Fiscal policy in economics is a method adopted by the government to balance out income and expenditure as well as reduce unemployment rate. The idea of fiscal policy came about due to
the need for the government to regulate unemployment in the country after the world war 2. This idea is based on the theories of John Maynard Keynes, a British economist.
Fiscal policy simply is a policy that involves decreasing government’s revenue which is mostly taxes, and increasing its expenditures. Fiscal policy is usually carried out alongside monetary policy. Monetary policy is quite different from fiscal policy because in the case of monetary policy, flow of income and expenditure is controlled by the central bank instead. The fiscal policy influence employment rate, inflation, demand of goods and services by the consumers as well as the general economic growth of the nation.
Here is how fiscal policy works;
In lowering the tax rates, people have more money in their pockets and less worry about taxes. This decrease in tax rates result in reduction in prices of commodities which in turn increases demand of goods by consumers who now have more to spend.
Also, increase in governments’ expenditure in a particular area that needs a push in their economy by funding major projects will in turn increase investments by business owners or entrepreneurs.
The customers’ resultant increase in demand and the subsequent increase in spending and investments by business owners returns more money back to the government.
The most important factor in implementing a fiscal policy is in finding the right balance between income and expenditure so as to prevent the economy from straying too far. Ideally, a healthy economy growth rate should be between 2 to 3% yearly.
As an entrepreneur, it is important that you understand how the fiscal policy in your area directly or indirectly affects you. Different businesses are affected by the different taxation levels in their respective locations. You as an entrepreneur have to understand the cash flow rate of by the government into the economy at all times.
Businesses thrive better when there is a balance between the demand and cost of commodities. Change in fiscal policy most times adversely affect small scale businesses because they have less capacities to survive changes in policies and are often not ready to face uncertainties.
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