Fiscal Policy And Economic Growth

Fiscal policy is also a potent weapon for the achievement of accelerated economic growth backward, underdeveloped economy. Without an appropriate fiscal policy, the process of economic growth in a country is bound to suffer. in achieving fast economic growing me government may have to deploy all the instruments of fiscal policy at its disposal, namely, taxation, public expenditure, public debt and deficit financing.

The problem in a backward underdeveloped economy is not one of lack of real resources, but that of shortage of financial resources. There is no shortage of real resources in the economy. Land, forests, water, minerals, labour etc. are all there in adequate quantities. What the country lacks is adequate finance to mobilise these real resources for development. So, all the instruments of fiscal policy may have to be used to raise adequate finance for economic growth.

Check out public administration notes in detail.

Taxation

It is an indispensable instrument for raising finances for economic development. For this purpose, the government may resort to both direct as well as indirect taxation, Direct taxes, such as income tax wealth tax, gift tax, capital gains tax and death duties may have to be levied to net adequate revenues for development purposes. The incidence of these taxes mostly falls on the richer classes. As such, they are quite justified from the point of equity.

The government may also impose steep excise duties and import taxes on luxury and semi-luxury goods that are consumed exclusively by the rich. To raise enough revenue for developmental purposes, it may also be necessary to levy excise taxes on articles of mass consumption, though the burden of such taxes is mostly borne by the poor and middle classes.

Public debt

Taxation taken alone may not yield adequate revenue for mobilising the real resources of the country. The government may, therefore, resort to public borrowings short-term as well as long-term, to add to its fund of investible resources. There may be opposition to heavy taxation, but no one opposes public borrowings, because the government pays interest on public loans.

While borrowing from the public, the government should ensure that the burden of interest charges does not turn to be unbearable for it. For this purpose, the government may adopt a cheap money policy to keep interest rates at a comparatively low level. Since the amount raised through international money market for raising the necessary funds for developmental purposes.

The government may even take loans from foreign countries on international lending agencies on suitable conditions and terms of repayment. While raising external loans, the government has to be alert enough to see that such loans do not compromise its economic and political sovereignty in any way.

Public Expenditure

The government of an underdeveloped country should devote quite a substantial portion of its expenditure to the building up of necessary infrastructural facilities for economic growth, such as roads, railways, communications, irrigation works, power mining general and technical education. These facilities will induce a rapid economy.

Along with that, a part of the public expenditure may also be allocated for the growth and development of basic industries which will provide the foundation of industrial growth in future. Agriculture which is generally the most important segment of an underdeveloped economy should receive the special attention of the government. Expenditure incurred by the government on the promotion of labour and social welfare also aids the rapid growth of the economy by improving the productivity of the labour force.

Deficit Financing

It is still another important instrument of fiscal policy. It has proved to be a dependable means of financing the economic growth of an underdeveloped economy. . . Several developing countries have, in recent years, employed the technique of deficit financing as a means of financing economic development.

Limitations Of Fiscal Policy

Fiscal policy as an instrument of economic stability and economic growth suffers from certain limitations which may be set forth below.

Firstly, the difficulty of accurately forecasting the onset of depression robs fiscal policy of much of its utility and effectiveness as an anti-cyclical device. More often than not, a country finds itself already knee-deep in depressions before it moves about to take corrective action.
Secondly, the corrective action taken by the government does not produce immediate results, because there is often a prolonged time interval between the enforcement of fiscal measures and their final impact on the functioning of the economy.
Thirdly, fiscal steps taken by the government to curb unemployment may fail to yields results if the unemployment is due to causes other than the deficiency aggregate demand. Fiscal measures, for example, will fail to make any dent in unemployment if it is due to seasonal, frictional, structural or technological causes.
Fourthly, the increase in public expenditure may reduce the volume of private investment which would adversely affect the employment and economic development programmes.
Fifthly, a strong and powerful fiscal policy adopted to deal with mass unemployment may unduly inflate the size of the public debt which will impose an unbearable burden on posterity.
Sixthly, while dealing with hyper inflation’ and boom, the government may carry its fiscal measures to the other extreme, namely far too high taxation and cutback in public investment. which will pave the way for the forthcoming depression.
Lastly, fiscal measures ( such as increased taxation and increased borrowings ) taken to finance economic growth in an underdeveloped economy may not suffice unless and until recourse is taken to monetary devices such as deficit financing etc.

Check out these notes on Resource Mobilization.