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of money in the stream of NI than are withdrawn, it can also be secured by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