Fiscal policy: Fiscal policy objectives, monetary policy (2024)

Fiscal policy is an effective politicized sector as the government of a country entirely regulates it. In contrast with the monetary policy, the area is wholly regulated by an independent central bank. Thefiscal policy objectivesdescribe which the government should spend their money and how they want to obtain it from taxpayers.

For example, the government may receive pressure from the public to spend more on local schools. The governing bodies may increase taxes or borrow money to form a balancing act for fiscal policymakers.

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What is a fiscal policy?

Fiscal policy refers to the governing bodies spending and taxation to influence the economic conditions, mainly the macroeconomic condition. It includes employment, inflation, aggregate demand for goods and services and economic growth. The question is how much income it receives through taxes and how much it is spent on defence, welfare, and education.

Although, the concept even contracts with monetary policy regulated by the central bankers influencing the quantity of money and credit in an economy. Both the concepts are helpful to accelerate growth when an economy begins to moderate growth. In addition, fiscal policy is also helpful in redistributing income and health.

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What are the fiscal policy objectives?

A government has severalfiscal policy objectivesin mind when making decisions. Some governments may favour an objective over the other one. Below are the five main objectives of the fiscal policy.

1. Economic growth– As an economy develops, its citizens become flourishing on the whole. Also, the economy’s government should be careful, as a violent fiscal policy may turn destructive in the long run.
2. Full employment– It is the primary objective of a government to get people into work. Not only do the higher taxes benefit the governments, but also the lower expenditures on social security. Although, an expansionary policy may invest in infrastructure to create employment opportunities in future. Likewise, it may also minimize taxes to supply more money to consumers to stimulate employment indirectly from purchases.
3. Control debt– Operating a budget deficit is not a harm. It creates more and more debt over time. If the tax receipts and economic growth do not increase its line, a nation witnesses an unsustainable debt. Thus, a rational fiscal policy tends to control to avoid drastic action.
4. Redistribution– The transfer of wealth from rich to poor is another government’s objective. High taxes may result in high tax receipts, but not always. Although avoidance and evasion may occur, small incremental increases may not be impactful in the short term.
5. Control Inflation– When an economy develops strongly, it may witness inflation depending on the monetary policy. Although inflation is a monetary phenomenon, the government still takes necessary steps to stem such a situation. Nevertheless, governments take steps by increasing taxes to minimize disposable incomes and consumption.

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Instruments of fiscal policy-

There are two mainfiscal policy instruments, i.e., taxation and spending.

1. Taxation– Governments optimize taxation as a way of capitalizing expenditures. The higher taxes are not popular with voters. Still, they want higher spending on defence, education and healthcare. It aims at encouraging investment, reducing inequality, regulating consumption, preventing domestic industries etc.

Thus, there is a complex act that maximum governing bodies don’t follow. Consequently, spending more than they receive.

2. Spending– Government spending plays a vital role in shaping the overall economy. Thus, trillions of amounts are spent on wealth transfers such as social security, Medicaid, and Medicare. Even in other developed nations, social transfers and healthcare are high expenditures.

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Monetary Policy and Fiscal policy

• Fiscal policy is defined as relating to government taxes and finance. In other words, fiscal policy is anything that relates to government spending and how much it brings by taxation tools.
• Likewise, the monetary policy relates to the money of a country. Thus, monetary policy has to do with a country’s money supply. It defines the way policies increase and decrease their supply, and the money is created.
• In simple words, fiscal policy refers to government spending and tax, whereas monetary policy refers to the creation and supply of money in an economy.

Conclusion

Fiscal policy is an essential element of government spending and taxation for influencing overall economic conditions, mainly the macro-economic condition. Although, thefiscal policy objectivestend to cover the total employment, economic growth, and control of inflation by taking necessary steps through governing bodies. Meanwhile,fiscal policy instruments, i.e., taxation and spending, play a vital role in funding expenditures and shaping overall economic growth. Consequently, the governments can also impact the performance of their economies by practising bothmonetary and fiscal policy.

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