These are very impressive achievements. Stability has been achieved in the external sector and the central bank can now conduct autonomous monetary policy. However, continued fiscal deficits are restraining the economy from realizing its full potential to grow and in providing quality infrastructure, both physical and social, that can meet the growing needs of a resurgent economy. Objectives of Fiscal Policy in Developing Countries In developing countries, taxation, the government expenditure, taxation and borrowing have to play a very important role in accelerating economic development.
Fiscal policy is a powerful instrument in the hands of the government by means of which it can achieve the objectives of development. There are several peculiar heartsickness of a developing country, which necessitate the adoption of a specific fiscal policy, which ensures a rapid economic growth. There are vast and diverse resources human and material, which are lying neutralized. Such countries have weak infrastructure, I. E. They lack adequate means of transport and communications, road ports, highway, irrigation and power and technical know-how.
Their population increasing at an explosive rate, which necessitates rapid economic development to, met the requirements of the rapidly- growing population. In order to overcome these handicaps, a suitable fiscal and taxation policy is called. The principal objectives of fiscal policy in a developing economy are. To immobile resources for economic growth, especially for the public sector. To promote economic growth in the private sector by providing incentives to save and invest. To restrain inflationary forces in the economic in order to ensure price stability.
To ensure equitable distribution of income and wealth so that fruits of economic growth are fairly distributed.In recent weeks, a number of signs have appeared suggesting that the recovery of the U. S. Economy from the recent recession is on a bumpy path. During the second quarter of 2002, real GAP grew at an anemic annual rate of barely over 1%, well off but has yet to show signs of declining. Adding some gloom to the general outlook, the stock market continued to drop through most of July and has remained volatile.
This sluggish economic performance comes despite substantial stimulus from both monetary and fiscal policy. Since January 2001, the Federal Reserve has reduced its benchmark policy interest rate, the federal funds rate, from 6. 52% in September 2000 to a current level of 1 . 75%. Fiscal policy also has become more expansionary. The deader government budget has swung from a surplus of $236 billion in 2000 (2. 5% of GAP) to a projected 2002 deficit of $1 57 billion (1. 5% of GAP) as the government has increased expenditures and reduced taxes. This active use of fiscal policy during a recession is somewhat unusual.
During the last U. S. Recession, in 1990, then President George H. W. Bush resisted attempts to use fiscal policy to stimulate the economy. In fact, his Council of Economic Advisers, in their February 1992 report, argued that increases in fiscal expenditures or reductions in taxes might hamper the economy’s recovery. In contrast, during the current recession, both Congress and the President have supported increases in expenditures and tax cuts as ways to stimulate economic growth, culminating in the passage of the Economic Recovery Act in March 2002.
The current recession and the 1990-1991 recession offer contrasting examples of the use of fiscal policy, and they also highlight some elements of the longstanding debate in economics over whether fiscal policy can play a useful role in combating business cycle downturns. This Economic Letter discusses some of the issues involved in using fiscal policy to help stabilize short-run fluctuations in the economy. In developing economies, the government has to play a very active role in promoting economic development and fiscal policy is the instrument that the state must see.
Hence the great importance of public finance in underdeveloped countries desirous of rapid economic development. In a democratic society, there is an inherent dislike for direct control regulation by the state. The entrepreneur would not like to be ordered about to produce this or that, how much to produce or where to produce. Fiscal incentives in the form of tax concessions, rebates or subside are, therefore, preferable. Similarly, the consumers would not like to be told directly to curtail their consumptions or to consume this and not to consume that.
