What are Fiscal Policies & what is their impact on the Economy?

Fiscal policy includes the measures of the Government which deal with its revenues and expenses. Fiscal measures are significant in any economy as when the Government changes the measures of its income (primary source being taxation) and expenditure (education, healthcare, police, military forces, interest on borrowing, administrative machinery, welfare benefits, etc.), it pressurizes collective demand, supply, savings, investment and the overall economic activity in the country.

Budgeted excess of the Government's expenditure over its revenues in a straight year is called a fiscal deficit, which is generally clear as a percentage of GDP. The Government bridges the fiscal deficit through both short-term and long-term market borrowings.

A large fiscal deficit and higher borrowing by the Government will push up interest rates in the Economy and make it complicated for corporate borrowers to access funds. A high-interest rate environment is disadvantageous to economic growth.

A country has business and other contracts with bodies abroad, resulting in receipts and payment of funds. These include receipts for Experts and payments for imports, interest, dividends received and paid, and other transfers from abroad. The current account balance is the disparity between the receipts and the payments. A country may have a current account surplus (receipts > payments) or deficit (receipts < payments). A high fiscal deficit in ratio to the GDP caused by lack of competitiveness in trade or unnecessary consumption is a negative remark on the Economy.

A high CAD causes the nation's currency to grow weaker than other currencies. This makes imports more expensive and will affect the Economy's efficiency as capital goods and commodities become expensive.

It diminishes the creditworthiness of the nation and makes borrowing more expensive. A run-down currency makes Experts of the nation more aggressive and may assist narrow the deficit. Suppose the country is viewed as an attractive investment destination. In that case, the capital inflows in the form of FDI and portfolio inflows will counterbalance the CAD and defend the currency from deflation.

Expenditure Is Funded By The Government Through Multiple Ways: Chiefly Through

• P/L measures - Income from operations: Taxation, interest, and dividend income
• B/S measures - Borrowing and Sale of assets

While Government Tries To Poise Between Its Inflows And Outflows, Based On Its Actions, Fiscal Policy Is Being Considered As:

Neutral fiscal policy–When governments' income and expenditure are in balance. No major changes are required in the Fiscal policies.
The Government's spending exceeds its income as measured by Expansionary fiscal policy. This policy bearing is usually undertaken during recessions/slow-moving Economies.

Contractionary fiscal policy:

Fiscal measures when government spending is lower than its income. The Government uses the surplus income to repay its debts/obligations or acquire assets.

Monetary Policies And Their Impact On the Economy:

Monetary policies administered by the central bank in an economy deal with money supply, inflation, and interest rates to encourage economic growth and manage price stability (inflation).