Fiscal Policy for Control of Inflation
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Fiscal Policy for Control of Inflation

Fiscal Policy for control of Inflation The two wings of fiscal policy are government revenues and government expenditure. The government's fiscal policy can contribute to the control of inflation either by reducing private spending by increasing the taxes on private sector, or by decreasing the government expenditure, or combining both the elements.

Fiscal Policy for control of Inflation

The two wings of fiscal policy are government revenues and government expenditure. The government's fiscal policy can contribute to the control of inflation either by reducing private spending by increasing the taxes on private sector, or by decreasing the government expenditure, or combining both the elements. If private spending tends to be excessive, the government can moderate the inflationary pressures by reducing its own expenditure.

But reduction or postponement of government expenditure in modern times is not an easy task. There may be projects already under construction and these obviously cannot be postponed. Similarly, other types of expenditure may be necessary to meet the normal requirements of the Collective consumption’ of the community—defense policy, justice, etc. Then there may be social expenditure on education, justice, etc., which are very difficult to cut because of undesirable political effects. Therefore, the major emphasis of fiscal policy in inflation has been on reducing private spending through increased taxation and mopping up excess purchasing power in the hands of the people through public borrowings and small savings.

An increase in taxes tends to reduce private spending. If the rates of direct taxes on incomes and profits are raised, the private disposable income is reduced and this will tend to reduce private consumption spending- If the rates of commodity taxes are increased or fresh levies are made, the effect on consumption will be more immediate. An increase in the tax rates on a commodity will penalize spending directly by raising the cost of purchases.

Thus, in periods of inflation, the government should curb its own spending and increase the tax rates to reduce private spend g. It is good thing to plan for a budget surplus during inflationary periods.

Summing Up. Thus, the fiscal measures consist in (a) reduction of government it spending, (b) imposition of new taxes or increasing the old ones to curtail the size of disposable income in the hands of the people and to reduce the magnitude of the inflationary gaps, (c) the encouragement of savings or introduction of compulsory saving schemes, (d) public debt management so as to reduce the money supply, (e) gold sterilization is done in the United States, and (f) over-valuing domestic currency in terms foreign currencies.

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