The government is made of two things Expenditure and Income. When both are clubbed together it becomes Fiscal Policy. This is known as the Fiscal Policy of any economy. It runs either in surplus or in deficit.
Expenditure happens when there are facilities are improved and government earns when there are taxes in it.
Methods of Funding Money
The government has various ways by which it borrows money. They are:
- Taxes: This is the simplest way to get money. Taxes are compulsory to pay and this is how government can get money for its expenditure.
- Sales: By selling assets of the government which is of no use to them is also another way of getting money. Those assets can be useful to some other company or economy.
- Seigniorage: This can be explained in a simple way which states the money that is obtained while printing money. This is government income which becomes a part of the fiscal policy.
- Surplus: the reserves of the fiscal policy also can be served as a part of income generating source. This money also the government can use to benefit the economy.
- Borrowings: the money that is borrowed domestically and on international platforms serves as a part of the fiscal policy. But when this is used to obtain money then the interest rates are so high that the policy will start having deficit
Understanding the Concept
When we say borrowing then there are various ways by which an economy gets money. When a government borrows money then there are procedures which the money is raised. It includes various treasury bills and bonds. The government gets money from the interest that is liable to the bill and it gives a financial back up to the fiscal policy.
Factors Affecting Fiscal Policy
Like every other thing, fiscal policy is also affected by many factors. They are:
- Aggregate Demand
- Aggregate Supply
- Money Supply and Demand
- Interest rates as well
The above factors have to be taken into consideration while drafting the fiscal policy. As the taxes become one way to get the money it should neither be too rigid nor too loose.
Thus it is the duty of the government to check that the Fiscal Policy always has a surplus and that money is utilized for the benefit of the masses.