Fiscal Measures to Control Inflation

Definition: The Fiscal Measures to Control Inflation is comprised of government expenditure, public borrowings, and taxation. The Keynesian economists, also called as “Fiscalist” assert that the demand-pull inflation is caused due to an excess of aggregate demand over aggregate supply.

The aggregate demand increases due to expenditure by the households, firms and government (usually excessive spending by the government). This increase in demand due to expenditure by either government or households can be effectively controlled by fiscal measures. Thus, fiscal policy and budgetary measures are the effective weapons to control demand-pull inflation.

In case, government expenditure is the main cause behind the demand-pull inflation, then it can be controlled by cutting down the public expenditure. With a cut in public expenditure, the government demand for goods and services decreases along with a decrease in the private income and consumption expenditure. In case, the demand rises due to the rise in private expenditure, taxing income is the most appropriate way to control inflation. The taxation on private income reduces the disposable income in hand, as a result of which the consumption expenditure also reduces.  This results in the reduction in aggregate demand.

In case of a very high persistent inflation rate, the government may adopt both these measures simultaneously to control inflation. Such as along with the reduction in public expenditure the rate of taxation shall be raised on the private income to keep the demand under control. This kind of policy of using both the measures simultaneously is called as “ Policy of Surplus Budgeting,” which says that “government should spend less than the tax revenue.”