Fiscal Policy

We are discussing public financing. Earlier, we have discussed income tax, VAT, Government budgeting and government bonds. Today, we have taken the concept of fiscal policy. Fiscal policy is that policy which is made by government for controlling the government expenditure, supply of money and taxes. Fiscal policy is great equipment in the hand of any country’s government to make better tax system and to manage the public loan and expenditures.

We all know that if government budget shows that estimated expenditures are more than estimated incomes. At that time, it is very necessary to make fiscal policy to bring this adverse situation to balance level where will be total expenditure will equal to total income of government. For this government can use following five techniques of fiscal policy.

Techniques of Fiscal Policy


1. Taxation Policy

By amendment in Indian tax law 1961, government of India has power to make new taxation policy according to the current Indian economic situation. Either government can increase the tax rate or decrease exemption for collecting more tax for previous year income.

2. Public expenditure policy

Public expenditure policy is very useful to reduce the government expenditure. Government divides total expenditures into two major categories one is development expenditure and other is non development expenditure. With this policy, government encourages only development expenditure and tries to reduce non development expenditure.

3. Deficit financing policy

If above two equipment does not work to create balance in government budget, government can get loan from central bank to adjust deficiency or deficit. For this RBI has to issue new currency notes. But this decision should be taken very carefully because increasing trend of deficit financing will decrease the value of currency in world market and it will increase the prices of commodities in commodity market.

4. Seigniorage

Seigniorage is also technique to take benefits by issuing new notes and it is important role to make fiscal policy.

5. Public Debt Policy

Public debt means, loan is taken by government to fulfill government expenditures. Government should make this policy very seriously. If there any other source, then government should use to pay government expenditure or reducing expenditure is better than taking loan. Sometime, under the pressure of foreign creditor, government of India has to take many decisions which are against public interest. So, government of India’s minister should live in simple life and think high. They should use internet for doing all work. With this, India can save Rs. 500,000 per month/ per minister for travelling expenditure.