Question

Explain the methods of Fiscal Policy.

Explain various methods of fiscal policy being adopted by underdeveloped countries.

Answer 1

1. Taxation Policy: The government ought to enact tax laws that encourage capital formation. In order to encourage saving, the tax system should reduce consumption and offer incentives to everyone who saves or is eager to invest. Saving more can be utilised to mobilise economic excess and increase investment.
2. Public Expenditure Policy: Public spending policies are implemented in developing nations. These nations typically struggle with capital, which is a fundamental prerequisite for economic growth. Public investments are being undertaken in a variety of areas, including the development of irrigation systems, electricity supply projects, health care, human resources, and transportation and communication infrastructure.
3. Public Debt. Policy: The undeveloped nations’ development needs cannot be met by the tax revenue alone. Because of the general public’s poverty, tax collection is extremely low, which has a negative impact on investment and savings. Therefore, using public debt to mobilise resources becomes essential.
4. Deficit Financing: Deficit financing has become a significant fiscal policy tool in modern times. It refers to the difference that results from the government spending more than it takes in through the issuance of new currency. Deficit financing is often accomplished by borrowing from the central bank, taking money out of the central bank’s cash reserve, and printing and circulating new currency. Lord Keynes was a particular supporter of this kind of fiscal policy.