A quick note on Fiscal Measures

To maintain a stable and robust economy, the Government administers several policies known as Economic policies. It includes decision-making regarding taxation, redistribution of income and supply of money. 

Fiscal policy is one such economic policy that aims to reduce the rate of poverty and promote sustainable growth. The Central Government mainly imposes this policy for government spending and taxation to influence a country’s economy. Contractionary, Expansionary and Neutral are the three types of Fiscal policy.

Role of fiscal policy to control inflation 

A country’s economy is influenced by the rela­tionship between the taxation laid by the Government and the amount that it spends. Any changes in taxation or government spending can lead to either an expansion or contraction in the economy. Such changes control unemployment or demand-pull inflation and are also called fiscal policy. For example, if there is increased unemployment, the aggregate spending also increases and, eventually, the level of economic activity.

This increase in spending can be due to:

(1) Increase in government buying and selling goods and services

(2) Increased transfer payments

(3) Reduction in taxes 

These three actions can cause economic activity to grow. If inflation is experienced, decreasing aggregate spending is the appropriate fiscal policy.

Excessive spending can be removed by:

(1) Increase in government buying of goods and services,

(2) Decreasing transfer payments

(3) Increased taxes.

The types of fiscal measure

There are three types of fiscal measures, such as:

Contractionary fiscal measure: The government collects more taxes than it spends. The government takes more money from consumers than from businesses. As a result, the companies get a hint about the decline in demand and stop raising prices faster. Hence, inflation is reduced.

Expansionary fiscal measure: The government spends more than it receives through taxes. It may involve tax reduction, increased spending, or both, creating a budget deficit in return.

Neural fiscal measure: This is also known as a balanced budget, where the government spending and the taxation are equal. Under this fiscal measure, it is difficult to predict the taxes to be brought in a year, and there’s a restriction on government spending.

The fiscal measures to control Inflation

It’s difficult for monetary policy to control inflation alone. As a result, it is accompanied by fiscal policy to control inflation. Hence, the fiscal measures to control inflation are; 

(a) Reduction in Unnecessary Expenditure: The government should reduce unnecessary expenditure on underdeveloped activities. This will help to control inflation and keep a check on private spending. But, this fiscal measure lags in distinguishing between essential and non-essential expenditure and should be supplemented by taxation.

(b) Increase in Taxes: Along with new taxes, the personal, corporate and commodity taxes should be increased to decrease consumption expenditure. But, it should be taken care that the taxes are not too high. Instead, it should be such that it provides more enormous incentives to those saving and producing more.

(c) Increase in Savings: Another fiscal measure to control inflation is to promote people’s savings. This will help in reducing income and consumption expenditure. But, in recent times, voluntary saving has been difficult due to the high standard maintenance of lifestyle.

(d) Surplus Budgets: In this fiscal measure, the government should adopt surplus budgets, that is, an anti-inflationary budgetary policy. The government should give up deficit financing to spend less and collect more revenues.

Conclusion 

Fiscal policy is considered as contractionary when the revenue is higher than spending. It is considered as expansionary when spending is higher than revenue. It has a significant impact on the open economy. It helps enhance economic growth by increasing the rate of investment in both the sectors; public and private sectors. The government uses fiscal policy to create a significant impact on the level of aggregate demand within the economy. It aims to achieve specific objectives such as price stabilization, economic growth and full employment.