Fiscal imbalance is used to refer to a point in time where the debt obligations of a given country differ compared to its income streams.  In fiscal federalism, two types of economic imbalances exist, which you can find in this essay on economy. They are the vertical and horizontal monetary imbalances.

The vertical monetary imbalance is that which is measured among the existing government levels. The horizontal monetary imbalance is that which is calculated between governments at the equal level. Horizontal financial instability is also referred to as regional inequality.

Three major fiscal policy tools can be used to correct all these types of financial imbalances.

Fiscal policy

The most essential factor in the shaping of a country’s economy is the fiscal policy. When the government makes use of fiscal policy, it is normally through adjustment of the spending levels and revenues. It is based on theories of a British economist which dictates that decreasing or increasing of revenue plus expenditure influences employment, inflation and flow of money in the economy.

  1. Taxation

Taxation is a very strong fiscal policy tool. Taxes affect the economy in a big way. First, they determine the amount of money that the government will be able to collect through revenues and hence determine its expenditure. They also influence how individuals are going to spend their money.

If the government wants to encourage investment and spending, it lowers the tax rates. With increased investments, more employment opportunities are created and more individuals are taxed. The government is able to raise more money from revenue and decrease its debt.

Fiscal policy affects the taxation of businesses and future generations. Taxation increases if government spending leads to huge deficits. When government operates on surplus, taxes are reduced.

  • Public expenditure

Active government participation in economic activities has brought public expenditure to the top among fiscal tools. Variations in public spending have a more direct impact on the economic activity level compared to taxes. Public spending influences employment, income, and output.

Increased aggregate spending can lead to inflation. In that case, both the public and private sector spending is high. In such a situation, public expenditure policy should focus on reducing the government’s expenditure on unnecessary projects.

  • Public debt

This is a fiscal weapon that helps greatly in the stabilization of the economy, helps fight against deflation and inflation. The government can choose to borrow funds from the non-bank or banking systems.  Government borrowing from the non-bank public is through the selling of bonds, which helps reduce the money that is in circulation. This form of borrowing is unlikely to cause inflation.

It can also choose to print money. Money printing, also known as deficit financing mobilizes for additional resources. The printed money adds bulk to the money that is already in circulation. This particular method of borrowing is hence regarded to be very inflationary even though it has good economic outcomes during depression periods.

Conclusion

The success of any given economy is assessed using a number of factors. One of them is the gross domestic product and another one is the aggregate demand.

Through the anchorage of inflation, monetary policy usually contributes to economic growth and stability. Anchorage of inflation leads to price stability and a straight medium-term directed monetary policy offers this.

Sustainability and stabilization of the economy are two compatible objectives. They complement each other in terms of fiscal policy which is aimed at ensuring the budget is maintained close to balance or even in surplus. In places where structural and other demographic changes affect structural budget negatively, discretionary fiscal actions should be adopted.

Discretionary measures are appropriate at times when countries have been hit by harsh recessions or at times when public finance changes are warranted. These measures need to be appropriately targeted and deemed to be effective in solving the underlying foundation.

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