Objective of Fiscal Policy

As an instrument of macroeconomic policy, the goals of fiscal policy are likely to be different in different countries and in the same country in different situations. For example, while in a developed economy operating at full and near full employment level the goal of fiscal policy should be the maintenance of full employment in a developing economy the main concern of fiscal policy has to economic growth with stability and reduction in the economic inequalities.

Economists now generally agree that fiscal policy should be employed to achieve full employment and stability in the economy. Before the great depression of the thirties, by economic stability was largely understood the stability of the general price level. The severity of the depression focused attention on the need to remove unemployment and to employ fiscal policy for this purpose. The employment Act of 1946 in the USA stated that it was the responsibility of the federal Government to use all possible means including fiscal policy, to promote maximum employment, production and purchasing power in the economy.

After the second world war inflation has become a worldwide problem. Consequently, economic stabilisation has come to be widely defined so as to include the elimination of inflationary pressures in the economy. This means that the achievement of full employment and price stability should be simultaneously attempted through the instrument of fiscal policy. At times however, both these goals may be difficult to achieve as these might be mutually inconsistent. An economy which wants to achieve full employment must accept moderate price rise unless it resorts to price control, rationing and wage freeze policies.