Fiscal policy is a state tax policy, which should be aimed at achieving goals related to stimulating economic growth and full employment of the population, as well as at solving the tasks set by structural, social and regular policies.
As a result of its functioning, significant changes are taking place in the expenditures and revenues of the state budget. These factors can be implemented both automatically on the basis of changes in the economic situation (without special changes in the legislation), and thanks to the targeted measures of the two branches of government. It is depending on the use of economic instruments that types of fiscal policy are divided into discretionary and non-discretionary.
A discretionary policy can be represented in the form of legislative amendments to taxation and the government spending system in order to ensure stability and achieve the main goals of macroeconomics.
The main tools of this type include:
- Regulation of tax revenues by changing the number of taxes and their rates. Thus, by changing the tax rate, the state achieves deduction of income from a reduction during a recession or a decrease in income during a sharp increase in the rate of trade. This tool is also used in the fight against inflation.
- Providing unemployed people with work. Financing of this event is carried out mainly from the state budget.
- Implementation of such social programs as the payment of old-age and disability pensions , various benefits, subsidies to pay for education, etc. These programs provide stabilization of the economy under various wave-like fluctuations in the functioning of the country.
Non-discretionary fiscal policy is based on the relationship of tax revenues and expenditures of the state with the activity of the business sector, as well as changes in the economic situation. Such interaction is carried out automatically and is immediately reflected in the share of taxes in the revenue side of the budget and the corresponding expenses for social activities in the spending side. This can be shown by the example of personal income tax. Indeed, with the growth of revenues under this article, the volume of payments of unemployment benefits automatically increases. With the observed downturns in the country's economic processes, household incomes sharply decrease and, accordingly, income taxes from salaries to the budget decrease (income tax is withdrawn on a progressive accrual scale). As a result of lower tax revenues, a budget deficit appears that is a companion to the decline in production.
Fiscal policy can be classified in another way - stimulating or restraining. Thus, a stimulating policy is applied during the general economic recession and involves a sharp reduction in taxes and an increase in government spending, which lead to a budget deficit. Restraining fiscal policy can be used during high inflation and is associated with increased taxation and reduced government spending. Based on the results of its implementation, a budget surplus arises, which can be used to pay off state debts.
When assessing the effectiveness of the implementation of the policy, a number of factors are noted confirming the limitations of its possible use, namely:
- sharp fluctuations in the structure of public spending (for example, the need to allocate additional funds for state defense, environmental protection and scientific research) do not allow the effective application of a stimulating and restraining policy;
- high efficiency from the use of fiscal policy instruments can be achieved only in the short term;
- there is a delay effect: due to the need to spend additional time on the adoption of the relevant regulatory document, after the entry into force of which positive results appear only after some period.
However, the high efficiency of the application of fiscal policy can be achieved in its implementation in conjunction with monetary.