A nation's citizens' increased purchasing power increases their capacity to pay taxes, which in turn influences and strengthens the nation's economy. Both direct and indirect taxes are paid by the nation's population. The government's ability to use its resources for national development is enhanced by higher taxation. The government creates infrastructure, roads, better health and education facilities, and new industries, all of which lead to an increase in employment.
It refers to the use of government spending and taxation to affect the macroeconomic factors that affect the nation's economy, such as the population's employment rate, the rate of inflation, and the overall demand for products and services.
The term "fiscal policy" describes how the government handles taxes, spending, and debt. It's how the government modifies tax rates and expenditure amounts to keep an eye on and affect a country's economic conditions.
Keynesian economics, which essentially holds that governments can affect macroeconomic productivity levels by changing tax rates and public spending, is the foundation of fiscal policy.
Types of Fiscal Policy
These fiscal measures are employed in accordance with the needs of the economic stage, sometimes to stimulate growth and other times to mitigate declines. Generally speaking, there are three forms of fiscal policy, which are covered below:
1. Expansionary Fiscal Policy
It includes every move the government does to put more money back into the economy. Reinvesting more money in the economy increases demand for goods and services. In addition, it boosts government and public revenue as well as job prospects. Stated differently, it promotes economic expansion.
For instance, the Indian government slows down the business's decline period by implementing an expansionary fiscal policy. Another name for it is the recession. In this instance, the government either increases spending, lowers taxes, or does both. The primary goal is to provide more money in the hands of the customers so they can increase their spending. There may be a budget deficit as a result.
2. Contractionary Fiscal Policy
The second kind of fiscal policy is contractionary fiscal policy, which is typically employed during an economic boom. The government attempts to moderate economic expansion in order to prevent it from becoming too severe since economic expansion can occasionally be risky. This kind of fiscal policy keeps inflation under control and aids in managing the economy's growth.
At times, the government began to impose high taxes on citizens while cutting expenditure in an attempt to lower investment prices and raise the unemployment rate. This is being done because businesses need unemployed labor due to the state of the economy. Therefore, in this instance, tax collection exceeds government spending.
3. Neutral Fiscal Policy
When the national economy is in balance, neutral fiscal policy is typically employed.
Therefore, with a neutral fiscal policy, the government's expenditure is financed by tax income and has no bearing on the levels of economic activity.
The Aim of Fiscal Policy
India's fiscal strategy aims to achieve the following main goals:
1. Economic growth:
By implementing policies that promote investment, consumption, and general economic activity, fiscal policy seeks to both initiate and maintain economic growth. This involves specific government expenditures on healthcare, education, and infrastructure.
2. Price stability:
Two of the most important goals of Indian fiscal policy are keeping prices stable and managing inflation.
3. Full employment:
By promoting economic growth, fiscal policy aims to create job possibilities. In order to do this, the government launches initiatives and programs that lower unemployment rates and increase employment.
4. Equitable income distribution:
To encourage an equitable distribution of opportunities and resources, fiscal policies like progressive taxation and social welfare programs are put into place.
5. External stability:
The goal of fiscal policy is to maintain a balance in the nation's outward commerce and payments. A sustainable balance of payments and exchange rate stability are achieved by a variety of measures, including changes to tariffs, subsidies, and other policies.
6. Mobilization of resources:
The government seeks to maintain a tolerable level of fiscal imbalance while striking a balance between tax and non-tax revenue sources.
7. Infrastructure development:
To support long-term economic growth, the government uses fiscal policy to invest in vital infrastructure projects like telecommunications, energy, and transportation.
8. Social welfare:
India's fiscal strategy includes funding for measures aimed at reducing poverty and for social welfare programs. These initiatives seek to improve the lives of marginalized groups within society by allocating specific funds for social security, healthcare, and education.
9. Environmental sustainability:
Adding ecological factors to budgetary decisions has become more and more important in recent years. In order to balance economic growth with ecological sustainability, steps are done to solve environmental issues and promote sustainable development.
Tools of Fiscal Policy
Implementing fiscal policy instruments is done through the annual budget, which shows the government's plans for spending and revenue. India uses a range of fiscal policy instruments to accomplish its economic goals. Among them are:
Government receipts
Revenues from taxes, interest, capital gains, and service fees are only a few examples of the money that the government receives. In order to fund its operations and make investments across various industries, the government needs these receipts. Receipts from the government can be divided into revenue and capital categories.
1. Capital receipts:
The government sells its assets or borrows money to raise these monies. Both external and market borrowings are included in capital receipts. The revenues from the sale of assets owned by the government, loan and advance recoveries, and repayments from foreign governments are also considered capital receipts. The government's development and capital expenditure programs depend on capital receipts.
2. Revenue receipts:
The government gets these money from sources other than debt, like taxes and other profits that don't result in obligations. The government needs these receipts in order to pay its daily operating costs. Tax and non-tax revenue are the two primary categories of revenue receipts. Tax revenue comes from levied on businesses and individuals in the form of direct and indirect taxes. Earnings from sources including interest on loans, investment dividends, and fees for government services are all considered non-tax revenue.
Government Expenditure
1. Revenue expenditures
These pay for the government's regular maintenance and running costs. They are required to keep the government running on a daily basis.
2. Capital expenditures
This refers to expenditures that the government makes in order to grow and increase revenue. Purchasing infrastructure or other long-term assets with a minimum one-year lifespan is a common component of capital expenditures.
Conclusion
Thus, it may be said that when the nation's economic conditions, such as employment, inflation, demand for goods and services, and economic growth, are impacted by government spending and tax policies.
Various countries employ distinct fiscal policies based on their respective economic requirements. Fiscal policy comes in three flavors: expansionary, contractionary, and neutral.