Fiscal policy refers to the revenue and expenditure measures of the public budget. By fiscal policy we mean the process of shaping taxation and public expenditure to help dampen the
swings of the business cycle and contribute to the maintenance of a growing, high- employment economy, free from high or volatile inflation. In formulating fiscal policies, the voters, the President and his cabinet (executive branch) and the legislative body (congress or general assembly) are involved. In a true democratic society, the welfare of the people is promoted through the budget. The most important needs of the economy and the people are given top priority. However, in not a few cases, political interests of government officials are the first considerations. For instance, many government projects appear immediately before the election time.
The objectives of fiscal policy are: 1. Provision for social goods
2. Equitable distribution of wealth and income 3. Maintain high employment
4. Ensure price stability; and
5. Sustain a satisfactory rate of economic growth 6.
The national budget contains specific provisions for the funding of projects and programs geared toward the attainment of the aforementioned policy objectives. The budget is focused towards the promotion of the welfare of the poor masses. It is the President of the Republic, together with the cabinet members, who prepare the national budget. The proposed budget is submitted to the legislature for discussion and approval.
Discretionary Fiscal Policy
A discretionary fiscal policy is one in which the government changes tax rates or spending programs, usually by passing new legislation. The principal weapons of discretionary fiscal policy are public works, other capital programs, public-employment projects, and changes in tax rates.
Public works include creating jobs, building hospitals, schools, and roads as well as other infrastructures needed for a growing economy. Other public works investments, such as electrification, proved enormously beneficial to underdeveloped areas, and transportation projects.
At the other extreme from highly capital-intensive, long-duration public works projects are public-employment projects. The idea behind these programs is simple: If the problem is high unemployment, why not just create jobs directly? Public-employment projects are designed to hire unemployed workers for a short time in public jobs, after which people can move to regular jobs in the private sector.
A third approach to discretionary fiscal policy is making temporary changes in income taxes. Tax cuts can keep disposable incomes from falling and prevent an economic decline from snowballing into a deep recession. Varying tax rates can be used to either stimulate or
restrain an economy. Many advocates of discretionary stabilization policy see varying tax rates as the ideal fiscal weapon. Once taxes have been changed, consumers react quickly; a tax cut is spread widely over the population, stimulating spending on consumption goods and including an economic upturn.
Shortcomings of Fiscal Policies
Many government programs and projects are very good. They are always intended for the good of the people, especially the poor masses. However, when it comes to results, it is already different. Such projects are not properly managed or implemented. Either the implementers or managers are inefficient or some very powerful groups have hampered the success of such programs for economic or business reasons. For example, the land reform program in most of the less developed countries is a failure.
Fiscal policy is very effective during economic depression. The government has to spend more money on public works in order to create employment. This results to more income and consumption that stimulate the private sector to produce goods and services. And this is the beginning of economic recovery. However, during a period of economic boom, the government finds it politically difficult to increase taxes and reduce government expenditures. Many people do not understand why the government should increase taxes and reduce government expenditures at the time when the economy is prosperous. They do not know that such fiscal measures are designed to prevent inflation.
Fiscal Functions
There are three major fiscal functions:
1. Allocation function. Private goods like rice, soap, or cake are allocated in the market. Those who have the money and they are willing to acquire such goods can purchase them. They just exchange their money with such goods. However, in the case of most social goods it is not efficient to allocate them through the market system. For example, Ayala avenue is a public or social good. If all those who use the street, including pedestrians, have to pay, then there would be a great delay in the movement of persons and transportation facilities. Another example is the anti-malaria or anti-pollution project in a community. It is not economically feasible to exclude those houses that do not like to buy the project. Whether they pay or not they get the benefits of the project. So, there is no need to sell the project to the community. If it is the felt need of the community, then the government should clean the community through health and sanitation programs. Such programs are funded by taxes paid by the people. The government also sells private goods at a lower price, and in many countries in Europe and America, such goods are even free for those who cannot afford to buy them in the market. They are given free food, clothing and shelter, medicare and education. In the Philippines, there are also goods and services sold by the government at a lower price or even free. But these are limited due to our inadequate financial resources. 2. Distribution function. The issue of the fair distribution of wealth and income has been a problem from ancient times to modern times. Some economists believe that just distribution of wealth and income is only for politicians, philosophers and poets. In economics, income
distribution is determined by the prices of factor ownership, like land, labor, capital, and entrepreneurship ability. This economic theory appears good but in countries where there is no just distribution of the factors of production, only very few have high incomes while the great masses have very low incomes. In less developed countries, most of the peoples own only labor. Because of very limited economic activities, there is a surplus of labor supply. Thus, wages are very low. This means most people in countries live below poverty line. Social reforms fight for distributive justice. They claim that the productive resources of society should be fairly distributed among its members. If this is done, the gap between the rich and poor is narrowed. Economic opportunities are available to all regardless of religion, race or belief. Such situations exist only in the richest countries of the world. Even a poor country, through its fiscal policies can contribute to distributive justice. Progressive taxation is a good example. This is based on the ability to pay.
3. Stabilization function. One goal of fiscal policy is the attainment of economic stability. When there are no problems of unemployment and inflation, then the economy is said to be stable. The government through the fiscal tools of taxation, borrowings, and expenditures can minimize or eliminate the problems of unemployment and inflation. The government should give top priority to projects which are very efficient in generating jobs and incomes for the people. Such productive projects do not only reduce unemployment but also inflation rate. More supply of goods means lower prices. This is the law of supply and demand. In the same manner, taxation can help in reducing inflation rate. If the kind of inflation is caused by oversupply of money in relation to the number of goods available in the economy, the solution of the government is increase taxes in order to reduce the disposable income of the buyers. Most individuals are not happy about such fiscal policy. They believe that taxes should be lowered during inflation because their purchasing power falls. What they do not understand is that when there is an oversupply of money, demand for goods and services increases. Since supply is limited, prices go up. The tax increase should only be temporary just enough to control the demand for goods and services while efforts are being done by the government in increasing supply of goods and services.