The role of fiscal policy in urbanized countries is to steady the rate of enlargement. While in under urbanized countries, the position of fiscal policy is to go faster the rate of capital configuration.
According to Samuelson, "By a optimistic fiscal policy we denote the procedure of determining community duty and community spending in arrange to help moisten down the swings of commerce series and to add towards the preservation of a rising elevated service, financial system free from extreme price rises or depression.
1. Equal Distribution of National income: Fiscal policy should add to nationwide profits and reallocate it in such a way that the great inequality of profits and riches are abridged in the financial system.
Little wealthy position in riches and mistreatment their profits on obvious consumption and inventories, genuine land, gold ingots, overseas exchange, conjecture etc. While on the additional give, the ample are wedged beneath the thing of scarcity and unhappiness. These aspire of fiscal policy is to take away these inequalities and straight the capital into creative channels for financial growth.
Fiscal policy nowadays is considered to be a powerful anti cyclical weapon in the hands of the government. Fiscal policy involves the process of shaping the public finance with a view to reduce fluctuation in the business cycle and attainment of full employment without inflation. If at any time, the government finds that private instrument is taking at a very fast speed and the country is likely to be threatened with inflation, it discourage private works programs, levies heavy taxes on business profits to discourage private investment, reduces purchasing power by taking loans from the people, prepares surplus budgets to reduce public debts, etc.
All these fiscal measures greatly help in curbing the inflationary tendency in the economy. If , on the other hand, the country's faced with depression, the government, launches its public works programs so that deficiency in the investment is made up, the government spends money on the construction of new canals, new buildings, new post offices and greatly helps increasing income , stimulating consumption expenditure and reducing un-employment. In order to encourage private investment, the government reduces taxes on business profits. The government also prepares deficit budgets and the deficit is met by the loans.
A government's fiscal policy usually becomes the most clear when the minister of finance delivers his/her budget. This budget outlines where the government intends to increase, or decrease spending, as well as any potential tax breaks. A government's fiscal policy, however, normally only addresses issues that it has direct control over, namely public spending. It does not generally involve direct, government intervention in the economy, or the private sector. As such, issues such as dealing with inflation, or lowering interest rates would not usually be considered something relating to fiscal policy.
2. To encourage socially optimal investment: This Policy should encourage the flow of investment into socially desirable channels. Investment in transport, Communication River and power development, education, public health, technical training facilities etc. this type of investment leads to external economics and tends to widen the market, raise productivity and reduce the cost of production.
3. To Increase level of Employment: Fiscal policy should aim at increasing employment opportunities reducing unemployment and under employment. For this, the state expenditure should be directed towards providing social and economic overheads. Such expenditures create more employment and increase the productive efficiency of the economy in the long-run.
4. To Promote Economic Stability: Fiscal policy should promote the maintenance of reasonable economic stability. Fiscal policy plays a crucial role in maintaining economic stability in the face of external and internal forces. Fiscal policy should aim at the diversification of the economy, balanced growth of the various sectors of the economy.
Govt. Expenditure, Taxation and Govt. Borrowing are the three main things included in fiscal policy measures. From demand side the main purpose is to influence the aggregate demand, output and employment. The purpose is to attain higher National Income, higher economic growth , higher employment and equal distribution of income. Fiscal policy also manipulates the supply side by controlling investment in a desired line. It brings competition in the market, encourage or discourage certain line of production in the economy. Fiscal policies are also aim at welfare activities in the economy. For example it encourage education, health care and production of public goods for the benefit of all. Appropriate fiscal policies are also very important to to get best out of foreign trade sector. Suitable fiscal policies are applied to ease the trade cycle movement. The best way to apply fiscal policy is to combine it with proper monetary policies.
Fifth objective is to bring price stability, by fiscal tools. Sixth objective of foreign policy in developing countries is to increase the rate of capital formation. Another seventh major objective of foreign policy is to protect the economy from inflation and damaging competition from foreign countries. One objective of foreign policy is the development of resources for private sector through borrowings. Ninth objective is to increase the developmental planning projects. The last objective of foreign policy for any country is to increase its relations with other countries.
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