Fiscal Policy and the Investment Finance
Of the state to manage the evonomy
Theory and experiences market economies
Transition countries in Europe and developing countries
Can note that the fiscal policy is decisions by the President and Congress, usually relating to taxation and government spending, with the goals of full employment, price stability, and economic growth. By changing tax laws, the government can effectively modify the amount of disposable income available to its taxpayers. For example, if taxes were to increase, consumers would have less disposable income and in turn would have less money to spend on goods and services. This difference in disposable income would go to the government instead of going to consumers, who would pass the money onto companies. Or, the government could choose to increase government spending by directly purchasing goods and services from private companies. This would increase the flow of money through the economy and would eventually increase the disposable income available to consumers. Unfortunately, this process takes time, as the money needs to wind its way through the economy, creating a significant lag between the implementation of fiscal policy and its effect on the economy.
The wider objectives of fiscal policy are to contribute to:
1 The allocation of resources the government considers necessary to provide public goods and to regulate the economy’
2 The stabilization of the economy in case of external shocks
3 A fair distribution of income through taxation and transfer payments
4 Stimulating economic development with designated programmers for example in knowledge development and social infrastructure.
The specific concerns of fiscal policy are;
(i) to maintain over time a balanced budget with taxation levels which do not restrict private business development;
(ii) to ensure that the national debt does not become a burden on the budget; and
(iii) the question how to use the budget as an anti-cyclical instrument in case of business cycles and external shocks.
Ø Fiscal policy thus deals with government budget expenditures and revenues and with national debt.
To fund its expenditures the government has a number of instruments at its disposal :
1 Taxes, Fees, utility pricing, sales of assets
2 Foreign borrowing
3 Borrowing from domestic non-bank sources
4 Borrowing from the domestic banking system
Ø If the government budget is not in balance, one speaks of a deficit or surplus.
Ø Having said this it is clear that in fast growing economies, the government can afford a budget deficit, as long as its can attract foreign borrowing to finance the budget deficit.
Ø The main instrument for financing government expenditures is taxation. Deficits are funded by borrowing.
The optimal fiscal policy from a macroeconomic perspective is to aim at a balanced budget and to have a budget surplus in years with relatively high growth and a budget deficit in a recession (acting as an automatic stabilizer to some extent).
To mobilize the investment finance needs for economic growth and further reforms.
To get access to these sources of capital at affordable prices, the international capital markets and or IDA (international development assistance) providers, such as neighbouring country governments and at a later stage International Financing Institutions need to have confidence in the reform vision and strategy pursued by the country such as :
1. In transition countries, monetary financing (printing money) was initially resorted to.
– This practice fuelled high levels of inflation and in some cases hyper inflation.
2. If at all possible, the DPRK should try to negotiate a stabilization fund with its main development cooperation partners.
– Such a fund would draw on grants or soft loans.
3. For development expenditure soft loans and commercial loans, as well as international borrowing in foreign currency government bonds would seem to be the most promising options.
– This does require, however, a strategic choice for export oriented private sector development, otherwise the repayment of the national debt, will become a main barrier
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