Objectives of Fiscal Policy
As an instrument of macroeconomic policy, the goals of fiscal policy are different in different countries and the same country in different situations.
However, the 5 major roles and objectives of fiscal policy can be listed below:
- Optimum allocation of resources
- Full employment
- Price stability
- Equitable distribution of income and wealth
- Economic growth
Let’s explore each of these fiscal policy objectives:
Optimum Allocation of Resources
One of the major objectives of fiscal policy is the optimum allocation of resources. Fiscal measures such as taxation and public expenditure programs can affect the allocation of resources in various sectors of the economy.
Taxation effectively curtails conspicuous consumption and other wasteful expenditures of the richer classes.
The curtailment of consumption and socially unproductive investment may help in the mobilization of resources optimally and also check the inflationary trend in the economy.
Thus, fiscal policy should aim at the optimum allocation of scarce resources, such as men’s, material, and money.
It means there should not be a waste of these resources and should be employed in maximum productive industries.
Full Employment
The second of the objectives of fiscal policy is full employment. Fiscal policy should aim at increasing employment opportunities and avoiding unemployment and underemployment.
To reduce unemployment and underemployment, state expenditure should be directed towards social and economic overheads.
These expenditures would help to create more employment and increase the productive efficiency of the economy in the long run.
Public expenditures are a waste if the growth rate of the labor force (population) is not controlled.
The objective of increasing employment is closely linked with stabilizing the growth rate of the population.
Rapid economic development is possible only if the rate of increase in employment opportunities and hence income is much higher than the growth rate of the population.
Therefore, fiscal policy should give more attention to achieving a higher level of employment.
Price Stability
Price stability is an important objective of fiscal policy. Falling prices mean a decline in economic activity while rising prices hit hard to certain sections of the economy and are beneficial to the traders and spectators.
Therefore, fiscal policy should be so formulated as to maintain some measure of stability in the general price level.
For this, the government should include fiscal policies such as removing the bottlenecks and structural rigidities, planned development of the various sectors of the economy, physical controls of essential products, their purchase and sale by the government, granting of subsidies and protection to the essential consumer goods industries in the economy.
Above all, for the fiscal measures of price stability to be effective, they must be supplemented by monetary measures.
Equitable Distribution of Income And Wealth
No one will disagree with the significance of the equitable distribution of income and wealth objectives of fiscal policy.
Extreme inequalities in income and wealth create social evils and lead to economic and political instability and economic development.
The rich enjoy the wealth and misuse their income on conspicuous consumption, real estate, gold speculation, etc.
On the other hand, the masses lie under the object of poverty and misery. Therefore, fiscal policy aims to remove these extreme inequalities and direct the misused resources into productive channels for economic development.
The redistributive aim of fiscal policy consists of increasing the real income of the masses and reducing the higher income levels of the rich.
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The government should invest directly in social and economic overheads which tend to increase the volume of output, employment, and real income in the economy.
This policy is very effective in reducing disparities in income and in raising the standard of living. Such fiscal policy also helps in reducing regional disparities.
The government should levy a highly progressive broad-based tax structure for reducing higher income levels.
However, a redistributive tax policy should not impinge on entrepreneurial income because this may obstruct economic growth.
There may arise a big problem in the implementation and collection of various direct taxes. Political pressures, lack of tax morality, and the absence of an efficient and honest administration prevent the policy from being an effective instrument of redistribution of income.
Economic Growth
Developing countries are caught in a vicious circle of poverty on account of capital deficiency.
Therefore, such countries need balanced growth to break down the vicious circle of poverty through capital formation. In this regard, the following fiscal measures can be used:
- Raising the saving ratio to income by curtailing consumption.
- Mobilizing them for raising the rate of productive investment.
- Encouraging the flow of spending in a productive way.
Thus, the government’s fiscal policy should aim at maximizing savings, mobilizing for productive investment, and channeling them into directions that will best serve the objectives of a balanced development program.
Read Next: Objectives of Monetary Policy
Sujan Chaudhary holds a BBA degree. He loves to share his business knowledge with the rest of the world.