Fiscal policy in developing countries.

Fiscal policy in developing countries.

Fiscal policy is the use of government taxing and spending of funds to influence the economy. It is a means in which the government modifies its taxation rates and expenditure levels to impact a country’s economy. It mainly affects macroeconomic surroundings, including employment, inflation, collection demand for goods and services, and economic growth. Fiscal policy ideas widely came from John Maynard Keynes, who asserted that the government could balance the business cycle and control the general country output (Harold, pp. 131). Fiscal policy is the surest way to increase national production in developing countries. Hence it is wise that developing countries employ fiscal policy governance to help them balance their economic stability.

There are two types of fiscal policies; contractionary fiscal policy and expansionary fiscal policies. The contractionary fiscal policy occurs due to the government reducing its spending and raising its taxation rates. It is employed when there is excessive inflation. This policy generally sucks funds from the private economy, intending to lower asset prices, and decelerate unsustainable production (Janet, pp. 97-101). It shifts the gross demand curve to the left. Expansionary fiscal policy involves rebates, transfer payments, tax cuts, and increment in government usage on essential projects. It is more effective since it aims at funding the businesses and the consumers hence spurring economic activities. It is used to restart the economy during a downturn. It shifts the gross demand curve to the right. Expansionary and contractionary policies are different because the expansionary policy aims to increase government spending and cut tax rates. In contrast, contractionary policies occur when government spending is reduced, and tax rates are increased.

The essential tools of the fiscal policy are derived from the definition. They include transfer payment, taxation, and government expenditure. Transfer payment in fiscal policy includes items like welfares, unemployment checks, social security, among others. Transfer payments lead to fluctuations in consumer incomes(Janet, pp. 97-101). The economic output is affected when the consumers use more of their income. Government expenditure in fiscal policy includes buying of goods and services. Regulating government expenditure has a direct effect on economic output. The government’s purchase of these products multiplies the economy as it influences the businesses that sell these products to them. A single spending displays more fruitful results, such as more employment for citizens. Taxation is the ultimate tool of fiscal policy. Fluctuations in taxation rates affect consumers’ income. Changes in consumers’ income, therefore, affect consumption. Thus, tax adjustment influences economic output. Tax is usually adjusted in ways like marginal rates being increased, reduced, or eliminated and modification of tax rules.

It easy to confuse monetary policy and fiscal policy. The two are different in that monetary policy includes changing the rates to affect the supply of money. In contrast, fiscal policy involves fluctuations in tax rates and government expenditure to influence its gross demand. Here are some of the distinct features of monetary and fiscal policy. Fiscal policy is a government set up, has no specific target, affects a government’s budget, and can be politicalized in the tax rate fluctuations.

On the other hand, monetary policy is a setup of the Central Bank, targets inflation, affects the housing markets and exchange rates, and is purely independent of the political processes. An economy that employs the fiscal policy can be at a very optimum economic level if the plan meets all its objectives. These objectives are listed below—full employment where the government expenditures are increased to curb unemployment. Price stabilization, where inflation due to economic imbalance is common in developing countries, fiscal policy removes the rigidities causing this situation (Edouard, pp. 89). Acceleration of commercial growth rate is another aim where measures like reducing taxations positively affect the economy, and the optimum allocation of resources. The government can use public expenditure to gear social infrastructure due to low national and per capita income.

Fiscal policies that are not carefully set up can bring adverse to the results to the nation. Inappropriate financial timing may lead to policy lags like administrative, recognition, and operational slowdowns. It is also difficult to predict the future states of economic stability; hence funds allocation may fail to meet the expectations (Anthony, pp. 20-23). Redistribution of wealth may experience adverse effects where income may be distributed in favor of the low-income class, increasing total demand. Reduction in national income in case the set budget is lesser than that of taxpayers hence reduction in national income. There are many doubts about effectiveness if the fiscal policy is employed as a debt control tool by the nation in concern. This is because the policies’ absorption entirely depends on the terms of trade, trade balances, and exchange rates reactions towards the fiscal shocks. Research has shown as trade balances decay, and exchange rates are devalued when fiscal consumption on private sectors rises.

However, more research has shown that proper employing of fiscal plans is the surest way to improve the developing countries. Increasing fiscal usage in private sectors leads to improved trade balances and improves the value of the exchange rates.

Economies with carefully set fiscal plans tend to curb unemployment problems. Government expenditure on projects such as quarries creates employment for more people. The funds used up by the government are then recovered. This way, both the per capita and the national income are improved hence recording a positive impact on both the government and the citizens. Weighing on the shortcomings and benefits of setting up the fiscal policy in developing countries then, it is correct to conclude that the fiscal policy is essential in improving these nations. The government has to consider accurate forecasts and then set up enough funds to gear the fiscal plans. The nation can then go ahead and employ the fiscal policy and then be patient and watch the fiscal policy to improve their nation.

Work cited.

Challe, Edouard, and Susan Emanuel. Macroeconomic Fluctuations and Policies, 2019, pp.89.

Cole, Harold L. Monetary and Fiscal Policy Through a Dsge Lens, 2020, pp. 131.

Makin, Anthony J. The Limits of Fiscal Policy, 2018, pp. 20-23.

Equality: International Perspectives, 2020, pp. 97-101.