Fiscal Policy refers to revenue and expenditure policy of the government. It is also called Budgetary Policy of the Government. It aims at achieving two objectives: (i) Economic Stability, and (ii) Economic Growth. Stability is achieved by correcting the situations of excess demand (inflationary Gap) and Deficient Demand (deflationary).
Growth is achieved by creating investment-friendly environment in the economy. The Government tries to accelerate the pace of growth by herself investing in public sector enterprises. It also prompts domestic and foreign investors to make more and more investment in the Domestic Economy.
Components of Fiscal Policy :
(1) Government Expenditure: It is the principal component (or principal instrument) of fiscal policy.
The Government of a country incurs various types of expenditure, mainly:
(i) Expenditure on public works programmes such as the construction of roads, dams, bridges,etc.
(ii) Expenditure on various of subsidies to the producers with a view to encouraging production.
(iii) Expenditure on the defence of the country and the maintenance of law and order.
(iv) Expenditure on education and public welfare programmes.
(2) Taxes:- Taxes are a compulsory payment made to Government by the household and the producing sectors. By increasing the tax burden on the households and the producers, the government reduces purchasing power in the economy. On the other hand , by lowering the tax burden, the government increases the purchasing power, Thus, When deficient demand is to be corrected (or when AD needs to be increased), tax burden on the households and the producers is reduced.
(3) Public Borrowing/Public Debt. By borrowing from the public, the government creates public, the Government creates public debt. In a situation of defecient demand (or when AD needs to be increased), the government reduces its borrowing from the public. So that people are left with greater liquidity (or cash balances) and aggregates expenditure remains high.
(4) Borrowing from RBI (the Central Bank). Borrowing by the government from the RBI is another element of Fiscal Policy. It is increased to fight deflationary gap, and reduced to fight inflationary gap. Higher Borrowing releases greater liquidity in the economy, as required when deflationary gap. When borrowing is reduced, the amount of liquidity in the economy is also reduced, as desired there is inflationary gap in the economy.