What is Fiscal Policy and its Objective Deficiency of capital

what is fiscal policy? Explain the objectives of fiscal policy

fiscal policy is the management of public finance by the govt. to influence the economy in the desired direction. It is concerned with govt. revenues and expenditures, involving all the attempts of the govt. to direct its economic operations to achieve economic stability with economic growth.

According to Lipsey: – “Govt. revenue raising and Govt. revenue spending activities are called Fiscal policy”.

According to M.W.Lee: – “Fiscal policy considers (i) imposition of taxes, (ii) Govt. expenditures. (iii) Public debt and (iv) Management of public debt”.

Objectives of fiscal policy:

 the objectives of fiscal policy are not specified, they may differ from country to country. Following are the main objectives of fiscal policy in the developing countries.

Desirable levels of prices: –

The desirable level of prices can be achieved with the change in rate of taxes. Higher taxes are imposed on luxury goods and lower on consumer goods.

Desirable level of employment:

The desirable level of employment is the level of full employment, which can be obtained with the increase in constructional and developmental, works in the country.

Desirable level of income distribution:

Higher income taxes are imposed on rich people so that there may be equal distribution of wealth in the country.

Desirable level of consumption:

fiscal policy
fiscal policy

Desirable level of consumption is achieved by imposing higher duties on foreign products and less duties on national product, so that domestic industries may be developed.

Proper utilization of economic resources:

Deficiency of capital can be removed by taking some fiscal measures like taxation, introduction of saving schemes etc. the capital so arranged can be used to utilize the economic resources properly.

To increase foreign exchange reserves:

Experts can be increased with the help of some fiscal measures, which also increase our foreign exchange reserves.

Reduction in burden foreign debts:

The main object of fiscal policy is to have a good alternative of foreign loans in the form of domestic resources. These resources may come from taxes, savings etc.

Control on the concentration wealth:

Another objective of fiscal policy is to restrict the concentration of wealth in a few hands. The policy of progressive taxation helps to achieve this objective.

Trade & industrial development:

One of the objects of fiscal policy is the development of trade & industry in the country. For this purpose, loans are provided, tax exemption is given to some industries, and industrial estates are established. Such measures not only increase the govt. revenue, but also bring economic prosperity in the country.

Financial assistance to low income group:

Govt provides financial assistance to low income people through making transfer payments like zakat, pensions, scholarships, unemployment allowances etc.


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