Fiscal policy is one of the principles that are employed by a government to generate revenue thus prevent the decline in economy. It relies on taxation and spending. The government prevents the decline in economy by regulating interest rates and circulation of market.
Decline in economy may be due to imbalance between the government revenue and the way that money is spent. When the economy is balanced there is no need of having a fiscal policy. This means that the expenditure of that government is sustained by the revenues collected by the government.
According to Blanchard (2000), the economy is most likely to decline when the rate of unemployment increases because the government is not able to collect adequate taxes from employees’ salaries. To rectify this problem the government should persuade investors to come and do business in that country because by doing so the government will benefit from the taxations that will be imposed on employees and imported goods.
In addition to that, the foreigners will bring more foreign currency which will be exchanged with the local currency thus the demand for local currency will hike and therefore increase the value of the local currency. Thus, sectors like tourism generate more income when most tourists are people from other countries.
There are several ways through which the government can obtain money for running its daily routines. These options are the backbone of monetary policy, in which the government tries to control the supply of money hence boosting the economy. The first option is to issue treasury bonds that allow individuals to lend their money to the government for some time. The individuals will on the other hand reap the benefits of retrieving the profits that accumulate at the end of each month while the initial amount is left untouched (Mishkin, 2004).
The shortest time that a treasury bond can last is sixty days but the period can still be extended. Actually treasury bonds are preferred by most investors because they provide low risk investment. The government has to ensure the money obtained from creditors is used for the intended purposes only or else incur more losses beyond recovery.
Secondly, the government can sell some of its properties to generate revenue. This includes possessions such as vehicles, houses and land. The sale of these properties is done through public auctions where several people who are interested in buying the same property are requested to quote their respective price tag. The bidder who quotes the highest price is allowed to walk away with the property. The money obtained from the sale of government properties is then injected into the economy through various sectors.
Selling of these properties does not only generate income for the government but also reduces government spending. For instance a government may decide to trim the motorcade of its cabinet ministers in order to save on fuel consumption. Every cabinet minister is allocated a few vehicles that do not consume more fuel.
Additionally land owned by the government may be sold to a potential real estate investor to help in solving the problem of inadequate housing instead of leaving it idle. Most people prefer to buy properties that are owned by the government because they are considered to be relatively cheap as opposed to those sold by individuals (Heijra & Van der, 2002).
The government can also introduce seignrioage. This is done by printing more currency hence the currency goes round within the market. In developed countries people who own gold are allowed to trade their gold certificates with currency. They are allowed to hold the currency for some time and at the end they are given their gold ounces back. But the effectiveness of this method is determined by the stability on the worth of the mineral.
Thirdly, the government can subsidize taxes on commodities which will make their costs go down. But Warsh (2006) argues that this policy should only be applied to locally produced goods and services otherwise if traders who import commodities that are also available locally are exempted from taxation the local industries will be eliminated from the market.
This will cause most of the local companies to close thus many people will be without jobs which will on the other hand reduce government income which is deducted from their salaries. Governments should therefore be cautious about this issue. In contrary if taxes were increased the commodity prices will shoot hence people will withhold their money or choose alternatives for those items
The government can also use the money that is usually kept for extra expenses or emergencies. These funds are usually withdrawn when the economy has shown signs of decline. This money shields the government from failing to accomplish its missions due to lack of money and depending on the volume of this money the government may not obtain money from creditors.
Manfred (2006) explains that although the above mentioned monetary policies are effective governments should find ways of solving the underlying problems which causes most economies to decline. Issues like unemployment can be minimized by encouraging more people to establish medium enterprises and thus more people will be working hence the source of government money will be stable. This is because individuals will be paying for business licenses and income tax.
Government corporations that are not competent should be privatized more foreign trade should be promoted in order to generate more foreign currency. This can be done by maintaining peace which will attract more investors. Both tourists and foreign investors fear to visit countries that are prone to wars.
In essence, governments should establish bodies that monitor the expenses of government agencies to ensure they are valid. This is because a lot of government money is squandered by individuals due to lack of proper mechanisms of vetting expenses. It is therefore important for governments to fight impunity. Fiscal policy and monetary policy help a government to stabilize its economy through a controlled supply of factors of production
Blanchard, O. (2000).Macroeconomics. New Jersey: Prentice Hall.
Heijdra, B.J. & Van Der. (2002). Foundations of Modern Macroeconomics. Oxford: Oxford University Press.
Manfred, G. (2006). Macroeconomics. New Jersey: Pearson Education Limited.
Mishkin, F.S. (2004).The economics of Money, Banking, and Financial Markets. Boston: Addison-Wesley.
Warsh, D. (2006).Knowledge and the Wealth of Nations: A Story of Economic Discovery New York: Norton.