(a) What is Fiscal Policy?
When
the Government increases prices or imposes a tax, people blame “the economy”. But
why does the Government want to raise prices or impose taxes? The government aims
to increase revenue by collecting money. Behind most of these decisions, there
is something called “Fiscal Policy”. So, what does simply “Fiscal Policy” mean?
The “Fiscal Policy” means how the Government “collects money “and “spends
money.” In addition to these two, “revenue” and “spending” tools, “management
of borrowing” and simply “overall management of its finances” to achieve short,
medium, and long-term economic objectives is known as the “fiscal Policy”.
Figure 1: Key Components of Fiscal Policy
· Government Revenue (Tax and Non-Tax Revenue)
Receipts received by the
Government from various sources, such as taxes, non-taxes, and grants to
finance public services, infrastructure, and development activities. This is
the money the government earns to finance education, healthcare, salaries and
wages, pensions, subsidies and transfers and development activities.
The majority of the revenue comes through taxes such as income taxes, Value Added Tax and Excise Duties.
· Government Expenditure
This refers to the expenses incurred by the government to carry out its operations, programmes, and service delivery. Government expenditure has two main components: recurrent expenditure and capital expenditure. Recurrent expenditure mainly includes salaries and wages, interest payments, and subsidies and transfers. Capital expenditure includes public investments.
· Budget Balance
The difference between government revenue and government expenditure is known as the budget balance. When expenditure exceeds revenue, a deficit arises, known as a budget deficit. Persistent consumption in excess of savings results in prolonged budget deficits, which in turn force the government to borrow to finance these deficits, leading to unsustainable debt accumulation.
· Primary Balance
The
difference between government revenue and expenditure, excluding interest
payments on existing debt, is defined as the primary balance. This is an
important indicator for assessing debt sustainability. Further, it indicates
whether the government generates sufficient revenue to cover its operational
expenses. When government expenditure excluding interest payments exceeds
revenue, a primary deficit arises.
(a) Fiscal Policy through a household example
· If we consider the government as a household,
the household’s income must be sufficient to cover its regular expenses, such
as food, children’s education, healthcare, clothing, and utility bills.
· When household expenses exceed income, the
household is required to borrow to meet its needs. If this borrowing continues
over a prolonged period, particularly to finance day-to-day consumption rather
than productive investments, and if borrowings are poorly managed, the
household may eventually fall into an unsustainable debt trap.
· Similarly, for a government, persistent
expenditure in excess of revenue leads to repeated borrowing, increasing debt
levels and interest obligations, which can undermine long-term fiscal and
economic stability.
(a) Fiscal Policy through a household example
· If we consider the government as a household,
the household’s income must be sufficient to cover its regular expenses, such
as food, children’s education, healthcare, clothing, and utility bills.
· When household expenses exceed income, the
household is required to borrow to meet its needs. If this borrowing continues
over a prolonged period, particularly to finance day-to-day consumption rather
than productive investments, and if borrowings are poorly managed, the
household may eventually fall into an unsustainable debt trap.
· Similarly, for a government, persistent
expenditure in excess of revenue leads to repeated borrowing, increasing debt
levels and interest obligations, which can undermine long-term fiscal and
economic stability.
Published by Deveconomics on 04 January 2026
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