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Book Name – Macroeconomics (HL Ahuja)
What’s Inside the Chapter? (After Subscription)
1. INTRODUCTION
2. OBJECTIVES OF FISCAL POLICY IN DEVELOPING COUNTRIES
3. ROLE OF FISCAL POLICY FOR MOBILISATION OF RESOURCES FOR ECONOMIC GROWTH
3.1. Promoting Private Saving
3.2. Taxation and Resource Mobilisation for Growth
3.3. Direct Taxes and Mobilisation of Resources
3.4. Agricultural Taxation and Resource Mobilisation
3.5. Merits of Direct Taxes for Resource Mobilisation
3.6. Role of Indirect Taxes in Resource Mobilisation
3.7. Role of Taxation in Promoting Private Saving and Investment
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Role of Fiscal Policy and Taxation in Resource Mobilisation for Economic Growth
Chapter – 32
INTRODUCTION
Fiscal policy refers to government decisions regarding taxation, public expenditure, and borrowing. It is the most important instrument of government intervention for influencing economic activity and promoting economic development.
Modern economists believe that fiscal policy is essential for controlling recession and inflation and for accelerating economic growth, as monetary policy alone is often insufficient to achieve these objectives.
Capitalist economies are prone to economic instability in the form of recurring trade cycles, which cause fluctuations in output, employment, income, and prices.
The ideas of J.M. Keynes greatly influenced fiscal policy by explaining the causes of economic fluctuations and emphasizing the role of government intervention in stabilizing the economy.
Governments now use fiscal measures proactively to prevent or reduce the severity of depressions and inflation, contributing to greater economic stability in advanced economies.
During a recession or depression, the government should adopt an expansionary fiscal policy by increasing public expenditure, undertaking public works programmes, providing subsidies, and reducing tax rates to stimulate consumption, investment, employment, and aggregate demand.
A budget deficit during periods of depression is considered beneficial because it helps increase demand, reduce unemployment, and promote economic recovery.
During inflation, the government should adopt a contractionary fiscal policy by reducing public expenditure and increasing taxes to curb excessive demand and control rising prices.
A budget surplus is desirable during inflationary periods as it helps withdraw excess purchasing power from the economy and maintain price stability.
Fiscal policy does not favour balanced budgets under all circumstances; the appropriate budget position—deficit, surplus, or balanced—depends on the prevailing economic conditions and policy objectives.
This approach is known as functional finance, under which government revenue and expenditure are guided not merely by financial considerations but by broader goals such as full employment, economic stability, and price stability.