Generally government speaks about fiscal policy during budget sessions frequently. So let’s understand the importance of what fiscal policy is, and what its effects are.
Fiscal policy basically means how the government tries to improve or increase the economy. The government spends some amount of money to stimulate the economy, which is collected through taxes or money that is borrowed.
Normal citizens generally pay these taxes in bonds as an investment. The government promises to pay the money back with interest.
The money paid by ordinary citizens in taxes is used to grow the country’s economy.
In monetary policy, the government stimulates the economy by lowering interest rates.
While in fiscal policy, the government spends money to help stimulate the economy.
A depression occurs due to two years of GDP contraction. Countries are not run like companies are. When a country faces economic problems, it might cut taxes to stimulate the economy.
Similarly, countries can stimulate the economy by building roads, bridges, trains, etc., during an economic crisis. When countries take in more than they can make in taxes, it is a deficit, and the opposite of this is a surplus.
It is not a good idea to have deficits for a very long period of time. So when inflation is very strong government implements fiscal policy.
According to Keynesian economics, the government spends a lot of money when the economy is bad, and this will help the government to get out of extreme recessions or a decline in general economic activity.
So, in short, it means that active fiscal policy and monetary policy in the short run will rescue an economy that is in bad condition. This concept plays a very important role in managing the economy of a country.
We have understood what fiscal policy is, but understanding its effects and significance on the economy is also important for an individual. Now, let’s understand its effects on the economy.
EFFECTS
The fiscal policy may affect a certain group of people in the country. Generally, this policy affects middle-class people mostly.
During an economic crisis, the middle-class people may even have to pay more taxes than the wealthier and upper class group of people.
Fiscal policy may help the backward and poor people as the government tries to stimulate the economy.
To stimulate the economy, the government starts constructing roads, bridges, trains, etc., which leads to increase in employment opportunities for the poor.
The wages of the construction workers will also increase, which helps in stimulating the economy.
This policy helps a specific group of people by affecting the other group of people to maintain balance in the economy of the country. But to maintain the overall economic stability, this policy is very much required.
CONCLUSION
The fiscal policy and monetary policy are the strengths for the government to maintain the economic stability of a country. These policies play a very important role during an economic crisis.
To maintain a good economy, the involvement of the government is very much required. The government decides when to apply this policy to maintain economic stability.
The fiscal policy generally improves the economy of a country when the inflation rate is very high. If the government does not play any role and does not apply this policy, it may lead to extreme recessions.
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