Guide on How to Write University Essays, Courseworks, Assignments and Dissertations

Fiscal Policy, Budget Deficit and Government Debt

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Fiscal policy refers to the government use of the budget to affect economic activity, allocation of resources and the distribution of income (wikipedia 2007 [online]).  The government uses fiscal policy and its sister instrument, the monetary policy, in various combinations so as to give direction to a countries economic goals. The fiscal policy is attributed to the theories of John Maynard Keynes who postulated that government can influence macroeconomic productivity level by playing around with tax levels and government spending, (the fiscal policy). Development may not be achieved in the absence of a supporting macroeconomic framework consisting of monetary and fiscal policies ( [online]).  Macroeconomic policy has to show dynamism to deal with eventualities, such as the decrease in price of a major export commodity, so that investors will have confidence that the government will keep its word on fiscal policy discipline. The task for policy makers is to obtain the right mix of fiscal policy for the best results. Government may spend money for the public good. It usually spends the money to provide services that would not be best served by the private sector, or where the distribution of resources would not be socially acceptable. This includes spending money on the Police, teachers, the military and so on.


Government can raise funds for the aforementioned activities mainly through taxation, a major component of fiscal policy (investopedia 2007 [online]).   A less desirable way of raising money is called inflationary tax, where government simply prints money and spends it. The problem with this method is that it creates inflationary tendencies which tend to hit the poor the most. The other way to finance government budget is borrowing from the population which results in budget deficit. The fiscal policy deficit is usually through government bonds. When the government borrows, it incurs the debt on behalf of the taxpayers. That debt is what is called government debt, or public/national debt. If the debt was incurred by borrowing internally, then that would be called internal debt. Money borrowed from multilateral/bilateral lenders or international finance markets constitute the external debt.


A good fiscal policy should be neither too restrictive as to discourage private investment and stall growth, nor should it be too relaxed as to create high inflation and crowd out private investment. Fiscal policy is usually central to the state’s role in its development agenda and miscalculations on this front may undermine growth ( [online]). Weak fiscal policy may also be a recipe for social unrest especially when one group in the wider population feels they are being treated unfairly. For the poor countries, aid and debt relief cannot work without a good fiscal policy system


Good fiscal policy system on the other hand can help boost economic growth through prudent public investments ( [online]).  Growth in turn increases the tax base which can result in higher government revenues that can be used for specific government objectives like the alleviation of poverty. And where the resource allocation in the past has been objectionable, fiscal policy reform can be a tool for correcting injustices. Bluntly put, fiscal policy is more about the political priorities that has captured the imagination of the government of the day more than other policy making roles.





1. URL Fiscal_policy. . Last accessed 27 October 2007.


2.URL policy-brief/fiscal-policy-pb-5-2006-online.pdf +understanding+fiscal+policy&hl=en&ct= clnk&cd=9&gl=ke.  Last accessed 28 October 2007.


3. URL articles/04/051904.asp.

. Last accessed 28 October 2007.

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