Question

Why is fiscal policy such an important tool for government to use for improving the wellbeing of a developing country's citizens ?

Answer 1

Macroeconomic policies in a country are usually implemented through two tools sets namely fiscal and monetary policy. When the government uses the fiscal policy it means an adjustment of the spending to stimulation of the production or taxation to influence and monitor the economy. In the developing countries the main objective of fiscal policy is reducing disparities of income and wealth, promoting capital formation, increasing national income, raising proper resource allocation, inflation control and achieving of full employment. Fiscal policies act as a significant tool for government in improving the wellbeing of citizens in a developing country because of the following advantages:

--Unemployment Reduction: When developing economy experiences high unemployment, the government can use an expansionary fiscal policy with an increase in spending or purchases and cutting taxes. To face the increasing demand, the private sector may increase the production and therefore creating more opportunities of employment in the process.

-- Budget Deficit Reduction: The developing nation often has a budget deficit i.e. the country's expenditures are more than its revenue. As the economic impact of this deficit is inclusive of increased public debt, the developing nation may use contraction in the fiscal policy and therefore reduce the public spending i.e. raise the rates of tax rates to earn more revenue and eventually decline the budget deficit.

-- Relative price stability: The fiscal policy protects the developing economy from unhealthy developments abroad and high inflation domestically. The fiscal measures are properly designed to curb forces of inflation.

-- Economic Growth Increase - A strong fiscal policy facilitate expansion of the developing economy with an aim of checking the sectoral imbalances, proper resource allocation, inflation control, full employment and decreasing the widespread inequalities of income and wealth

-- Improvement in the standard of living: The living standards of the masses are enhanced by providing social goods on a huge scale. Moreover the fiscal policies ensure the diversification of the flow of spending and investments from an unproductive usage to socially most desirable channels

--Limit negative community behaviors: It can also be used by the government in limiting the negative behaviors on the community such as imposing taxes on cigarettes