Finance

Objectives of Fiscal Policy in a Developing Economy

The objectives of fiscal policy differ from country to country depending upon the level of economic advancement. Therefore, the objectives of fiscal policy of developed countries are different from those of developing countries. The role of fiscal policy in a developed Country is to maintain the level of full employment because their problem is not that of development (because they are fully developed) but of maintaining economic stability on account of business fluctuation caused by trade cycles.

Whereas in a developing economy, the role or objectives of fiscal policy is to accelerate the rate of economic growth by promoting the rate of capital formation and investment, changing the pattern of investment into desired direction, maintaining or increasing the adequate supply of capital and consumer goods and services, maintaining price stability and above all making the distribution of national product just and equitable.

The following are the major objectives of fiscal policy in a Developing Economy

(1) Mobilization of Resources. The first objective of the fiscal policy is to mobilize resources for the development of the economy through various resources including imposition of fresh taxes, increasing rates of existing taxes; operating surplus of public enterprises, public borrowings, deficit financing etc. This is necessary to break the vicious circle of poverty in under developed countries. In order to collect more revenue for growth, it is necessary to increase the rate of investment and capital formation which cannot be achieved without resorting to voluntary and forced saving measures.

Growth breeds inflation. It is therefore, essential to contain the inflationary pressures in the economy by curtailing the consumption and unproductive expenditure. The per capita income being low in developing countries, the voluntary savings may not come up to the expectation hence the Government has to go for taxation and public borrowing for raising revenue to finance development projects.

(2) Acceleration of Economic Growth. The second of objectives of fiscal policy is to accelerate the rate of growth so that the real national income may increase in the long run. The Government through its taxation policy, public expenditure, borrowings and deficit financing may provide incentives for savings, employment and investment. The following fiscal measures would help accelerating growth.

(i) The revenue collected through taxes should be invested in productive activities
(ii) Public expenditure should be manipulated in such a way to give incentive to the developmental activities, for example, providing basic infrastructure for development
(iii) Tax reliefs and subsidies to the entrepreneurial classes may be given to boost the investment activities. The expansion of investment opportunities will certainly accelerate the rate of economic growth.

(3) Minimizing inequalities of income and Wealth: The next objectives of the fiscal policy of a developing economy should be to eliminate or at least to reduce the inequalities of income and wealth in the society to ensure the rapid economic and social growth because inequality is the mam feature of the under developed economies. If inequality is not reduced, the people will feel discontentment that will generate instability in the economy. The following fiscal measure may help reducing the inequalities of income and wealth in the society.

(i) Progressive taxes may be imposed on rich people so that unnecessary consumption expenditure may be curtailed by them
(ii) The poor section of the society should be exempted from tax or taxes should be levied on them at a very rate,
(iii)The-luxury goods which are generally used by the upper class may be heavily taxed and the proceeds so collected may be diverted to more productive sectors of the economy
(iv) The public expenditure should be tailored in such as to benefit the poorer sections of society most,
(v) The fiscal policy must discourage the unearned income,

The objectives of fiscal policy by reducing inequalities may clash with the objective of maximum economic growth because rapid economic growth is not possible without aggregate saving in the economy and the aggregate savings may be maximum only when there is a great disparity in income and wealth. The Government should attempt through appropriate measures to reconcile (he two conflicting Objectives of rapid growth and social justice in a judicious manner.

  (4) To Increase Employment Opportunity: One of the important Objectives of fiscal policy is to provide more and more employment opportunities to unemployed because the objective or economic growth is quite impossible without providing employment opportunities to all. The Government through its fiscal measures may create atmosphere for employment opportunities. The Government may resort to the following measures to raise the level of employment in the country-

(i) Taxation Policy. The taxation policy of the Government may influence the level of employment is a developing economy. Unemployment is the result of low propensity to consume. The richer have low propensity to consume whereas the poor have high propensity to consume. It means the rich save more than the poor. The Government here can adopt re-distributive tax policy i.e. to collect more by way of taxes from the rich and distribute the proceeds to the poor progressive taxes on the rich people are justified, socially desirable and economically advantageous. This type of tax policy will not also adversely affect the inducement to save and invest.

(ii) Public Spending. The role of public expenditure is also important to fight against unemployment or to provide more employment opportunities. The level of employment depends more upon effective demand. The Government can influence, effective demand by making more public expenditure or adopting such fiscal measure as to raise the level of private expenditure. During depression, public expenditure plays significant role when the private investment in productive activities is not coming forward. The Government can resort to counter-cyclical fiscal policy which means that taxes and Government spending to varied to anti-cyclical direction, Government spending cut and taxes increased in the expanding phase of cycle and Government spending increased and taxes cut in contraction phase Increased Government expenditure will open new vistas for employment in the economy which means creation of demand for goods and services.

During depression, the pump-priming policy of public expenditure may be followed. This means that more purchasing power shall be injected through public expenditure or in other words deficit financing will be adopted. It will give a momentum to the halt economy.

(iii) Public Debt Policy: In order to meet various public expenditure obligations in a developing economy, the Government has to resort to public borrowing because the per capita income in developing countries is very low, hence requisite amount cannot he raised through taxes being the scope of imposing fresh taxes or raising the existing tax-rates very limited.

Public debt policy can be used to divert the savings of public from non-essential consumption expenditure to more essential public expenditure. The Government issues bonds for this purpose with attractive rates of interest to encourage people to purchase them and contribute to the national growth. The Government used the proceeds of such issue for development expenditure and thereby increase the employment potentials. If sufficient amount could not be raised through public debt, the Government may resort to compulsory savings by the public.

(5) Price Stability: An underdeveloped country does not possess the adequate capital resources to finance its development expenditure. It is also evident that the scope of raising revenue through taxes and public borrowing is also not unlimited. In order to meet the requirement of development expenditure, the Government resorts to deficit financing e.g. it meets its requirements by printing more currency notes. The supply of money will increase that will push the general price level and inflationary pressure in the economy which may cause hardship to wage-earners and other fixed income groups. High prices will result in the demand for high wages that will increase the cost of production and this again pushes up the prices. A mild inflation may be favored as an incentive for capital formation but a vicious circle of high prices and high wages will never end and may thus retard the economic growth.

A package of fiscal measures may be adopted to control the inflationary trend in the economy-

(a) The excess purchasing power of the people should be with- drawn by raising the rates of taxes and imposing such new taxes as would be necessary to contain inflationary pressures like super tax, expenditure tax etc. The tax policy to be followed should be progressive i.e. to collect more from richer section and less from poorer section. Savings should be encouraged and non-essential expenditure should be discouraged through taxes.

(b) Proceeds of taxes should be used for development expenditure.

(c) Public borrowings may also help withdraw the purchasing power of the public for the time being.

The Government should implement monetary measures to check inflation.

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