Anti-inflationary fiscal policy

 Anti-Inflationary Fiscal Policy

Inflationary phase of trade cycle is the reverse order of unemployment and deflationary situation. Under inflationary situation, private expenditure go on increasing even after full employment is reached. Since there do not remain unutilised capacity and idle resources or manpower, the increase in aggregate expenditure cannot add to production but only raises the price level. However, due to increased incomes in society, government revenues would rise and would lead to budget surplus. But this surplus is often not sufficient to counter the inflationary pressure of over-investment. The normal budget surplus that could be created due to automatic rise in revenues and fall in deflation - oriented public expenditure is no

likely to be anywhere near the excessive rise in private expenditure. Therefore a deliberate budget policy and fiscal action must be evolved to meet the situation. The alternative fiscal remedies are :

(i) reduce effective demand to a level where aggregate expenditures become equal to the value of output at stable prices.

(ii) reduce private consumption by imposing new taxes or raising rates of taxes.

(iii) curtail all non-development expenditure of government.

(iv) combine tax-expenditure measures. If economy suffers from acute inflation, decrease in government expenditure should be combined with increase in tax rates and imposition of new taxes. Thus Budget surplus is the main instrument to check inflation. But the creation of budget surplus is not always feasible, when inflation arises due to war expenditures or compulsions of public expenditure for economic development in under-developed countries. Hence in such cases the revenue side has to provide the main fiscal measures. Taxation as an anti-inflationary fiscal device has also serious limitations.The fiscal policies must be supplemented by monetary and debt policy.