Limitations of Fiscal Policy

Limitations of Fiscal Policy

Fiscal policy an important tool used by the government to control the ecnomic situation with country. However , there are number of limitations associated with fiscal policy. These limitations have been explained below

1.    Identification of Economic Condition

It is not an easy task to immediately judge the situation of economic condition i.e. depression or boom. A lot of data is required to judge the prevailing economic condition and normally data is collected semi annually or annually for detail analyses and reports. Thus fiscal policy measures cannot be timely introduced to control the situation.

2.    Trade Cycle Dynamic in Nature

Economic condition or Trade cycle is a dynamic in nature (changes with time), therefore a fiscal measure may not be relevant to a dynamic situation. The time period of a trade cycle cannot be estimated and therefore fiscal measure are difficult to implement in continuously changing situation.

3.    Taxes Imposition is not easy

It is not an easy task to impose taxes, because taxes not only require the parliament approval, but may also result in business community resentment & reaction. However, a reduction in taxes is relatively easier, but still requires time for approval from the parliament.

4.    Long Term Impact

Fiscal policy measure will take time to produce results and especially long term project requires more planning before implementation. Only huge project can change the situation (depression into boom), but huge project require a lot of planning and take start with lower pace.

5.    Expansionary Policy is always favorite

Politician always loves the expansionary policy in any situation, because no one loves taxes in the universe, so effective role of fiscal policy reduced due to this biased approached. politician are reluctant to implement contractionary fiscal policy despite the need.

6.    Interest Rate will Nullify the effect

Government will require more funds for expansionary policy and go for bank borrowing, this will create competition between government & private sector for debt, and interest rate will jump (increase) and such increase rate will reduce private investment. Therefore desired results will not be achieved.