10 Importance and Objectives of Fiscal Policy (Economy)

The economic conditions and priorities of developed and developing countries differ from each other. Therefore, the importance and objectives of the fiscal policy adopted by such countries differ vastly.

The significance of the fiscal policy has increased since the worldwide depression of the thirties (1930).

Importance and Objectives of Fiscal Policy

In the developing country, the importance and objectives of fiscal policy are the following:

1. Revenue Earning

The most effective objective of fiscal policy is to earn public revenue. The government needs adequate revenue to fulfill responsibilities.

The state cannot fulfill its duties in case of a shortage of money but excessive taxes cannot be imposed for increasing revenue.

The tax should be based on the taxable capacity of the citizens of the country.

From the social point of view, the burden of tax should be equal on all citizens.

Moreover, it should not adversely affect savings and investment in the country.

The main objective of fiscal policy is to increase government revenue through the appropriate taxation system.

2. Rapid Economic Development

The government plays a significant role in rapid economic development.

The government spends its revenue on those activates which will facilitate the rapid economic development of the country.

By spending on infrastructure (Both physical and social), maintaining law and order, protecting national boundaries and providing services for social welfare the government promotes rapid economic development.

3. Proper Allocation of Resources

It is also one of the effective objectives of fiscal policy.

Generally, all natural and human resources are in limited supply as compared to their requirement. Hence these should not be misused.

When making use of these resources priority should be given to those areas or activities which are more essential.

The optimum allocation of resources should be done in such a way that it increases employment opportunities and facilitates judicious distribution and checks misuse of national wealth.

The resources can be transferred from luxurious activities to essential activities or areas through fiscal policy.

4. Capital Formation

The objectives of fiscal policy are also to encourage capital formation in the country.

Saving and investments are low in most of the developing countries like Bangladesh because their national income low, Therefore, fiscal policy can be used to increase the level of savings, investment, and capital formation.

Consumption can be reduced and savings can be increased through appropriate fiscal and taxation policy. It will increase capital formation in the country.

5. Control on Inflation

Deficit financing is resorted to when public expenditure exceeds public revenue. It creates a situation of inflation in the country. Inflation affects adversely the economy of the country.

Therefore. It should be checked urgently and essentially.

The fiscal policy may aim at controlling inflation.

The purchasing power of the public can be reduced by increasing taxes. It will help to check inflation and price rise.

6. Price Stability

Various classes of society such as consumers, laborers and employees, agriculturists, producers, traders, etc. Are affecting by in-fluctuation in prices.

The general public is adversely affected by increasing prices. Of course, it increases opportunities for earning undue profits.

In the country, employment, and output are badly affected by a decrease in prices.

The fiscal policy endeavors to bring stability in prices by removing demerits of increase/decrease in prices.

The impact of the price increase can be reduced by providing subsidy or decreasing taxes.

Likewise, in the case of the decrease in prices, the government can purchase commodities at minimum support price or it can provide the subsidy to buyers.

7. Balanced Economic Development

Imbalanced economic development creates several problems in the country. Balanced economic development can be done through fiscal policy.

The government takes initiatives to invest their money example: irrigation, transport, power and water supply facilities in India.

By setting up various projects in underdeveloped areas the government facilitates balanced development in the country.

8. Economic Stability

One of the objectives of fiscal policy is to provide economic stability in the country by reducing the adverse impact of international cyclical fluctuations.

The fiscal policy provides economic stability by controlling external and internal forces.

Tariffs and customs duties can be imposed in the situation of the boom period while public construction works can be encouraged during the period of depression.

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9. Increase In the Rate of Investment

The fiscal policy also aims at increasing the rate of investment in the private and public sector.

The rate of capital formation in developing countries is very low due to unemployment and low per capita income.

The vicious circle of poverty is main the problem of these countries.

Therefore, fiscal policy is adopted in such a way that it reduces consumption and encourages savings.

Taxation policy is used to reduce undesirable consumption in developed countries.

10. Creation of More Employment

Last but not the least objectives of fiscal policy is to increase employment opportunities and to reduce unemployment and underemployment, For achieving this objective the government should develop socio-economic and physical infrastructure.

The community development programmes should be launched in rural areas.

Thus, now you know the importance and objectives of fiscal policy.