Why do a government need fiscal policy?
In: Economics
It is also needed to maintain a currency. Most countries use a Fiat system where money is essentially worthless, but is backed up by faith in the government and the central bank. This is different from a commodity money system where money has intrinsic value (gold or silver coins) or a representative money system where money is backed up by a commodity (1 paper note equals 1 amount of gold or silver).
If the government has poor fiscal policy people stop believing in the currency and hyperinflation occurs. A good example of this is post WW1 Germany and more recently Zimbabwe.
There has to be some agreement of what you spend resources on and what you don’t if you have any sort of organization that accumulates, distributes, or uses resources.
For much the same reason businesses or even normal butt people need fiscal policy. You need to track your expenses and have a savings and spending plan in order to keep your operations afloat and stay out of bankruptcy. If you’re not budgeting and planning for the future and you overspend it starts causing a lot of problems for your population. On the other hand if you’re saving every penny that comes your way then you’re missing out on opportunities to make things better.
A fiscal policy is basically a budget. For a government to function, it needs to provide some basic functions (or it won’t be called a government). Typically these are things like defending the country (an army), maintaining the peace (law enforcement), maintaining rule of law (legal system), governing and regulatory bodies (parliament etc), monetary system (banks) and also other typical things like healthcare, social safety nets, education, environment, infrastructure (roads, bridges, power, water, phone).
In order to do this stuff, people need to be employed. People don’t work for free. Government collects taxes or borrows and uses these funds to pay for the other stuff mentioned above. This is what is known as the fiscal policy; how a government collects money and how it chooses to spend the money.
Latest Answers