MONEY AND BANKING PART 14
TOOLS OF FISCAL POLICY There are 5 tools of fiscal policy 1. Budget 2. Taxation 4. 5. Public expenditure Public work Public debt
TAXATION A very important instrument of fiscal policy which affects the disposable income, consumption and investment. An anti depression tax policy, means lowering of taxes. This means, people will have more disposable income than before which would increase their demand. This will raise the level of economic activity.Hence, it is often suggested to lower down the excise duty, import duty etc. Although, tax reduction increases the level of comsumption and investment, the reduction of unemployment is very less. If such a policy is repeated, consumers might postpone their spending in anticipation of a further fall in taxes.
Anti Inflationary tax policy On the contrary, during inflation, steps should be taken to increase the taxes properly as well as devise new methods to remove excessive purchasing power and consumer demand A regressive tax policy must be adopted, where the richer section are levied a higher tax and the lower section on the soceity are charged a lower tax Export should be restricted and the import of essential commodities must be liberated Therefore, proper care must be taken that the government policies should not bring violent fluctuations and impede economic growth
PUBLIC EXPENDITURE This is an important fiscal tool due to the increase public spending. This has a even more direct effect than the taxation. The increased public spending will have a multiple effect upon income, output and employment. Sinmilarty, a reduction in public spending, can reduce the level of economic activity through the reverse operation of the government expenditure multiplier
PUBLIC EXPENDITURE DURING INFLATION Inflation mainly arises due to increased aggregate spending. Both private consumption and investment spending are very high. In this case, some public spending schemes must be avoided and some must be postponed. Spending in unproductive channels must be stopped
PUBLIC EXPENDITURE DURING DEPRESSION Public expenditure is extremely important during depression as it helps to move the stagnant economy. The depression arises due to the fall in the private consumption and investment spending. An increase in both of the above will help to bridge the deflationary gap. The public spending will have a mutilpier effect which will help the economy to come out of depression.