Home » Objectives of Fiscal Policy
Macro and Development of Pakistan

Objectives of Fiscal Policy

Objectives of Fiscal Policy

Economic Growth

The basic objective of fiscal policy is to promote economic growth in the economy. In all countries, whether developed or underdeveloped, the state gives top priority to economic development i.e., raising if national income, per capita income and standard of living. Govt. adopts certain measures to stimulate the rate of growth in the economy. The fiscal measures like deficit financing, deficit budget and borrowings are very helpful in promoting economic growth.

Fair Distribution of Income

In a free enterprise economy, economic development is always accompanied by inequalities in the distribution of wealth. A prominent objective of fiscal policy is to minimize the disparity in the distribution of wealth. Disparities of income can be minimized by taxing high-income groups at a progressive rate and by subsidizing the cost of living of the poor people.

Full Employment

The achievement of full employment is another objective of fiscal policy. Employment level can be increased by giving incentives to investors and govt., though fiscal policy can induce by lowering down the tax rate or by increasing slabs. Income tax holiday and reduction in other taxes may bring larger investment.

Optimum Allocation of Resources:

Fiscal measures like taxation and public expenditure can greatly affect the allocation of resources in various occupations and sectors. As it is true, per capita income of underdeveloped countries is very low. In order to gear the economy, the government can push the growth of social infrastructure through fiscal measures like Public expenditure, subsidies etc.

Economic Stability

Economic fluctuations are very frequent in a free enterprise economy. This injects the element of instability in the economy. Sometimes the economy has to suffer from the undesirable situation of depression and sometimes there is a problem of inflation. In order to obtain stability, the govt. adopts the policy of deficit budget in depression and surplus budget in inflation.

Capital Formation and Growth:

Capital assumes a central place in any development activity in a country and fiscal policy can be adopted as a crucial tool for the promotion of the highest possible rate of capital formation. A newly developing economy is encompassed by a ‘vicious circle of poverty’. Therefore, balanced growth is needed to breakdown the vicious circle which is only feasible with a higher rate of capital formation.

Discourage the Production of Unnecessary Goods

Production of intoxicants and other injurious to health goods can be stopped ugh heavy taxation. Production of Cigarettes may be in the individual interest but not in the interest of the nation. The govt imposes heavy taxes on such commodities so as to discourage their production.

Correct the Disequilibrium in the Balance of Payments

Disequilibrium in the balance of payments arises when the import payments of a country exceed its exports. To correct this disequilibrium the govt. may adopt certain fiscal measures. On the one hand, a heavy custom duty and tariffs are imposed in order to discourage the volume of imports and on the other hand, the govt. may provide subsidies to those industries which are producing exportable goods.

To Encourage Investment:

Fiscal policy aims at the acceleration of the rate of investment in the public as well as in private sectors of the economy. Fiscal policy, in the first instance, should encourage investment in public sector which in turn effect to increase the volume of investment in the private sector.

Value of Money

Changes in the value of money cause instability in the economy. Therefore, Govt. action is necessary to stabilize the value of money. During inflation govt. reduces private expenditure. In the case of deflation, the government increases its own expenditure and encourages private expenditures by a cut in taxes.

Suitable Consumption Level

It is also necessary that through fiscal policy a suitable and desirable level of consumption should prevail in the country. The long-run objectives of Fiscal Policy are as follows:

High Level of Employment

The economic system may operate below or above the high level of employment. Modern economists, therefore, advocate that long-run basic aim of the fiscal policy should maintain growing high level of employment without inflation in the country.

Stabilization of Price Level

The stabilization of price level is another long-run objective of the fiscal policy. When prices begin to rise the government should adopt contractionary fiscal policy and when they begin to fall, the expansionary fiscal policy should be adopted.

Add Comment

Click here to post a comment