What Are the Objectives of Fiscal Policy?

K. Kinsella

National and regional governments often implement various policies to influence the direction of the economy. While short-term objectives of fiscal policy may vary, all fiscal policies are driven by government attempts to control economic activity. Some people confuse fiscal policy with monetary policy. Fiscal policies generally relate to government expenditure, borrowing and the assessment of taxes while monetary policies control interest rates and the national money supply.

A country's fiscal policy can dictate the actions of a companies.
A country's fiscal policy can dictate the actions of a companies.

The ultimate objectives of fiscal policy include lowering unemployment and encouraging economic growth. Monetary policies can also influence growth and unemployment levels but fiscal policies are policy decisions that relate to government budgets and how public funds are used in order to shape the economy. Objectives of fiscal policy for a regional government may include reducing the number of families that live below the poverty line. The government may decide to alleviate poverty by raising taxes to fund free health care programs, housing projects and various other types of benefits programs that improve living standards for large numbers of people. Conversely, a government may try to improve economic conditions by reducing taxes so that businesses have more money to spend on hiring employees, as this may lower unemployment and improve living standards.

Fiscal policies are considered distinct from the monetary policies -- such as interest rate changes -- of the Federal Reserve.
Fiscal policies are considered distinct from the monetary policies -- such as interest rate changes -- of the Federal Reserve.

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While the objectives of fiscal policy are usually related to improving the economy as a whole, some politicians attempt to implement policies that are designed to improve the financial standing of the actual government. Some governments base fiscal policies around the notion that governments should not just support job creation but should directly assume responsibility for job creation. In some nations, governments assess a wide variety of taxes and some of the revenues are used to create jobs for public employees who may work for the security services, the post office or national health care providers. Opposition parties may campaign for fiscal policy changes that result in a reduction of the government workforce and lower taxes.

Aside from taxes, government agencies can also raise money by issuing debt instruments called bonds. Typically, bonds are backed with tax money which means that bondholders receive interest payments that are derived from tax revenues. Therefore, a ruling government that increases spending will cause taxes to rise in the long-term even if one of the stated short-term objectives of its fiscal policy is to keep taxes at low levels.

In theory, governments as non-profit organizations should have balanced budgets. Nevertheless, deficits and surpluses are not uncommon and the objectives of fiscal policy of some political groups include eliminating both deficits and surpluses. A deficit can be erased by increasing tax revenues while a surplus can be eliminated by either increasing short-term spending or by returning tax revenues to taxpayers.

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Discussion Comments

ddljohn

@burcidi-- Yea, but let's not confuse long-term objectives with short-term objectives. Fiscal policies have both.

As you said, the long-term objective is stability in the economy. But short term objectives are increasing jobs, keeping inflation low and giving incentives for private sector. These short-term objectives work toward the long-term objective.

turquoise

I think of fiscal policy as "emergency policies." Governments don't really want to use fiscal policy to stabilize the economy. Monetary policies are better and more effective for this. In the US, we usually use fiscal policy during recessions. When monetary policy doesn't work, there is no choice but to use fiscal policies. It's like the emergency button.

burcidi

I think that the objectives of fiscal policy are more long-term in comparison to monetary policy.

Monetary policy aims to stabilize inflation, exchange rates and interest rates. But fiscal policy aims for sustainable economic growth. The goal is for the economy to grow, but not too slowly or too quickly. Either is bad. The rate of growth should be such that it can be maintained for a long time. That's why there is a low of economic analysis and prediction involved. Fiscal policies take longer to implement, so if an economic downfall is foreseen, new policies have to be decided on as soon as possible.

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