According to Arthur Smith, fiscal policy is a policy under which the government uses its expenditure and revenue programmes to produce desirable effects and avoid undesirable effects on the national income, production and employment. Simply put, fiscal policy refers to government actions affecting its receipts and expenditure to influence the direction of the growth of its economy.
Instruments of Fiscal Policy
Budgetary policy or Contra-cyclical Fiscal Policy: Seeing as the budget is the principal instrument of fiscal policy, budgetary policy exercises control over the size and relationship of government receipts and expenditures.
There are three types of budgetary policy:
· Budget Deficit; This is a fiscal policy adopted during depression. It can be achieved by putting large amounts of money in the stream of NI than are withdrawn, it can also be secured by reducing taxes without government spending.
· Surplus Budget; This is adopted during boom. The policy is mainly to control inflationary pressure within the economy which can be achieved by increasing taxes, reducing government spending which reduces income and aggregate demand.
· Balanced Budget; Here increase in taxes and government spending are of equal amount which results in an increase in the net national income.
Compensatory Fiscal Policy:
This aims to continuously compensate the economy against chronic tendencies towards inflation and deflation by manipulating public expenditure and taxes,
It has two approaches;
§ Built In Stabilizers; This involves the automatic adjustments of the expenditure and taxes in relation to cyclical upswings and downswings with in the economy without government interference.
§ Discretionally Fiscal Policy; This involves deliberate changes in the budget by actions of the government like an increase or decrease in tax rates or government expenditure. It can take any of the bellow three forms:
o Changing taxes with constant government expenditure
o Changing government expenditure with constant taxes
o Simultaneous changes in both government expenditure and taxes
LIMITATIONS TO FISCAL POLICY
· Conflicting objectives.
· Political problems
· Inadequate date or difficulty in obtaining accurate data
· Structural problem
· Timing problem