What are the advantages and disadvantages of fiscal policy?

Answer 1

Drawbacks/shortcomings/Limitations of fiscal policy?

No doubt fiscal policy acts as an important tool for price control, control over Government expenditure but still the smooth functioning of fiscal policy is not possible in countries like India because of following limitations.

1.Lack of Elasticity: - In countries like India tax system is not that elastic as it is supposed to be. Moreover in these economies because of huge tax evasion, it is difficult to earn revenue from taxes. The spread of tax is very few.

2. Non Monetised Sector: - Although each and every activity is now awarded in terms of money, but still a major part of economy of UDC's like India is not monetised. In this part fiscal policy remains unaffected.

3. Inadequate Statistics: - In the countries like India adequate and reliable date is not available. Because of non-availability of reliable and accurate data, the area of fiscal policy remains unaffected.

4. Illiteracy: - Most of the population of India is either illiterate or not in a position to understand economic policies and is implications, that is why they are not able to evaluate the importance of fiscal policy and, therefore, they also try to evade taxes.

5. Limited Sector: - Fiscal policy only affects a few sectors of the economy. Most of the sectors remain untouched e.g. burden of taxes on salaried person whereas big businessmen hardly pay any taxes in spite of high income levels.

6. Delay in decision: - Fiscal policy decision needs approval by the Government. A lot of time required for approvals, that is why decisions are not taken at proper time.

7. Limitations regarding full employment: - As a result of fiscal policy in connection with full employment wage rate increases. Increases in wage rate results into increase in prices instead of increase in production. Employment multiplier decreases and desired increase in employment does not take place. Structural unemployment cannot be tackled by fiscal policy.

8. Defective Tax Structure: - The country been relying more on indirect taxes ultimately affecting poor persons. Contribution to direct taxes has been declining and that of indirect taxes rising.

9. Inflation: - As a result of increase of public expenditure on non-development heads and deficit financing pull inflation has taken place. Also high rate of indirect taxes has resulted in cost push inflation. High rate of direct taxes and increase of black money in the country has given rise to parallel economy and increase in inflation.

10. Huge investment with negative return in public sector: - Huge investments in public sector have become sunk money now because of failure of public sector. Investment of Rs.2,04,054 crore was made in public sector enterprises in 1998 and Rs.3,03,400 crore in 2001. Return on this investment has been very low. Also takeover of sick textile mills by government has further increased public expenditure. Huge amount has to be spent to keep such undertakings going thus making the resources of country scarce.

pradeepkalari (pradeep sp)

Answer 2

Advantages of fiscal policy include the ability to allocate money to the areas that need it most and having a way to provide a stimulus without adding to the deficit. Disadvantages include time lags and budget deficits if money is not handled appropriately.

Answer 3

1) Problem of crowding out

2) Fiscal policy and inflation

3) Expected Future income

4) Fiscal lags