Importance of Fiscal Policy to the Economy

Importance of Fiscal Policy to the Economy

Importance of Fiscal Policy to the Economy

It requires little knowledge to picture an economy with runaway deficits, stagnation or unstable or even the three combining together into what is a perfect storm for a country. However, nowadays, it has become an odd thing to find stable, grown and balanced budgets. As the monetary policy appears lifeless, people are proposing adoption of short-term growth instead of the fiscal sanity. Even though that is the case, various tools of monetary policy such as taxation and public expenditure are so hard to ignore since they affect the disposable incomes of the citizens, consumption levels and investment made to a particular country. As such, there is a need to analyze the role that the fiscal policy plays in economic development and maintaining stability of a nation.

For starters, the main aim of any fiscal policy is to mobilize resources both from the public and private sectors. In underdeveloped nations where per-capita income and national income are low, the use of this tool helps to steer the people towards investing which helps to boost the rate of economic development. For example, taxation and heavy tariffs on imported goods not only mobilize the resource for the government but also protect the local industries.

When the government wants to accelerate the rate of growth, they revise the fiscal policy and use it as the tool to attract investment in the private and public sectors. For example, public borrowing and taxation and deficit financing are used to ensure that consumption and distribution of wealth is even. Additionally, to induce investment and capital formation or encourage investment, the government will use the necessary tools that will promote social development.

Finally, fiscal policy will play an important role in increasing expenditure that will help to create employment when the economy is hit with high rates of unemployment, to monitor economic stability and regulate the rate of inflation. Apart from the mentioned roles of monetary policy, it also plays a vital role in ensuring that there is balanced growth in the economy, reduce inequality in income distribution and also in reallocation of resources.

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