Income Tax Filing for AY 2024-25 is now open. File early for quicker refunds. Start Now eFile now

Fiscal Policy

What is fiscal policy?

Fiscal policy involves the government's use of taxes and spending to impact the state of the economy. It's usually deployed during a recession or inflation when the situation gets worse quickly and needs government intervention.

Ideally, an effective use of fiscal policy should help steady an unstable economy and support ongoing growth.


How does fiscal policy work?

When policymakers aim to influence the economy, they operate two primary tools: monetary policy and fiscal policy. Let's clarify these concepts:

Monetary Policy: This strategy involves the indirect control of the money supply within the economy. It contains adjustments to key financial indicators such as interest rates, reserve requirements for banks, and the purchase or sale of government securities. These measures effectively manage the volume of money circulating in the economy.

Fiscal Policy: Fiscal policy pertains to how the government directly or indirectly manages the allocation of resources within the economy. It encompasses various actions, including alterations to taxation, government expenditure on public goods and services (such as infrastructure and education), and government borrowing.

The objectives of fiscal policy can vary over time. In the short term, governments may prioritize macroeconomic stability. For instance, they might increase government spending or reduce taxes to stimulate economic growth during a a downturn, or conversely, cut spending or raise taxes to curb inflation or address external economic vulnerabilities.

In the long run, the government might want to facilitate steady growth or help citizens who lost their jobs and are struggling to fight with inflation. To encourage steady growth, the government can invest in better infrastructure or education. These goals can change depending on what’s happening in the country.

Short-term goals might be caused by things like economic ups and downs or natural disasters. Long-term objectives can be influenced by how developed the country is, its population, and the resources it has. 

For instance, a low-income country might allocate more resources to primary healthcare to alleviate poverty, whereas an advanced economy could implement pension reforms to address the long-term financial implications of an aging population. In the case of an oil-producing nation, policymakers may seek to align fiscal policy with broader macroeconomic developments by avoiding excessive spending when oil prices surge and refraining from abrupt cuts during price declines