Fiscal Policy Definition: Objectives, Clasification and Instruments

"Policies regarding taxes, other revenues, debts and government spending with specific objectives, such as supporting economic stability, monetary balance, increasing economic development, and expanding job opportunities (fiscal policy)."

What is Fiscal Policy?

Fiscal Policy is an economic policy made by the government to direct the economy with changes in government spending and income. The main instruments used in Fiscal Policy are government spending/state spending and taxes.

Tax is a fiscal instrument used to finance development. Taxes are coercive and are stated in the law, where all taxpayers in the form of business entities or individuals are required to pay taxes to the state.

Meanwhile, there are many types of state expenditures/expenditures, such as costs for improving the quality of education, infrastructure development, operational financing, and so on. All these expenditures are compiled in the State Expenditure Budget.
 

Fiscal Policy

Fiscal Policy Objectives

Fiscal Policy has several objectives, namely:

• Creating the country's economic stability
• Creating the country's economic growth
• Expanding job opportunities
• Creating social justice including income distribution
• Stabilize prices / overcome inflation

Various Fiscal Policies

Based on theory

Fiscal policy is divided into 3:

1. Functional fiscal policy. Functional fiscal policy is a policy in consideration of government budget expenditures and revenues which are determined by looking at the indirect effects on national income, especially to increase employment opportunities.
2. Deliberate fiscal policy. Deliberate fiscal policy is a policy used to overcome economic problems by deliberately manipulating the budget, either through changes in taxation or changes in government spending. 3 forms of deliberate fiscal policy are; (1) make changes to government spending, (2) make changes to the tax collection system, and (3) make changes simultaneously both in government management and the tax collection system.
3. Unintentional fiscal policy. Unintentional fiscal policy is a policy in controlling the speed of the business cycle so that it is not too volatile. Types of inadvertent fiscal policy are proposals, progressive taxes, minimum price policies, and unemployment insurance.

Based on the number of receipts and expenses

The following are the types of fiscal policy based on the amount of revenue and expenditure:

1. Balanced fiscal policy. A balanced fiscal policy is a policy that makes revenues and expenditures equal or equal in number. The positive impact of this policy is that the state does not have to borrow some funds, both from within the country and abroad. However, the negative impact is that the country's economic condition can decline if the country's economy is in an unfavorable condition.
2. Fiscal policy surplus. In a surplus fiscal policy, the amount of income must be higher than expenditure. This policy is a way to avoid inflation.
3. Deficit fiscal policy. A deficit fiscal policy is a policy that is opposite to a surplus policy. The deficit fiscal policy was able to overcome the sluggishness and depression of economic growth, which are the advantages of this policy. While the drawback is that the state is always in a state of deficit.
4. Dynamic fiscal policy. The dynamic fiscal policy provides income that can be used by the government in meeting its growing needs over time.

Classification of Fiscal Policy

Based on the classification, fiscal policy is divided into two main types, namely:

• Expansive Fiscal Policy: This is a policy that is carried out when the economy experiences a decline in people's purchasing power and high unemployment, namely by increasing state spending and lowering tax rates.
• Contractive Fiscal Policy: on the contrary, this type of fiscal policy is a policy that is carried out to make income greater than its expenditure, by lowering the level of state spending and increasing the tax rate. This aims to reduce people's purchasing power while at the same time controlling inflation. This policy is rarely used and will be issued when economic conditions are experiencing an overheating expansion to determine demand.

Fiscal Policy Instruments

The following are the instruments for fiscal policy:

• Tax Policy: This policy is closely related to the new amendments in terms of direct and indirect taxes. Fiscal taxation policy is one of the policy instruments that has a strong public authority and influences changes in income, investment, and consumption. The government will make taxation policies progressively after analyzing the effects of increasing or decreasing taxes.
• Government Expenditure Policy: this policy prioritizes government spending on important and urgent sectors, such as school openings, construction of public roads, bridges, transportation routes, as well as government operational costs.
• Deficit Financing Policy: It is a policy instrument issued if the government runs a deficit or the amount of expenditure is greater than revenue. One way is to issue a new currency from the country's central bank, but on the other hand, this can also cause the purchasing power of the currency to fall and inflation to occur.
• Public Debt Policy: This policy is issued if the deficit financing policy is deemed insufficient to meet public expenditures. Public debt policy aims to increase government cash by using debt originating from internal sources such as market loans, compensatory bonds, or government securities, and external sources from external market loans or international institutions such as IDA, World Bank, IMF, and other partners.
• Budgeting: this policy is also known as a budget policy. This is because fiscal policy operates through a budget or budgeting. The budget owned by a country serves to assess economic fluctuations.

Advantages and Disadvantages of Fiscal Policy

The following are the advantages of Fiscal Policy:

• The fiscal policy makes it easier to control state revenues and expenditures.
• Fiscal policy is useful to cover the shortfall of monetary policy and both play an important role in overcoming the problem of deflation-inflation.
• Fiscal policy is considered more effective than monetary policy.

Meanwhile, fiscal policy also has several weaknesses as below:

• Fiscal policy is more rigid or less flexible because it has to go through a fairly complicated bureaucracy, namely the State Expenditure Budget.
• Fiscal policy can lead to negative views from the public or society because it is associated with an increase in the amount of taxes.