Fiscal Policy

Introduction

• Fiscal policy is the guiding force that assists the government in determining how much money it should spend to stimulate economic growth and how much revenue it needs to raise to keep the economy running smoothly. 
• The use of government income collection (tax or non-tax) and expenditure (spending) to influence a country’s economy is known as fiscal policy.
• Along with monetary policy, fiscal policy is critical in governing a country’s economy.

Objectives of Fiscal Policy

• To facilitate optimum allocation of resources.
• To facilitate equitable distribution of income and wealth.
• To promote capital formation in an economy and encourage growth.
• Accelerating the rate of economic development.
• To raise standard of living.

Types of Fiscal Policies

Expansionary Fiscal Policy:

• It stimulates economic growth because the government either spends more, cuts tax rates or both.
• It puts more money into the consumers’ hands, so they spend more which increases the demand for the goods and services in the economy. 
• Expansionary fiscal policy works towards expanding the economy by increasing the fiscal deficit and increasing the purchasing power of people( more consumption of goods and services) and more consumption will give more revenue to the government.

Contractionary Fiscal Policy: 

• The contractionary fiscal policy goal is to slow economic growth and stamp out inflation. 
• The Government increases the tax and cuts its spending.
• Contractionary fiscal policy works towards contracting the economy like low level or decrease in fiscal deficit or decrease in purchasing power of people (it will lead to lower consumption of goods and services)