subject: Fiscal policy of a government and inflation [print this page] Fiscal policy of a government and inflation
Inflation is as an increase in the general level of prices for goods and services which eventually declines the purchasing power of money. Fiscal policy is the Government's expenditure policy that influences macroeconomic conditions. It is basically the revenue generating policy of the Government.
The government finances its expenditures on the basis of fiscal policy. The two methods of financing are borrowing and taxation. Taxation can be of several forms like taxation of personal and corporate income, value added taxation and the collection of royalties etc. The fiscal policy influences interest rates, tax rates and government spending.
A government not having sufficient tax revenue to finance its expenditure borrows money to provide goods and services to its people. The government borrows money through the issuance of securities.
In recent decades all nations have looked upon the income and the wealth of the more prosperous citizens as an inexhaustible reserve which could be freely tapped. Whenever there was need for additional funds, one tried to collect them by raising the taxes to be paid by the upper-income brackets. As the votes of these rich do not count much in elections, the members of the legislative bodies were always ready to increase public spending at their expense.
This type of fiscal history has come to an end since many of the legislators are now wealthy. Hence now all government spending will have to be financed by taxing the masses.
In order to meet this expenditure, it is necessary for the government to tax the citizens. Military equipment wears out much more quickly than civilian equipment. Further the costs of a modern war are enormous.
If the Treasury increases the amount of money in circulation or borrows from the commercial banks, it inflates. It is the most expensive method of financing a defense and war .It is socially disruptive and should be avoided.
Inflation is a typically anti-democratic. It is a policy of governments that do not have the courage to tell the people honestly what the real costs of their conduct of affairs are. A truly democratic government would have to tell the voters openly that they must pay higher taxes because expenses have risen considerably.
If one wants to collect more taxes, it will be necessary to lay a burden greater than hitherto on the lower income brackets, the strata of society whose members consume the much greater part of the total amount consumed in this country.
If there is inflation, price control is a hopeless venture. It is the government that makes our inflation. As a means for preventing and fighting inflation or its consequences, direct controls are absolutely useless.
The fiscal policy has the power to affect the level of overall demand in the economy. The primary objective of fiscal policy should be to maintain the price stability, economic growth and employment of the country. Hence an appropriate fiscal policy can help in combating rising inflation rates in any country.
