ekalawya/?p=2299 measures to control inflation-fiscal policy fiscal policy is budgetary policy in relation to taxation, public borrowing, and public expenditure. Changes in the total expenditure can be effected by fiscal measures. To combat inflation, fiscal measures would involve increase in taxation and decrease in government spending. During inflation the government is supposed to counteract an increase in private spending. Obviously, during a period of full employment inflation, the aggregate demand in relation to the limited supply of goods and services is reduced to the extent that government expenditures are curtailed. A certain public expenditure may is not be sufficient. Government must simultaneously increase taxes to effect a cut in private expenditure also, in order to minimize inflationary pressures. As we know, when more taxes are imposed, the size of the disposable income diminishes, as also the magnitude of the inflationary gap, given the available supply of goods and services. Inflationary pressure is significantly weakened by the simultaneous curtailment of government expenditure and an increase in taxation because, more resources are released for expanding the productive capacity in the private sector; the supply curve of aggregate goods and services shifts upwards with a contraction of monetary demand due to a decline in disposable income with people. It has been argued that a tax policy can be directed towards restricting demand without restricting production. For instance, excise duties or sales tax on various commodities take away the buying power from the consumer goods market without discouraging the expansion of production capacity. However, some economists point out that this is not a correct way of combating inflation because of its regressive nature. On the other hand, this may lead to a further rise in prices of such commodities, and inflation can spread from one sector to another and from one commodity of another. But, during inflation, a progressive direct tax is considered best; it is also justified in the interest of social equity. Private savings have a strong dis inflationary effect on the economy and an increase in these is an important measure for controlling inflation. Moreover, the effects of a large deficit budget, which is mainly responsible for inflation, can be partly counteracted by covering the deficit through public borrowing from non-bank lenders that has a dis-inflationary effect. Further, public debt may be managed in such a way that the supply of money in the country maybe controlled. Anti inflationary debt management also includes cancellation of public debt held by the central bank out of a budgetary surplus.
Posted on: Sat, 18 Jan 2014 06:49:30 +0000