Fiscal policy refers to the mechanisms a government puts in place to regulate its expenditure and monitor tax rates to achieve national economic impacts. It is a close associate to monetary policy utilized by the central bank to regulate supply of money in a country. These two policies are used varied contexts to shape a nation’s economic objective. ACCA and CIMA certifications exhaustively cover how fiscal policy is applied, regulated and the impacts of rolling out this policy on a nation’s population.
Prior to the Great Depression, which happened between September 4, 1929 and the late 1930s or beginning of 1940s, the government’s strategy towards the economy was non-interventional. After the World War II, the government made a decision to become actively engaged in economic issues to tame the unemployment, business, inflation and value of money. By combining both monetary and fiscal policies (depending on the political backgrounds and beliefs of those who were ruling then, one policy could outdo the other), governments managed to get jurisdiction over the economy. The relationship between the two policies and how it affects the economy is covered in CIMA online syllabus.
For those studying ACCA online courses, you need to understand that the key is to balance between adjusting tax rates and public spending. For instance, motivating a sluggish economy by allowing more spending or reducing taxes threatens a rise in inflation. This is because when the amount of money in circulation and demand for it increases, it can lead to a drop in the value of money. The result of this is it becomes expensive to buy an item whose value is still the same.
If the economy is slow; Joblessness is on the increase, customer spending power is low, and businesses do not realize meaningful profits. The government can step in and drive the economic engine by lowering taxation that results into consumers using more money while raising government spending by purchasing services from the market through infrastructure projects (setting up roads and schools). When the government spends on these projects, it opens up job opportunities and increases wages that are absorbed into the economy. “Pump priming” takes place when taxation is lowered by pumping more funds into the economy and up-scaling spending by the government. When this is done, with time more jobs are created.
With enough money circulating in the market and fewer taxes, the public’s demand for goods and services goes higher. Subsequently, businesses transform from dormancy to become active. Comprehensive ACCA online study courses adequately explain inflation.
However, if this process is not regulated, an overactive economy can lead to saturation of money in the market. This oversupply reduces the worth of money and increases prices because there’s a higher demand for products. When this happens, inflation goes beyond the acceptable levels.
Regulating the economy using fiscal policies alone is not an easy task. Not providing enough oversight, keeping the balance between an active economy, and inflation can be easily lost. Enrolling for a CIMA online study course helps you to have a better understanding of how fiscal policy works.