Objectives of Fiscal Policy . Full Employment . Price stability . Economic growth .
Equitable distribution . External stability . Capital formation . Regional balance excess demand is due to private spending.
Taxation reduces disposable income and so aggregate demand. To fight depression, the Government needs to increase its spending and reduce taxation. . Economic Growth Fiscal Policy is used to increase the productive capacity of the economy.
Tax is to be used as an instrument for encouraging investment. Tax holidays and tax rebates for new industries stimulate investment. Public sector investments are to be increased to fill the gap left by private investment. When resource mobilization through tax measures is inadequate, the Government resorts to borrowing both from internal and external sources to finance growth projects.
. Equitable distribution Progressive rates in taxation help to reduce the gap between the rich and the poor. Similarly progressive rates in public expenditure through welfare schemes such as free education, noon meal for school children and subsidies promote the living standard of poor people. .
Exchange Stability Fluctuations in international trade cause movements in exchange rate. Tax concessions and subsidy to export oriented units help to boost exports. Customs duties on import of non-essential items help to cut import bill. The reduction in import duty on import of raw material and machinery enables reduction in cost and make the exports competitive.
- - Fiscal Economics . Capital formation Capital formation is essential for rapid economic development. Tax relief helps to increase disposable income, savings and thereby capital formation. Government expenditure on infrastructure development like power and transport encourages private investment.
. Regional balance Fiscal incentives for industries in the backward regions help to narrow down regional imbalances. Public expenditure may be used to start industrial estates so that industrial activity is stimulated in backward regions. Summary: The science of public finance deals with the revenue and expenditure of the Centre, state and local Government.
In modern times, this subject includes five major divisions: Public revenue, public expenditure, public debt, fiscal administration and Fiscal Policy. Thus, public finance plays a