Fiscal Policy Is One of the Tools

¶ … fiscal policy is one of the tools available to the government to influence the national economy and to make an effort to bring positive changes in it. The term fiscal policy refers to the disbursement made by the government to provide goods and services to the general public. Moreover, it is considered as a means to finance different government expenditures including expenditures for providing goods and services to the general public, spending on defense of the country, investing in different development projects etc.

In this regard, government uses two methods of financing. First is through taxation and the second is through borrowing. While considering the issue of taxation, it can be said that taxation can be implemented in a number of ways. For instance, in developed economies, taxation ranges from personal to corporate income. There are also some value added taxes as well some collection of revenue through royalties and taxes on specific goods and services. All these policy variables directly or indirectly influence the GDP growth rate of the nation. Increased taxes on some goods and services might influence their exports or might discourage their exports, hence discouraging the business involved in their trade. This may bring a negative impact on the overall GDP of the country. On the other hand, tax exemptions on some goods or services may encourage the local manufacturers to produce more goods and services and hence can increase their productivity. This will in turn bring a positive impact on the overall GDP growth rate of the country. Moreover, increased taxation on personal incomes can also harm the economy in the long run as it will limit the ability of the buyers to purchase commodities and will lessen the economic activity. The net effect of this reduced economic activity will appear in the form of a negative impact on the GDP growth rate of the country.

In addition to this, the borrowings made by the government are also a part of the government's policy to mange national resources. These policy variables have profound implications on country's monetary policy and on the GDP growth rate as well. In developed societies like that of the United States, governments are facing a number of challenges and solutions to most of these challenges are in conflict with each other. At one hand, it may be trying to minimize the effect of a recession and to smooth out the national income and at the same time it will be taking initiatives intended to achieve particular social objectives but need some additional resources that may further bring down the national income.

A government spends the revenue, collected through taxation or borrowing, in two primary areas. First is the money is spent on the delivery of goods and services to the general public and secondly it is spent in distributing the revenue to other governmental levels. The money thus spent by the government directly or indirectly affects the economy. This money can be spent on supporting the economy in the times of recession so that the confidence of the consumers should be regained and business should be captured back. This boost in economic activity, because of the support of the government in lifting up the economy, can positively affect the GDP growth rate of the country. The situation, in which the government supports the economy in the time of recession and reduces their spending in the times of growth, is a representation of the Keynesian economic model.

Western societies found this theory to be very attractive as it benefits the whole society, leading to the balanced sharing of resources. Transferring of wealth and resources from people having high income compared to those living in poverty, is considered to be one of the primary objectives of a country's fiscal policy. However, such policies discourage those who are prosperous and are availing impressive income opportunities.