Fiscal policy is the deliberate manipulation of government income and
expenditure so as to achieve desired economic and social objectives. The instruments of fiscal policy are
taxation and government spending. Changes in the level, timing and composition
of taxation and government spending can have a significant impact on people’s
living.
Public spending is financed by various ways, 1) taxes levied by central government, 2)
taxes levied by local
authorities, 3) fees, 4) fines, 5) national insurance contribution, 6) borrowing
7) sales of assets, and 8) aids or
grants. Out of all the above, taxation provide the major
contribution towards public spending.
Taxes
are collected by government department. Taxation
will vary greatly between different countries, how they differ,
such as the distinction between direct taxes on income and indirect taxes on
expenditure.
The
direct taxes are taxes levied on
income and capital. It is paid directly by the tax payer to the government.
The burden of direct taxes is borne by the person or company responsible for
paying the taxes.
Indirect taxes are taxes paid in the form of higher price indirectly
through some others (Sellers, distributors or manufacturers) to the government.
In this taxation incidence is with the tax payer and
its impact is passed on to another in the form of higher prices
(such as sales tax).
There
are various aims of government policy but there are possibilities that there
may be possible conflicts between these
aims. The task of aiming to achieve one aim might conflict with
the other aims, for example, the aim of reducing unemployment could
conflict with the need to keep down the rate of inflation. In order to
achieve one goal government often sacrifice another. So policy makers are
compelled to establish some scale of priorities (main
concern).
The
major policy objectives are 1) full employment, 2)
price stability, 3) economic growth, 4) redistribution of income,
and 5) balance of payments stability. There are different forms of
government policies. The best known are Fiscal policy and monetary
policy. Fiscal policy is
the deliberate manipulation of government revenue (taxation) and government
expenditure. Monetary policy is
concerned with the changes in the supply and price of money. There are
other policies such as regional policies (which influence the location of
industry) income policies (which influence incomes, especially wages).
Failures in objectives occur when government intervention fails
to improve economic efficiency (welfare). It arises from a number of
reasons.
1) It is difficult to achieve all the objectives
simultaneously.
2)
Policy instruments will be making use
of economic theory and forecasts which has conflicts of opinion between different economists.
3)
Governments receive advice from Treasury and from panel of independent
economists. The strength of the advice
depends on the accuracy of information gathered and the interpretation
in the economic models used.
4)
There will be delays involved in
government policy, that is, time taken to recognize the problem, time
taken to formulate policy measures, time taken to implement the policy and time
taken people and firms to react to the policies. The economic circumstance will
change from the time the problem is identified to the time of implementation.
(E.g. change in seasons)
5)
There are practical problems –
national and international known as policy constraints. It is difficult
to change government expenditure, taxation and legislation quickly.
6)
Economic advisers may recommend a rise in taxation, but if this is just before
a general election, due to political
influence a government may choose to ignore the advice.
[Governments tend to introduce harsh (cruel) measures just after an election
and more popular ones near an election]
7)
The real world is a complex and
constantly changing place, and therefore, it is very difficult to
measure and control the economic components involved in the policy measures,
[such as increasing mobility of money around the world makes more difficult to
measure and control money supply]
8)
Civil servants’ and politicians’
self-interest to pursue their own department or their own advancement
(pay scale, promotion chances and status) may be influenced in policy decisions
even if it is not in the country’s interest.
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