What is

Fiscal
Policy?

Definition
and
Explanation:

The classical
economists were
of the view that the
economy
automatically
moves towards
fullemployment in
the long run. They
ruled out the
possibility of over
production and
hence

unemployment in
the long period.
The role of the
government in the
economy,
according tothe
classical
economists,
should be the
minimal.The
J. M. Keynes
in his famous
book, "General
Theory of
Employment,
Interest and
Money",

disagreed with the
views of the
classical
economists that
the economy has
the tendency
tomove towards
full employment in
the long run.He
was of the strong
view that the
government must

interfere in
economic matters
to achievefull
employment, to
prevent inflation
and to promote
rapid economic
growth. In order to

achieve the macro
economic goals,
he stressed that
the government
must step in and
usegovernment
expenditure and
taxes for changing
the size of national
income


and the tempo
ofaggregate
economic


activity in the
country. The use
of deliberate
changes in
governmentexpen
diture and or taxes
to achieve certain
national economic
goals is called
Fiscal Policy.

Fiscal policy
thus is the
deliberate change
in government
spending and
taxes to stimulate
or

slow down the
economy. In the
words of
F.R. Glahe:
"By fiscal policy is
meant the
regulation of the
level of
government
expenditure and
taxation to

achieve full
employment
without inflation in
the economy".
J. M. Keynes
describes fiscal
policy as the
steering wheel for
the aggregate
economy.
Objectives/G
oals of
Fiscal Policy
:

The
objectives of fiscal
policy
differ with the state
of development in
the country. In

advanced
countries of the
world, the goal of
fiscal policy may
be the
maintenance of
fullemployment
without inflation. In
developing
countries, the
objectives of fiscal
policy may be to

achieve maximum
level of
employment and
reduction in
economic
inequalities.
However, themain
goals of fiscal
policy


are in brief as
under:
(i) Removing
Deflationary
Gap:

J. M. Keynes is of
the view that fiscal
policy can play a
major role in lifting
the economy out of

depression and
closing the
deflationary gap.
When the
economy is in
depression, it is
faced

with rising
unemployment,
falling income,
severe declining
investment and
shrinking
ofeconomic
activities. The
government, by
undertaking public
works programme,
increases its

expenditure which
helps in raising the
level of aggregate
demand out
employment in
theeconomy.

The government
can also induce
changes in
aggregate
investment by
reduction of taxes,
taxrelieves,
abolition of sales
tax, reducing
excise duties etc.
The tax relief
measures are also
aneffective
methods to raise
the level of
aggregate demand
and removing
deflationary gap
fromthe economy.
(ii) Fiscal
Policy in
Inflation:

If the economy of a
country is faced
with inflationary
gap, then anti
cyclical fiscal
policies

should be adopted
to bring down the
prices and for
closing the
inflationary gaps.
The mainfiscal
measures to bring
down the excess
demand in the
economy are: (a)
reduction
ingovernment
expenditure, (b)
increase in taxes
and (c) creating a
budget surplus.