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Give the limitations of Fiscal Policy

Give the limitations of Fiscal Policy

Answers

Wilfred
(i) Even with correct forecasting of the course of the business cycle, the fiscal policy is rendered difficult by the uncertain incident of different taxes and government spending.

(ii) Timing lags pose a real problem. The time lag may not only reduce the effectiveness of fiscal policy but even create distortion not desired. Uncertainty surrounding the time lag between the initiation of fiscal measure and their full impact on output, income and employment may have an adverse effect on fiscal policy.

(iii) Other things may rarely be equal. Public investment may compete with private investments for resources which may possibly lead to decline in private investment which may cancel or modify the impact of the public investment. It is difficult to define accurately the size of fiscal action that will not affect private investment.

(iv) Fiscal policy cannot overcome business psychology. It?s particularly ineffective in the face of hyper inflation when speculation takes over. Even a high rate of taxation can not restrain the temptation to make a „fast buck? (abnormal profits)
e.g. among the monopolists.

(v) The theory of fiscal policy assumes that public expenditure has a multiplier effect. All expenditures do not have the same multiplier effect. Public investment expenditure has a large multiplier effect than transfer payment which give right only to consumption expenditure whereas public investment expenditure creates additional demand for capital goods as well as additional demand for labour employed in the capital good industry.
Wilfykil answered the question on March 9, 2019 at 07:52

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