The two wins of , fiscal policy arc government revenues and govcn -uucnt expenditure. The government’s Ii. cal polic v can contribute to the control of inflatic neither hy reducing private spending by in rea ill)! the taxe ,1 private ector or by decreasinging g( ‘crn mcnt e. pen disturb, or combining boththe element . If private I I iding tend- to be excessive, the government can moderate the inflationarypressure by reducing its own l -xpcnditurc, DUI reduction or postponement of gov comment expenditure in modern times is not an easy task. There may he projects already under construction an« these obviously cannot be postponed. Similarly, otlu -r types of cxpc ndi turc may hc necessary to meet thc normal requirementsofthc ‘collective consumption’ of thc community-dcfcncc, police, justice, etc.Thcn, there may be social expenditures on cducation, hcalth, etc., which arc vcry difficult to cut because of undesirable political effects. Therefore, the major composix of fiscal policy in inflation has been on reducing private spending through increased taxation. An increase in taxes tends to reduce privatc pending. If the rates of direct taxes on incomes and profits are raised, the private disposable income is reduced and this will tend to reduce private consumption spending. If thc rates of commodity taxes arc increased or fresh levies arc made, the effect on consumption
will be more immediate. An increase in thc tax rates on a commodity will penalise
spending directly by raising the cost of purchases. Thus, in periods of inflation, thc government should curb its own spending and increase the tax ratcs to reduce private spending. It is a good thing to plan for a budget surplus during inflationary periods. Thus, the fiscal measures consist in (a) reduction of government pending, (b) imposition of ncw taxes or increa ing the old one to curtail the size of disposable income III the hand of the people and to reduce the magnitude of the inflationary
gaps, (e) the encouragement of savings or introduction of compulsory saving schemes, (d) public debt management so as to reduce the money supply, (to) gold
sterilisation as done in the United States, and (f) overvaluing domestic currency in terms of foreign currencies.
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