List of Goals
Fiscal policy is utilised by governments to influence the aggregate demand (AD level) to achieve its macroeconomic objectives:
- Low and stable inflation.
- Low unemployment.
- Promote a stable economic environment for long-term growth.
- Reduce business cycle fluctuations.
- Equitable distribution of income.
- External balance.
Low and Stable Inflation
- Fiscal policies change the income taxes and government spending, causing the aggregate demand to shift respectively.
- This policy is used often when there is high inflation.
- The policy increases income taxes and lowers government spending to lower the aggregate demand, reducing inflation rates.
- Therefore, fiscal policies help maintain a low and stable inflation rate.
Opposed to monetary policy, fiscal policy does not have a inflation target, hence it may be used to support monetary policy when the monetary policy fails to address inflation problems.
Low Unemployment
- By influencing aggregate demand (AD), the fiscal policy may attempt to reduce cyclical unemployment (which occurs because of lack of aggregate demand).
However, unlike monetary policies, fiscal policies may have supply-side effects as well and be able to affect structural unemployment as well.
Promote a stable economic environment for long-term growth.
- Fiscal policies are crucial for the government's aim to have a stable economic environment, in order to enhance the investments and consumer spending.
- This is because stable economic environment will give confidence for investors, hence ensuring economic growth.
Reduce Business Cycle Fluctuations
- Governments try to reduce business cycle fluctuations using fiscal policies, to prevent big recessionary or inflationary gaps, which could negatively affect the economy activity in the economy.
Equitable Distribution of Income
- Fiscal policies have a big influence on income redistribution, as it can determine tax policies and government spending, to achieve a more equal income distribution.
- In particular, the changes in government spending could be utilised for merit goods, public goods, etc.
Equitable Income distribution is a macroeconomic objectives which fiscal and monetary policies don't share as a common goal.
External Balance
- Governments can cause the country's expenditure on imports to be equal to the total revenue earned from exports.
- This is done by using fiscal policies to influence the quantity imported by changing the aggregate demand (AD).
