ECONOMY, INCREASE IN THE RATE OF CAPITAL FORMATION IS THE SOLUTION TO INCREASE OUTPUT AND EMPLOYMENT

• METHODS
• TAXATION POLICY:  GOVERNMENT COLLECT HUGE FUNDS BY IMPOSING DIRECT AND INDIRECT TAXES ON  PUBLIC. THE AGGREGATE DEMAND CAN BE INFLUENCED BY IMPOSITION OF TAXES. AS MORE TAXES,IMPOSED,PURCHASING POWER IS REDUCED SO THE AGGREGATE DEMAND WILL BE LESS VICE VERSA. EFFECT OF TAXES ON AGGREGATE DEMAND DEPENDS UPON TAXATION MULTIPLIER.
• KT=∆Y/ ∆T  =-C/1-C. KT=TAXATION MULTIPLIER, ∆Y=CHANGE IN INCOME. ∆T=CHANGE IN TAXATION,C=MARGINAL PROPENSITY TO CONSUME
• GOVT EXPENDITURE POLICY=THE EXPENDITURE INCURRED BY GOVT IS OF TWO TYPES
• PUBLIC EXPENDITURE MADE TO BUY GOODS AND SERVICES.HAS DIRECT EFFECT ON THE GOODS AND SERVICES. THE QUANTUM OF THE EFFECT DEPENDS ON PUBLIC EXPENDITURE MULTIPLIER
•  KG= ∆Y/ ∆G =1/1-C

·         2. WITHOUT BUYING GOODS LIKE PENSIONS,SCHOLARSHIP,MEDICAL FACILITIES. CALLED TRANSFER PAYMENTS. AND INCREASE WHEN THERE IS INCREASE IN TRANSFER PAYMENTS

• PUBLIC DEBT POLICY: INTERNAL DEBT AND EXTERNAL DEBT
• DEFICIT FINANCING:: MEETS ITS BUDGETARY DEFICIT BY DEFICIT FINANCING. INCOME OF THE PEOPLE GO UP AND AD ALSO INCREASES.

• FISCAL POLICY AND STABILIZATION
• AFTER THE GREAT DEPRESSION OF 1930.LORD KEYNES GAVE STRESS ON THE IMPORTANCE OF FISCAL POLICY TO ACHIEVE ECONOMIC STABILITY. CLASSICAL ECONOMISTS DID NOT FAVOUR FISCAL POLICY.
• ECONOMIC STABILITY REFERS TO MINIMUM POSSIBLE CHANGES IN THE INTERNAL PRICE LEVEL AND FOREIGN EXCHANGE RATE.

• ROLE OF FISCAL POLICY TO CONTROL INFLATION

1. DECREASE IN PUBLIC EXPENDITURE: BY REDUCING UNNECESSARY EXPENDITURE IT COULD DECREASE THE AD
2. INCREASE IN PUBLIC DEBTS:-REDUCING THE PURCHASING POWER BY TAKING PUBLIC DEBTS FROM THE PUBLIC
3. DELAY IN PAYMENT OF OLD DEBTS
4. INCREASE IN TAXES:
5. SURPLUS BUDGET POLICY: EXPENDITURE SHOULD BE LESS THAN REVENUE
6. OVER-VALUATION OF MONEY: IMPORT WILL INCREASE AND EXPORT DECREASE.

• FISCAL POLICY AND DEFLATION
  
  

1. INCREASE IN GOVT EXPENDITURE:-DEMAND WILL INCREASE
2. DECREASE IN TAXES: PURCHASING POWER WILL INCREASE AND DEMAND WILL INCREASE
3. INCREASE IN SOCIAL WELFARE EXPENDITURE:SPEND MORE ON SOCIAL WELFARE PROJECT
4. PUMP PRIMING:PUBLIC INVESTMENT IS DONE TO BOOST PRIVATE INVESTMENT
5. PRICE SUPPORT POLICY:-DURING DEFLATION,THE PRICES FELL DOWN SO GOVT HAS TO PURSUE SUPPORT PRICE.
6. DEFICIT FINANCING FOR INCREASING DEMAND

• EXCHANGE STABILITY
  
  

1. BALANCE PAYMENT SHOULD BE IN EQUILIBRIUM
2. PROMOTING EXPORT AND RESTRICTING IMPORT
3. ENCOURAGE IMPORT SUBSTITUTIONS

• ROLE OF FISCAL POLICY IN ECONOMIC DEVELOPMENT
• CAPITAL FORMATION:-IN ORDER TO PROMOTE RATE OF CAPITAL FORMATION EITHER THE GOVERNMENT WILL HAVE TO INCREASE PROCEEDS FROM TAXATION OR IT WILL HAVE RESORT DEFICIT FINANCING
• INCREASE IN NATIONAL INCOME:BY MAKING SUCH CHANGES IN THE TAXATION SYSTEM AS PROMOTE SAVING AND INVESTMENT AND BY SETTING UP INDUSTRIES AND BOOSTING PRIVATE ENTREPRENEURSHIP
• PROPER ALLOCATION OF RESOURCES:TAXATION POLICY CAN BE SO DESIGNED THAT INDUSTRIES HAVING LARGE SOCIAL COST ARE DISCOURAGED. INDUSTRIES HAVING LARGE SOCIAL ADVANTAGE SHOULD BE ENCOURAGED
• CONTROL OVER INFLATION AND  REGIONAL INEQUALITIES: BY ADOPTING PROGRESSIVE TAXATION. HEAVY TAXES ON LUXURY GOODS AND PRICES OF ESSENTIAL GOODS LOWERED.
• UNEMPLOYMENT: REDUCE UNEMPLOYMENT AND INCREASE EMPLOYMENT OPPORTUNITIES
• FISCAL POLICY AND UNEMPLOYMENT
• CYCLICAL UNEMPLOYMENT:-MODERNIZE AND DIVERSIFY THE ECONOMY.PUBLIC INVESTMENT SHOULD BE DIRECTED TOWARDS THE SETTING UP OF NEW INDUSTRIES,PROMOTING THE GROWTH OF PRIVATE INDUSTRIES AND DEVELOPING AGRICULTURE.
• DISGUISED UNEMPLOYMENT:-INCREASE THE RATE OF CAPITAL FORMATION. TO INCREASE SAVING AND INVESTMENT.

• LIMITATION

1. LACK OF ACCURATE FORECASTING: NOT EASY TO PREDICT BOOM AND DEPRESSING SITUATIONS
2. DELAY IN DECISIONS: TIME CONSUMING
3. CONFLICTING TRENDS IN PUBLIC AND PRIVATE SECTOR
4. INCREASE IN PUBLIC DEBTS TO CONTROL UNEMPLOYMENT AND DEPRESSION BECOMES DIFFICULT TO MANAGE PUBLIC DEBT
5. DEFICIT FINANCING: BEYOND A PARTICULAR LIMIT IT BECOMES THE SOURCE OF INFLATION
6. CONFLICT BETWEEN SOCIAL AND ECONOMIC OBJECTIVES

• LIMITATION OF FISCAL POLICY IN UNDERDEVELOPED COUNTRIES

1. TAXATION SYSTEM IS NOT MODERN,RATIONAL AND ELASTIC
2. A PART OF THE ECONOMY IS NOT MONETIZED
3. INADEQUATE DATA
4. ILLITERACY
5. LIMITED SCOPE

• METHODS OF FISCAL POLICY IN UDC
• TAXATION POLICY:

1. PROMOTE CAPITAL FORMATION
2. BOOST SAVING
3. MOBILIZATION OF ECONOMIC SURPLUS

• PUBLIC EXPENDITURE POLICY:-

1. DEVELOPMENT OF PUBLIC ENTERPRISE: SETTING UP BASIC AND HEAVY INDUSTRY
2. ENCOURAGEMENT TO PRIVATE SECTOR: BY SUBSIDIES,REDUCING TAXES AN
3. PROVISION OF INFRASTRUCTURE

•  
• PUBLIC DEBT:

1. INTERNAL DEBT: MOBILIZING IN SUCH A WAY IT HAS NOT BAD EFFECT ON INVESTMENT. MOBILIZATION OF RURAL SAVING  AND BOOSTING OF CAPITAL FORMATION. PUBLIC DEBTS SHOULD BE COLLECTED FROM THE CLASS OF WHICH WHO HAS LOTS OF FUNDS AND SPEND ON LUXURY GOODS
2. EXTERNAL DEBT: BRING FOREIGN CURRENCY,TECHNICAL KNOW HOW AND CAPITAL GOODS, SUCH LOANS SHOULD BE USED FOR DEVELOPMENT PURPOSE AND IT WILL BE EASY TO MAKE REPAYMENT