The fiscal policy that governments follow is an integral part of the economy. The government intervenes in the country’s economy through its fiscal policies to achieve certain goals, and the most important of these goals are, in advanced economies, the government’s preservation of the largest amount of employment or achieving full employment if that is available, in addition to its attempt The role of fiscal policy in achieving and mobilizing financial resources to finance projects, the majority of which are development projects aimed at improving infrastructure and impacting the economy, adds value to the economy. Through fiscal policy with a number of tools, and this article will present the most prominent classification of these tools.
What are the financial policy tools?
The following are the most important tools used by the government in fiscal policy:
Fiscal policy – First: the budget
It is the tool that is used to evaluate the fluctuations in the country’s economy, and it is divided into:
Balanced annual budget
This type of budget aims to achieve a balance between the revenues that the government obtains and the expenditures that it pays, but there are some problems that arise when choosing this type of budget due to the lack of a cash surplus to spend on investment projects and the development of the country, which does not create a state of prosperity or achieve economic growth.
Periodically balanced budget
It aims to create a surplus in revenues that exceeds public spending in times of prosperity so that this surplus is employed to reduce the state’s public debt by paying it, and it is also employed in cases of economic stagnation when the budget is impotent so that its expenditures exceed the revenues it obtains, so balance is achieved and repayment This deficit is one of the surpluses from previous budgets.
A Fully Managed Compensation Budget
This budget aims to achieve full employment in the economy without leading to an increase in inflation to maintain price stability, and this is done by adjusting taxes and public spending in line with these goals.
Fiscal policy – Second: Taxes
It is one of the most important tools for influencing income and wealth distributions, as well as trying to influence investment and consumption in order to achieve the main goals of public financial policy, such as economic stability.In both cases:
Tax policy in the event of inflation
The government increases tax rates in order to curb the huge demand for goods and services, which producers can no longer balance with the commodity supply, which leads to increased consumption. Purchasing encourages producers to increase production due to an increase in price to achieve a state of balance between supply and demand.
Tax policy during the recession
The government reduces tax rates in cases of recession in an attempt to encourage consumers to increase purchases and spending to improve levels of demand and reduce the gap between it and supply, and to try to encourage investment in order to employ the largest number of workers to achieve full employment, but there are some observations on reductions in tax rates when unemployment is low. Creating a situation of tax cuts does not lead to an increase in employment, but both consumers and investors postpone their consumption and investments in order to obtain greater benefit because they expect that there will be tax cuts coming later.
Fiscal policy – Third: Public spending
The policy of spending in cases of inflation differs from that of stagnation as the government reduces spending in cases of inflation to reduce the money supply, which has caused a rise in demand in a way that is harmful to the economy, and it also works to increase spending in cases of recession to reverse the first reason. the government:
Investment expenses
It is called capital expenditures, and it is all the expenditures that the government pays on projects aimed at developing the economy. This economy creates projects that have added value to the capital stock of the state, not to mention its impact on investment in a positive way. It stimulates investment in the state, which leads to an increase in productivity due to this investment.
Consumption expenditures
These are all expenditures that the government spends on purchasing goods and services from within the country itself, with the aim of consuming them by the government, such as consumer and maintenance equipment used in the maintenance of government facilities or any commodity that is consumed by this sector.
Transfer Payments
These include expenditures on social security programs; retirement and old age programs; unemployment funds; unemployment allowances; and health insurance. transfer payments in order to reduce the material difference between these layers.
Fiscal policy – Fourth: Public Works
The idea of public works is based on the establishment of development projects in the country, such as infrastructure projects such as:
construction of airports, roads, ports, railways, etc.
Employing the unemployed in such projects, the government has achieved the most important objective of fiscal policy, which is full employment, or at least reducing unemployment rates to the lowest possible level, at the same time that it aims to produce durable investment and development projects that benefit and add value to the country’s economy. It also has great importance in increasing the purchasing power of individuals due to the income and returns that they obtain from these projects, and it stimulates the private sector to invest, but there are some obstacles facing the public works tool, such as the scarcity of the state’s economic resources, or delays in starting these projects. due to complexities, lengthy government procedures, and sometimes misallocation of resources.
Fiscal policy – Fifth: Public Debt
Public debt is used as a tool that maintains stability in the economy. This debt is obtained from several parties as follows:
Borrowing from the non-banking sector
The government issues bonds to the general public in the country, and when these bonds are purchased by individuals, the government gets the money. But there are some drawbacks to borrowing from this category, in which the government has added value to the economy and achieved its goal in the event that the money that it seeks is Bonds are purchased through hoarded funds by individuals, and they do not employ them. On the contrary, if the interest rates on bonds are attractive to consumers or investors, they may cancel their investments that they intend to make with these funds or delay their consumption because of the returns they achieve They have these bonds, and in general, borrowing is more beneficial if it is done in cases of inflation to reduce the money supply than in cases of recession that reduce the money supply and have an adverse effect on the goals to be achieved.
Borrowing from the banking sector
The government obtains loans from the banking sector in various ways, such as bonds or loans, and the most important benefit of this borrowing is in cases of recession, so there is a lot of money that is not used by banks, due to the reluctance of individuals to carry out investment and consumption operations. When the government borrows these funds and then pumps them into the economy through one of the public spending methods mentioned above, this will create a state of demand that will contribute to reducing recessions. On the other hand, the government’s borrowing from banking institutions in cases of inflation may be difficult because of the few cash reserves that the banks have.
Withdrawals from the treasury
The government makes withdrawals from the treasury when it needs to finance the budget deficit, and this spending leads to adding to the money supply in the economy, and it is used more in cases of recession to stimulate demand.
Money printing
It is another method of government financing other than the method of withdrawals from the treasury, and financing is done in this way only in cases of recession because of its negative impact on the value of the national currency in cases of prosperity and inflation.
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