Fiscal Policy Tools

In this article, we shall try to understand the basic concept of fiscal policy, its tools and objectives in detail.
Fiscal policy is important for any nation because it is this policy that determines the way governments use their revenue and expenditure effectively to improve the nation's income and total productivity. The main aim behind this policy is to strengthen the economic position and increase the pace of growth which will in turn bring prosperity to the nation. So, let us know some basic facts about the fiscal policy.

Features

The following are the striking features of fiscal policy:
  • Resource mobilization is one of the basic objectives of a fiscal policy where levels of investments need to be improved
  • Resources mobilized have to be used to achieve high levels of productivity which will itself accelerate economic growth of a nation
  • Concentration of wealth has always been the main problem for majority of people having low standard of living. The tools aim at minimizing inequalities of wealth and income
  • Fiscal policies enable government authorities to control economic situation in times of inflation and deflation
  • Over the years, the successful implementation of fiscal measures has become difficult because of high level of tax evasion and lack of knowledge among people
Stances

Fiscal policy stances are indications or outlook by the government to decide which method suits the best to achieve the targets of inflation and deflation control, employment, increasing national income and improving employment.

Neutral Stance
A neutral stance is characterized by a balanced and stable economy generating large revenue in the form of taxes for the government.

Expansionary Stance
The expansionary stance is when the government spending is greater than the revenue generated from taxes.

Contractionary Stance
The contractionary stance is governed by low government spending as compared to the revenue generated from taxes.

Basic Tools

The discretionary fiscal policy and automatic stabilizers are the main fiscal tools which are used for improving overall economic condition of a nation's economy. Apart from these basic tools, the tools which are mostly used are government expenditure, transfer payments and taxation. Here is an explanation of these tools.

Discretionary Fiscal Policy
Introduction of changes in the government spending, transfer and taxation for promoting fast macro-economic growth, beating inflation and increasing overall employment is known as the discretionary fiscal policy.

Automatic Stabilizers
Automatic stabilizers are those features of the government purchases or spending which aim at minimizing the changes in disposable incomes of people. These stabilizers are governed by changes in government purchasing policies.

Government Expenditure and Purchases
Government purchases and expenditure, when done in an extremely controlled and systematic manner can help in the expansion of the government sector and steady economy growth achievement. These purchases are nothing but money spent by the government on final goods and services. When it comes to expenditure, every government has planned budgets and procedures as of where investments would be made. Generally, all sectors of the economy are included in the government spending. For proper spending, the Federal government forms several agencies and institutions which actually execute the purchases on behalf of the government. So, these agencies receive funding and assistance directly from the Federal government. This planned government expenditure helps in creation of large-scale employment which will raise standard of living of common people and help the government earn more in taxes.

Transfer Payments
Transfer payments are yet another important fiscal policy tools. These transfer payments are for the benefit of the public. They are payments made by the government without any expectations of returns. The transfer payments are of three types:
  • Welfare benefits for the poor
  • Unemployment benefits to eligible unemployed people
  • Social security benefits for the aged
The main advantage of transfer payments is that this helps the needy people have more cash in hand and increases habit of consumerism in them. So, these people can buy goods from the market, which in turn increases business for owners and benefits the economy.

Government Taxes
As seen in the above two fiscal policy tools, the government spends a lot of money on public welfare and economic development. So, there must be a continuous source of income for the government treasury too. Taxes levied on people and corporations are the best source of income for the government. The entire tax system is monitored and controlled by Internal Revenue Service (IRS) and tax rates are decided as per the income levels of people.

So, these were the three vital tools that help the government in attaining its aim of accelerated economic development. For the success of a fiscal policy, public participation and co-operation is also equally important, apart from government initiative and willingness. By appointing experienced economists in the panel that takes decisions regarding the fiscal policy of a country, it is certainly possible to achieve long term economic goals comfortably.