Fiscal policy is about the government using the instruments of taxation, public spending and public borrowing to achieve various objectives of its economic policy. It influences income, production and employment in an economy.

Role of Fiscal Policy:

• In a developing economy, fiscal policy playsa plays a key role in elevating the rate of capital formation both in the public and private sectors.

• Fiscal policy may be employed to channelize savings of the people into productive channels.
• Fiscal policy may be used to give adequate incentives to the private sector to expand its activities through subsidies and tax-relief measures.

• It can be used to secure the pattern of investment that not just benefits the private investor but contributes to the national product. Investment in economic and social overheads, viz. transport, power, education, and public health etc. forms the base for other economic activities and development.
• The government can increase the productive capacity of the economy and accelerate the rate of economic growth by incentivising innovation in both public and private sector, laying emphasis on capacity creation rather than on income-generating aspects.
• Fiscal policy plays the important role of income redistribution. A broad-based and progressive tax structure can lead to secure equitable distribution of income and wealth.
• The fiscal measures can be used to counter inflationary pressures on the economy. Apart from direct control via taxes and expenditure, fiscal policy can remove structural rigidities, market imperfections and imposition of physical controls including subsidies and protection to essential consumer goods industries.

Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing. It indicates the total borrowing requirements of the government from all sources. The government can control fiscal deficit via:

• Reducing government spending by cutting subsidies, reduction in expenditure on salaries, allowances; reducing interest payments on past debt etc.
• Increasing revenue from both direct and indirect taxation sources.
• Achieving faster economic growth: If the economy grows, then the government will increase tax revenue, without raising taxes.