Public Financial Management

Public financial management

Public financial management
Answer 1
Fiscal policy instruments can be defined as a major tool for enhancing the level of
employment, curbing inflation and leading to growth. The most important tools that are used
are:
Taxation:
Fiscal policy instruments allow the government to get rid of various economic issues such as
poverty, unemployment, inequalities of income, etc. Taxation is considered as one of the
most powerful fiscal policy instruments as it highly impacts the alterations in not just
investment and consumption but disposable income as well. The consumption, investment
and disposal income of a citizen can be leveraged by means of formulating anti-depression
tax policy (Bekaert & Hodrock, 2012). At the same time, it cannot be denied that there are
probabilities for an individual to have surplus funds during the time of tax reduction for
investment and consumption purposes.
All this collectively might result in higher spending activities that further means that there
shall be a rise in demand and fall in a deflationary gap. So, concession in commodity taxes
such as sales tax, import duty and excise duties is always advisable. Reducing the rates of
commodity taxes will automatically uplift consumption. Musgrave and Hansen are amongst
such few economists that have highlighted the fact that an economy can only be free of
contractions when there is a growth in private investment which is probably only with
concession in commodity taxes.
Cyclically Balanced Budget:
The cyclically balanced budget is also commonly known as the ‘Swedish budget’. This
budget represents the surplus of budgets earned during a peak season and utilizing such
excess amount so as to get rid of public debt. When there is a recession period, the excess
from budgets earned during the prosperous period is balanced with deficit budgets so as to
adjust with deficits.
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Public financial management
Public Expenditure:
Undoubtedly there is a rise in public spending as compared to an earlier time as a result of the
active involvement of the government authorities. The level of economic activity shall be
highly impacted with a noticeable variation in public expenditure as compared to taxes
(Bekaert & Hodrock, 2012). Income, output, and employment are prone to various impacts
on account of a rise in not just investment but public spending as well. The level of economic
activity can be reduced with a reduction in public spending.
Public Expenditure in Inflation:
Excessive aggregate spending is one of the basic reason contributing to inflationary pressures
during inflation. It is seen that there is an unusual rise in not just investment but private
consumption as well. To deal with such scenarios where the government spending is
abnormally higher there must be an appropriate public spending policy (Handley & Limao,
2015). This means that there lies the need for postponing/abandoning certain schemes
without shelving such government spending that is of productive nature as it could worsen
the scenario more.
Inflationary pressures faced by an economy can be suppressed by means of reducing
unproductive channels. However, from a political and economic point of view, this decision
doesn’t seem feasible enough. The decision is highly practical but it should also be noted that
there are chances for the fiscal authority to shuffle its expenditure so as to tackle as many
inflationary pressures as possible (Bekaert & Hodrock, 2012).
Borrowing from Banking System:
During the time of recession, there are high chances for the government to borrow from
banks and the effectiveness of such borrowings cannot be denied. The private business
community is uninterested to borrow from banking institutions owing to the unprofitability of
the cash reserves during the recession while the latter is loaded with huge cash reserves at this
time. These cash reserves lying with banks results in the generation of employment and
higher national income when borrowed by the government (Handley & Limao, 2015).
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