BudgetingFinance

Role of Fiscal Policy in Economic Development

Aspects of Economic Stability and the Role of Fiscal Policy in economic development and controlling Inflation cannot be ignored. Inflationary situation in an economy represents the rising prices of goods and services. It is highly essential to control this otherwise it may bring instability in the economy. The fiscal of the Government may contain this trend through various measures as follows-

(1) Government Spending: Due to unregulated private expend in the aggregate demand of goods and services increases that pushes the general price level due to limited availability of goods and in the market. To control the situation as a part of the Role of Fiscal Policy, the Government should reduce public spending to the minimum extent possible so the aggregate effective demand may not pass heavily on the economic stability may be maintained. Now, it is for the government to see how much and to what head expenditure should curtailed.

(2) Taxation: Taxes plays a significant role in controlling the inflationary trend. The main problem during inflation is to reduce disposable income (Gross income-savings) in the hands of public in view of the limited supply of goods and services available in the market so that private expenditure may be curtailed. Withdrawing the excessive purchasing power from public is, therefore necessary. Hence the Government should manipulate its taxation policy accordingly and should take the following measures-

(i) The rates of existing taxes should be steeply increased in such a way as to influence the poor section the least. Most of the burden of the increased taxes should be shouldered by the higher society having capacity to pay.

(ii) New taxes mainly anti-inflationary should be imposed. The rates for direct taxes should be progressive and those of indirect taxes should be so adjusted as to affect the poor section the least. It means such taxes should be imposed heavily on luxury items which are mainly used by the upper class. In imposing new taxes, the Government should find out the strategic points at which the aggregate effective demand can be curtailed taxes should be imposed at these strategic points.

(iii) Besides liquid Assets, cash balances and capital assets should be taxed.

(iv) Tax policy should encourage voluntary savings and control non-essential consumption expenditure.

 These measures would certainly help in withdrawing the excessive purchasing power from the public and thus reducing the aggregate effective demand.

 (3) Public Borrowings. The object of public borrowing is also to withdraw the purchasing power from the hand of the public in order to reduce the aggregate effective demand. If the Government fails to raise the requisite revenue to meet the development expenditure through tax, it resorts to public borrowings. Public borrowing may be voluntary or compulsory. Ordinarily public borrowing is voluntary i.e. left to the free will of individuals. But, if voluntary borrowing does not bring the desired affect on inflationary pressures, the Government may resort to compulsory saving or compulsory borrowing from the public by deducting a part of the salaries or wages of the employees. Such compulsory borrowing may be redeemed after a fixed period thus withholding the purchasing power for a definite period. It should be the role of Fiscal Policy in Economic Development by managing public borrowing well.

 (4) Debt Management. The existing public debt should be managed by the Government in such a manner as to reduce the money supply and prevent further credit expansion. For this purpose; the debt held by commercial banks should be retired by the Government out of a budget surplus. This would check the banks to encash their securities and add to reserves for the purpose of credit expansion. But, one point should be remembered here that during inflation, the Government might not have the budgetary surplus. In that case, the Government may retire the bank held bonds by selling them to non-bank investors like insurance companies. The Role of Fiscal Policy in economic development and controlling Inflation well recolonized by almost all government.

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