Fiscal Policies And The Fiscal Policy

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Before we talk about ways to assess fiscal policy of an economy, I would like to describe what we mean by fiscal policies and why it is important for an economy. Fiscal policy is the use of government revenues and expenditure to influence growth of an economy. Fiscal policies that increase demand in an economy are called as expansionary policy whereas those which reduce demand are called as contractionary fiscal policies. These policies are most effective in a fixed exchange rate regime with perfect capital mobility while they are less effective if the exchange rate is flexible. These policies are used to tackle cyclicality, external account imbalances and inflationary problems. In the following sections, I will discuss describe various roles of fiscal policy, how the fiscal policies should be designed, how to assess its sustainability. The essay will end with a brief policy recommendation on fiscal policies which should be generally followed by the governments. The government uses fiscal policy to achieve its short term and long term objectives. Short run objective mainly includes macroeconomic stabilization by responding to various domestic and international shocks such as natural disasters, terms of trade shock, financial crisis etc., while in the long run the government goals can be to eradicate poverty, improve infrastructure or have structural changes in labor market. Although countries broadly share these objective, but the priorities may change as per country’s need

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