Fiscal policy is concerned with the revenue and expenditure of the government, which is careful as a powerful device for stabilization. It refers to the budgetary policy of the government. This has become an extremely important tool of the government to preserve economic stability, economic growth, high employment, and balance of payments equilibrium. The major components of fiscal policy are aspects of government expenditure, debt management and tax revenue. In the economy to attain economic stability above all aspects should be equilibrium. Fiscal policy is the package of government economic measure, which is attached to public expenditure, public revenue and public debt. Various economists have defined fiscal policy.
In the words of Prof. Musqrave, “Fiscal policy is concerned with those aspects of economic policy which arise in the operations of the public budget”. According to American Economic Association, “Fiscal policy should mean the policy which concerns itself with aggregate effects of government expenditure and taxation on income, production, employment”.
Similarly, Arther Smithies defines fiscal policy as, “A policy under which government uses its expenditure and revenue program to produce desirable effects and avoid undesirable effects on the national income, production and employment”.
In short, contemporary fiscal policy is an application of the principle of functional finance. It is used to actively function in accordance with the changing conditions of the economy, i.e. to control inflationary or deflationary tendencies. Thus it is the government policy related to public income, public expenditure and public debt to have beneficial effects and remove unbeneficial effects on the economy. There are mainly two types of fiscal policies i.e. expansionary fiscal policy and concretionary fiscal policy.
(i) Expansionary Fiscal strategy: Fiscal policy is said to be expansionary when spending is higher than revenue. That is, it is the situation of budget deficit. In expansionary fiscal policy, government usually reduces the tax rate and or increases the administration spending, which leads the situation in which spending is greater than revenue.
(ii) Reduction Fiscal Policy: Fiscal policy is said to be reduction when revenue is higher than spending. That is, it is the situation in which government budget is in surplus. In reduction fiscal policy, government usually increases the tax rate and or reduces the public expenditure so that income is greater than spending.