The ruling authority exercises adjustments on the spending levels and alterations to tax rates through a fiscal policy. It can influence and monitor the economy of a country says Paul Haarman. Similar to the monetary policy, the central bank is held responsible for controlling a nation’s money supply. Often fiscal policy and monetary policy are utilized in different combinations to administer the financial goals.
After the recent global crisis, governments of several nations were determine to play a dynamic role in controlling a country’s financial system, regulating business cycles, controlling unemployment, inflation, and the value of money. Governments can use a combination of fiscal and monetary policies to handle the economic phenomena.
What is Fiscal Policy, as explained by Paul Haarman
Fiscal policy has a significant role in controlling and influencing a nation’s economy. The policy constructs on various theories presented by economists. These theories state that the ruling authority can affect the productivity levels of macroeconomics components by enhancing or reducing public spending and tax levels—the impact, in turn, aids in curbing inflation, improving employment, and maintaining a good money value.
The stabilizing role of a fiscal policy
The primary role of a fiscal policy is to form a balance between public spending and tax rates. For instance, a stagnant financial system can get stimulating by improving spending or by lowering tax rates. When this utilizes, it is said expansionary fiscal policy. However, it also holds a risk of increasing inflation. It is a fall in money value due to a rise in consumer demand and the quantity of money in the market.
When the economy stabilized, the employment level rose, and a decrease in consumer spending got notice. But businesses cannot make relatively substantial profits. The ruling authority may fuel the financial system with a reduction in tax rates, which would leave consumers with extra spending money. Further government spending can also increase with the creation of wages and jobs, which results in pumping the economy, asserts Paul Haarman.
As more money starts pumping into the financial system and lesser taxes became expected, demand for services and goods increasing, resulting in an improving business cycle.
However, if the ruling authority plays no part in managing the process, the economic productivity rise can cross a line, resulting in excess money in the economy. The extra money supply may result in a decrease in money value. Prices will push up, and inflation will also take the lead. You can avoid such circumstances; the economy requires fine-tuning with the help of fiscal policy. But fiscal policy is not satisfactory alone and requires a combination of monetary policy to achieve the nation’s economic goals.
But a significant factor that needs consideration when utilizing fiscal policy. To obtain a nation’s economic goals is to determine the involvement level of the government. In the past years, there have been various levels of involvement of the ruling authority. But for a significant part, a certain level of government participation is essential to keep the economy vibrant and sustainable, as long as it meets the population demand, elucidates Paul Haarman.