Learn More → Business success often depends on the economy. Spending initiatives have often been effective in spurring economic growth, but they can have a long-term downside. Contractionary Fiscal Policy . If such a policy of tax reduction is repeated, then consumers and investors both are likely to postpone their spending in anticipation of a further fall in taxes. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. Keynes had strong faith in such a programme that he went to the extent of saying that even completely unproductive projects like the digging up of holes and filling them up are fully admissible. (v) This policy is a prolonged lag which in practice has a disturbing effect on the economy. Some of the major instruments of fiscal policy are as follows: A. Aggregate can be influenced by taxes. The volume of credit in the country is regulated for economic stability. In practice, a balanced budget can be expansionary. Public debt is a sound fiscal weapon to fight against inflation and deflation. In addition, the government may create deficits by borrowing the money it spends, adding to the public debt in the process. It assigns only a secondary role to the budgetary balance. There are Three instruments of fiscal policy. Taxes can be changed in several ways. Welcome to EconomicsDiscussion.net! Business News Daily: What Is Fiscal Policy? The fully managed compensatory budget has been criticized on the following grounds: (i) It considers that the government should give blanket guarantee against unemployment. Another serious problem relates to the timing of public works with the moment of cycle. The tools of contractionary fiscal policy are used in reverse. Fiscal policy is the general term for some of the key strategies used by policymakers to foster sustainable economic growth. During the period of boom, wages and prices in construction industries have a strong upward tendency while in recession or depression, prices move downward, wages and costs remain sticky relatively. contractionary fiscal policy, regardless of the mix of fiscal policy choices. Contractionary fiscal policy is expected to reduce interest rates, … employee, welfare programs, and public works projects. Adkins holds master's degrees in history of business and labor and in sociology from Georgia State University. This regulation of credit by the central bank is known as “Monetary Policy”. Content Guidelines 2. Monetary policy also plays a key role. (i) Classical version that balanced budget is neutral is not well based. This change in fiscal policy is notable, as expanding fiscal stimulus when the economy is not depressed can result in rising interest rates, a growing trade deficit, and accelerating inflation. Monetary policy is conducted by the central bank of a country (such as the Federal Reserve in the U.S.) or of a supranational region (such as the Euro zone). The public works programme, generally, are financed through borrowing during depression. The banks, being already loaded up and having no excess cash reserves. There are major components to the fiscal policies and they are Its main implication is that borrowings from non bank public is more advantageous in an inflationary period and undesirable in a depression phase. In this way, delay is the natural cause. In depression, public spending emerges with greater significance. Taxation as a instrument of fiscal policy in Nigeria is a process, system or machinery by which individuals, companies or corporations are made to contribute part of their income in some agreed rate to the government for the purpose of administration and development of the society. 3 WHAT ARE THE BEST POLICY INSTRUMENTS FOR FISCAL CONSOLIDATION? Taxation is a powerful instrument of fiscal policy in the hands of public authorities which greatly effect the changes in disposable income, consumption and investment. To sum up, despite certain short-comings of taxation, its significance as an effective anti-cyclical and growth inducing investment cannot be forfeited. Fiscal policy that increases aggregate demand directly through an increase in government spending is typically called expansionary or “loose.” By contrast, fiscal policy is often considered contractionary or “tight” if it reduces demand via lower spending. The word fiscal comes from a French word Fisc, which means treasure of Government.All the taxation and expenditure decisions of the government comprise the Fiscal Policy.. Fiscal Policy is different from monetary policy in the sense that monetary policy … (v) They help to maintain the moral and self respect of the work force and make use of the skill of unemployed people. • Budget is also known as Annual Financial Statement of the year. Export should be restricted and imports of essential commodities should be liberated. Consequently, the economic utility of such public works remains very limited. He became a member of the Society of Professional Journalists in 2009. There are two types of fiscal policy, they are: Expansionary Fiscal Policy: The policy in which the government minimises taxes and increase public spending. Therefore, borrowing from banking institution have desirable and favourable effect specially in the period of depression when the borrowed money is spend on public works programmes.