Fiscal Policy: How Does It Stabilise the Country’s Economy

You might have had heard the term “fiscal policy” before but did you ever wondered what exactly it is or you just ignored it and moved on. Well, you should know that it plays a huge role in the economic development of the country and when it is implemented each and everyone is affected. Now let us understand briefly about this topic.

In simple and plain words, fiscal policy is the implementation of rules and regulations by the government in order to maintain an economic balance in the country.

Therefore, what happens in this is that the government adjust the revenue and the spending levels to ensure that the country’s economy stays on the right track.

Types of fiscal policy

In general, there are two types of fiscal policies- expansionary and contractionary, which are implemented differently. However, both policies help the government in achieving the same goal and i.e. growth of the economy. The government uses each one of them as per the economic situation in the country.

Expansionary fiscal policy

This policy is quite popular among the people and is also very much favoured. In expansionary fiscal policy, the government increases the flow of money in the country and this way the purchasing power of the people also increases dramatically. Now, you must have well understood why it is highly popular among the users. Basically, the government implement this policy in two ways:

  • Firstly, by spending more on public projects and giving monetary benefits to the unemployed.
  • Secondly, by cutting the tax levels so that the people of the country won’t have to pay much tax to the government.

Both have their own benefits and some people prefer government spending as according to them if the government start spending, then the unfinished projects would be get completed soon.

Hence, contributing to the overall development of the country. On the other hand, some prefer the tax-cutting method, as they believe that by doing this, the government would be able to put more cash into the hands of the customer.

Contractionary fiscal policy

Well, this is just the opposite of expansionary policy which means that the government tries to slow down the growth of the economy either by cutting the spending or increasing the taxation. You must be thinking why government would do things like these? Well, the answer is to decrease the purchasing power of the consumer and to reduce inflation.

Now, in order to have a clear idea about this, try to understand this- when the flow of money in the economy is high, everyone will have enough money in their hands that means the purchasing power of the consumers will increase significantly. Well, this will lead to more demand in the market and lesser supply and thus resulting in inflation. Therefore, in order to avoid such a situation, the government may use the contractionary fiscal policy.

Other useful terms related to fiscal policy

There are two other concepts that are related to fiscal policy which are also very important to understand. They are- fiscal surplus and fiscal deficit. Now, let us dig deeper into these two.

  • Fiscal surplus: When the government receive more money than they spend then that term is known as “fiscal surplus”. Well, it is quite difficult to have a surplus.
  • Fiscal deficit: When the government spend more than they receive then the term is known as “fiscal deficit”. Usually, when it occurs, the government lend money from other external sources.

What are the main tools of fiscal policy?

In general, there are two tools of fiscal policy that a government uses and they are:

  • Taxation: This is the main tool via which the government collects money from the general public. The government receive money in various forms including income taxes, sales taxes and other indirect taxes. Tax is the most primary ways of collecting money from the public by the government.
  • Government spending: In order to keep the economic pace of the country good, the government needs to keep on spending various projects. This can be building infrastructure for public usage, spending for the unemployed and many others. 

Well, this was pretty much everything! Hopefully, you must have learned a lot about fiscal policy and have a clear understanding of this topic. The main objective of this policy is to ensure that the economic wheel of the country keeps on running.