The Meaning, Objectives, and Types of Fiscal Policy

Reviewed by Omotolani Ajileye

Meaning of Fiscal Policy

Fiscal policy refers to the deliberate actions taken by the government to influence economic activities through the use of taxation, government expenditure and public borrowing. 

Government uses fiscal policy to achieve important economic objectives such as promoting economic growth, reducing unemployment, controlling inflation, maintaining price stability and improving the distribution of income. 

For example, when unemployment is high, the government may increase its spending on roads, schools and other public projects to create jobs and stimulate economic activity. On the other hand, when inflation is high, the government may increase taxes or reduce its expenditure to reduce excessive demand in the economy. 

Objectives of Fiscal Policy

The major objectives include:

1. Full Employment

One of the major objectives of fiscal policy is to achieve full employment, which means creating conditions where people who are willing and able to work can find jobs. 

When unemployment is high, the government can adopt an expansionary fiscal policy by increasing its expenditure on projects such as road construction, schools, hospitals and other infrastructure. These projects create direct employment for workers and also generate indirect employment through increased demand for goods and services. 

Government can also reduce taxes to increase people’s disposable income and encourage consumption and production, which can lead to more employment opportunities.

2. Price Stability

Fiscal policy is used to maintain stable prices and control inflation or deflation. When prices are rising rapidly, the government can reduce its expenditure or increase taxes to reduce the amount of money available for spending. 

Lower demand can help reduce…