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WHAT IS FISCAL POLICY AND ITS ROLE IN ECONOMIC GROWTH?

What is Fiscal Policy?

Fiscal policy sets out a framework for national expenditure and income. It plays a vital role in economic growth. For example, if the government increases its spending on the countrys infrastructure like roads, it may stimulate job creation, which ultimately leads to more economic activity and growth.
Fiscal policy is a process by which the national government decides on the timing and composition of government spending and taxation. It is often the case that most governments will spend money and raise taxes in order to finance their expenditure. Fiscal policy is the process through which these financial activities are achieved.

What Role Does Fiscal Policy Play in Economic Growth?


Government spending and taxation are two instruments of fiscal policy, which can have a major role to play in economic growth. Expansionary fiscal policy can be applied in times when the economy is performing poorly and economic growth is low. In this case, government may tend to increase its spending and reduce taxes to stimulate the economy. By doing so, more saving and investment opportunities will be created domestically and may in turn have a positive impact on economic growth. On the contrary, contractionary fiscal policy can be applied in order to contain inflation that may occur from an excess demand in the economy and in times when the economy is doing relatively well. Government may then decide to reduce spending and increase taxes. This may hamper economic growth, because incentives for saving and investment are reduced. Government spending and taxation can also influence economic growth by lessening the level of inequality in income and wealth and by increasing employment opportunities in the country. Taxation can be used to redistribute income and wealth to those with lower incomes, ensuring their efficient contribution to economic activities. Tax rebates and concessions can be used to promote the growth of industries that have high employment-generating potential such as mining, fishing and agriculture.
Sources: Grant, S.J., 2000. Stanlakes Introductory Economics, 7th Edition Mohr P; Fourie L and Associates (2000) Economics for South African Students, 2nd Edition Wikipedia.com

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