DEFINITION OF FISCAL POLICY:

the word FISC means “state treasury”

fiscal policy refers to policy concerning the use of state treasury or the government
finances and tax policies to influence economic conditions and achieve the
macroeconomic goals
government adjusts its spending levels and tax rates to monitor and influence a nation’s
economy
it is the sister strategy to monetary policy through which a central bank influences a
nation’s money supply

HOW FISCAL POLICY WORKS:

Fiscal policy is based on the theories of British economist John Maynard Keynes. Fiscal
policy is also known as Keynesian economics and this theory states that government can
influence macroeconomic productivity levels by increasing and decreasing tax levels and public
spending. This influence, in turn, curbs inflation, increases employment and maintains a healthy
value of money.

OBJECTIVES OF FISCAL POLICY:

i. Full employment
The first and foremost objective of fiscal policy in a developing economy is to
achieve and maintain full employment in an economy.  To reduce unemployment and
under-employment, the state should spend sufficiently on social and economic
overheads. These expenditures would help to create more employment opportunities
and increase the productive efficiency of the economy.
ii. Price stability and controlling inflation
Deflation leads to a sharp decline in business activity. On the other extreme,
inflation may hit the fixed income classes hard while benefiting speculators and traders.
Fiscal policy has to be such as will maintain a reasonably stable price level thereby
benefiting all sections of society.

iii. Economic stability and economic growth

Economic stability is another prime aim of a sound fiscal policy. This goal implies
maintenance of full employment with relative price stabilization. Economic growth and
stability are the twin objectives jointly pursued by a developing country’s fiscal policy.
The forces stimulating growth process should be given a boost at a time while
inflationary pressures are to be curbed.

iv. Ensuring equal distribution of resources

The purchasing power increases with a fair distribution of resources among
different classes of society. This leads to high levels of production which lower the
unemployment level.