It means the procedure of shaping government taxation and government spending so as to accomplish certain objectives. In short fiscal policy refers to the taxing, spending and borrowing policy of the government. It is mainly concerned with the process of shaping; government revenue and govt. expenditure so as to achieve certain important, specific and main aims.
The basic objective of fiscal policy is to promote economic growth in the economy. In all countries, whether developed or under developed, the state gives top priority to economic development. Govt. adopts certain measure to stimulate the rate of growth in the economy. The fiscal measures like deficit financing, deficit budget and borrowing are very helpful in promoting economic growth.
Fair Distribution of Income
In a free enterprise economy, economic development is always accompanied by inequalities in the distribution of wealth. A small group of population becomes richer and richer and majority of the population becomes poorer and poorer. A prominent objective of fiscal policy is to minimize the disparity in the distribution of wealth. Disparities of income can minimized by taxing high income groups at progressive rate and by subsidizing the cost of lining of the poor people.
The achievement of full employment is another objective of the fiscal policy. Employment level can increased by giving incentives to investors and govt. through Fiscal Policy can induce by lowering down the tax rate or by increasing slabs. Income tax holiday and reduction in other taxes may bring larger investment.
Economic fluctuations are very frequent in a free enterprise economy. They inject the element of instability in the economy. Sometimes the economy has to suffer from the undesirable situation of depression and sometimes there is a problem of inflation. In order to obtain stability, the govt. adopts the policy of deficit budget in depression and surplus budget in inflation.
Value of Money
Changes in the value of money cause instability in the economy. Therefore, Govt. action is necessary to stabilize the value of money. During inflation govt. reduces private expenditure. In case f deflation government increases its own expenditures and encourages private expenses by a cute in taxes. That is, Govt. gives relief to tax- payers and they are induced for investment.
Suitable Consumption Level
It is also necessary that through fiscal policy a suitable and desirable level of consumption should prevail in the country.
To Discourage the Production of un- Necessary Goods
Production of intoxicants and other injurious to health goods can be stopped through heavy taxation. Production of Cigarettes may be in the individual interest but not in the interest of the nation. The govt. imposes heavy taxes on such commodities so as to discourage their production.
To Correct the Disequilibrium in the Balance of Payments
Disequilibrium in the balance of payments arises when the imports of a country exceeds its exports. To correct this Disequilibrium the govt. may adopt certain fiscal measures. On the one hand a heavy custom duty and tariffs are imposed in order to discourage the volume of imports and on the other hand, the govt. may provide subsidies to those industries which are producing export goods. When imports and discouraged and payments are stimulated, the disequilibrium in the balance of payments is corrected.