Advantages of Expansionary Fiscal Policy

Advantages of Expansionary Fiscal Policy

Advantages of Expansionary fiscal policy include new jobs creation, removal of depression form the economy, social uplift , raise in income level and achievement the desired growth rate.

1.    Create Job opportunities

Expansionary fiscal policy i.e(more spending & reduced tax rate) create a lot of job opportunities. Public expenditure creates a lot of direct job & indirect jobs. Expansionary policy also boosts the private sector by creating a lot of demand. Private firm produces more to meet the increased demand and thus job opportunity is also created in private sector.

2.    Remove Depression

Expansionary policy removes the depression condition from the economy. In 1930 at the time of great depression, the expansionary policy was adopted by the world leading economies to reduce the impact of depression, which changed the depression situation.

3.    Social Benefit

Expansionary policy also brings change in the social life of the people. The life standard or living standard of people improves due to better facilities of health & education. Increase level of income due the expansionary policy also improves life style of people.

4.    High & Distributed Income level

Expansionary policy raise the income level of the people, because income level rise is not limited to a specific area or group, therefore income gap in the society is also reduced.

5.    Growth Rate Improves

Expansionary policy improves the growth rate, which has a vital importance for maintain the employment level.

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.

Fiscal Policy Objectives

Fiscal Policy Objectives

Fiscal policy is a tool used by the Government to control national economy with the help of taxation and spending. Fiscal policy may be termed as intervention of the government in the national economy. Fiscal policy objective can be explained in terms of price stabilization, consumption pattern influencing, employment generation, income distribution and economic growth.

1.    Price Stabilization

Fiscal policy can control the price, for example if there is inflation in the market, then government may reduce the demand by increasing tax rate and reducing public expenditure.  The reduce demand will bring the prices down and inflation will be controlled.

2.    Change Consumption Pattern

Fiscal policy can change the consumption pattern, for example heavy taxes on tobacco can reduce the tobacco consumption, and similarly heavy taxes on luxury goods can also reduce the consumption on those goods.

3.    Employment Generation

Fiscal policy can generate employment especially when economy is not at full employment level. Government expenditure can create employment opportunities in many ways direct employment & indirect employment opportunities.

4.    Income Distribution Gap

Fiscal policy can play effective role for filling the income distribution gap. Government can impose heavy taxes on rich people and can spend that amount on social welfare; this will change the income structure in the economy.

5.    Economic Growth

Fiscal policy can play important role in achieving the economic growth targets set by the governments. Public expenditure can really boost the economic activity & growth in the country.