Expansive and Contractive Fiscal Policy

Expansive and Contractive Fiscal Policy – ​​Does You know how the government will build the country’s infrastructure such as roads, terminals, station stops and others? These various facilities were built using the taxes that we pay as citizens, you know !

Yes, the tax goes into state revenue and later this income will be managed and reissued for various community needs such as building roads, stations, terminals and so on. It is this management, which is then regulated in a fiscal policy.

Of course, with the potential for large tax revenues, tax management requires a strategy so that the management is effective and has a positive impact on people who tax well. Therefore, tax management is based on fiscal policy.

Come on, in this article we will learn in full about fiscal policy starting from its types, understanding, objectives, instruments!

Types of Fiscal Policy

First, we will discuss the types of fiscal policy. For more details, fiscal policy is classified into two types, namely:

1. Expansionary Fiscal Policy

Expansionary fiscal policy is carried out by increasing state spending while simultaneously lowering the tax rate. Well, this type of fiscal policy is enforced when the economy of a country experiences a decline in people’s purchasing power and/or is accompanied by a high unemployment rate. The goal is to encourage healthy economic growth.

An example of an expansionary fiscal policy is what happened last year, where the Fiscal Policy Agency (BKF) of the Indonesian Ministry of Finance throughout 2020-2021 implemented an expansionary fiscal policy. Expansion itself means that the government spending deficit remains large in order to maintain economic growth during the COVID-19 pandemic.

2. Contractionary Fiscal Policy

Contractionary fiscal policy is a policy whose procedure is to reduce state spending and increase tax rates. This policy aims to reduce people’s purchasing power and overcome the problem of inflation. The trick is to make your income bigger than your expenses. This type of policy is issued when the country’s economy is in an expansionary condition and begins to heat up ( overheating ) to reduce demand pressure.

Fiscal Definition

Next, we discuss the meaning of fiscal. So far, what did You know?

According to the Big Indonesian Dictionary, fiscal is related to state income and tax matters. The word fiscal itself comes from the Latin word fiscus which is the name of someone who had or held power over finances in ancient Rome.

Meanwhile, in English, fiscal is referred to as fisc , which means the arrangement or treasury of the incoming and outgoing money in the kingdom.

So, this fiscal is used to explain the form of state and royal income that is collected from the community, then the royal government or state government is considered as income and used as expenditure for various programs with the aim of achieving national income, economy, production, and also used as balance device in the country’s economy.

Definition of Fiscal Policy

In terms of definition, fiscal policy is a policy or strategy implemented by the government with the aim of maintaining state financial expenditure and income. In more detail, fiscal policy is a policy originating from the government to influence the economy through changes in government revenues and spending.

The main regulated income is from the tax sector while the expenditure is in the form of a budget issued with the aim of supporting government programs. Fiscal policy has a close relationship with policies to achieve certain economic objectives through instruments of revenue, taxation, accounts payable, and government spending. In Indonesia, fiscal policy authority is held by the Fiscal Policy Agency (BKF) of the Ministry of Finance of the Republic of Indonesia.

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Fiscal Policy Objectives

The main objective of implementing fiscal policy is to determine the direction, goals, targets and priorities of national development and the nation’s economic growth. However, it is not only that, because it turns out that there are several other objectives of implementing fiscal policy, namely:

1. Increase the potential of human resources and reduce unemployment

Did you know, You , that one of the biggest problems in the Indonesian economy is the high number of unemployed who are in the productive age category. Fiscal policy can deal with this problem through programs to improve the quality of Community Resources (HR). By improving the quality of human resources, it is hoped that workers of productive age will have adequate competence and expertise and be able to compete in the world of work both domestically and internationally. This indirectly raises the level of the country’s economy.

2. Maintain price stability

You must have seen or heard news about rising commodity prices, starting from essential commodities such as fuel prices, to various things that are close to us such as the price of cooking ingredients. Rising and falling commodity prices can occur due to various factors, starting from the level of market demand, to various ways that are not justified such as hoarding stock and monopoly which can cause scarcity.

3. Stimulating the country’s economic growth

In its main objective, in addition to maintaining the balance of the country’s economy, fiscal policy also functions to increase economic growth. Fiscal policy is expected to spawn many new innovations in the economic sector as a solution to boost the economy and also play a role as a policy maker

4. Encouraging the rate of investment

One of the biggest transactions in the economy is the value of investment coming into the country. Through fiscal policy, the rate of investment can be encouraged to improve the economy and investors’ confidence in the stability of a country’s economy. With a good investment climate, investors will be interested in disbursing investment funds, so that the state can also attract more tax values.

5. Realizing social justice

Fiscal policy also has a role in programs to increase social protection and welfare. A clear example of this is the existence of the National Economic Recovery Program initiated by the Ministry of Finance so that people with a lower and vulnerable economy are able to survive all the impacts of the COVID-19 pandemic. Thus, economic stability will be maintained and the community can feel the positive impact directly.

Fiscal Policy Instruments

Then to find out more about fiscal policy, we also have to get to know some of the instruments. Fiscal policy instruments are sectors in the economy that are used by the government to maintain macroeconomic stability. These sectors include:

1. Taxes

An important sector in fiscal policy instruments is taxes from both the domestic and foreign sectors. In order to achieve economic goals, the government can increase or decrease people’s purchasing power through taxes.

For example, if taxes are reduced, the amount of output of goods and services will also increase so that it will affect and increase people’s purchasing power. However, the opposite also applies if taxes are increased, it will reduce the output of goods and services and can reduce people’s purchasing power.

2. Expenditures

The fiscal policy instrument that You needs to understand next is state spending. This is the same as the basic concept of whatever happens, even in You’ own life. For example, if the family income decreases, of course, You will try to save money and reduce expenses so that there is a balance between income and expenses.

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In the context of the state, the value of state spending can be increased or decreased according to needs. If the country’s balance of payments is in deficit, the government can reduce spending on certain sectors, for example delaying the payment of holiday allowances for civil servants.

3. Public Bonds

The last fiscal policy instrument is regarding the issuance of bonds for citizens or bonds. These debt securities are quite well known in the field of investment, where people who have funds are offered to buy debt securities from the state, and the state will repay the debt accompanied by interest on the loan.

One of the bond products is Government Securities which are traded or Retail SBN. This letter is traded as one of the investment products. If You decides to buy Retail SBN, besides getting returns through interest, You will also play a direct role in financing the country’s development budget, you know !

Differences between Monetary Policy and Fiscal Policy

In order to maintain the stability of the country’s economy, the government can implement two policies, namely monetary policy and fiscal policy. These two economic policies are equally important for increasing economic growth and maintaining the stability of the country.

In practice, monetary policy and fiscal policy can be applied simultaneously or just one of them. All of this hinges on the country’s need to stabilize its economy. However, these two policies have their differences.

The second difference can be seen from the objectives of implementing monetary policy and fiscal policy. The objective of monetary policy is to maintain the amount of money circulating in society. While the purpose of implementing fiscal policy is to maintain state revenues and expenditures in order to create economic stability.

Examples of Fiscal Policy Applicable in Indonesia

There are several examples of fiscal policies that have been implemented by the Indonesian government. Among them:

The first fiscal policy was when President Joko Widodo announced the Tax Amnesty program in 2017. This program was launched because there were many cases of tax arrears reports and many people did not report the amount of wealth they owned. Therefore, finally President Joko Widodo decided to implement the Tax Amnesty program.

The Tax Amnesty Program is a program for the elimination of taxes owed as well as countless criminal sanctions in the field of tax administration sanctions. With this amnesty, many political parties are competing to immediately settle tax arrears as well as many individuals who immediately report the amount of their wealth to the authorities. This program can increase Indonesia’s national income against rupiah and it is proven that national income can increase up to 15.22 trillion rupiah.

The second is the tax relaxation that will take place from 2020 to early 2021. This tax relaxation program aims to increase people’s purchasing power.

An example of the last fiscal policy is gas and fuel subsidies. The purpose of this fiscal policy in the fuel sector is to facilitate mobility and economic transactions in society.

So, that was an explanation of fiscal policy. You understand, right? Now we know that fiscal policy plays a key role in maintaining a country’s economic stability.