Fiscal Policy -Fiscal policy is a policy under which the government uses its expenditure and revenue programmes to produce desirable effects and to avoid undesirable effects on the national income, production and employment. It was keynes who popularized the interest in fiscal policy as a measure attaining macro-economic goals like increasing the level of employment and income. -The concept of sound finance (BALANCED BUDGET APPROACH) According to the classical economists, fiscal policy should have the minimum range of operations and the budget should be balanced annually.

Under the theory of sound finance, classicists favoured a balanced budget criterion for the following reasons, -If the budget is unbalanced, the government has to borrow. The government’s market borrowings cause reduction in loanable funds available to private productive employment and investment activities. - imply a wide extension of state functions— -may generate inflation -Unbalanced budget causes economic uncertainty and promote instability. -An increase in the burden of public debt. Thus, classical economists firmly advocates a laisez faire policy and were confident of the unhampered optimum operations of the free enterprise economic system.

Functional Finance The concept of functional finance (Unbalanced Budget Approach) Keynesian revolution in economic thinking reconstituted the whole basis of public finance and affirmed functional finance as a fiscal norm in modern times. Lerner suggests the following rules for government’s responsibility and activity under functional finance: - The government budget should be directed toward the achievement of full employment and price stability. For this purpose government budget need not necessarily be balanced.

-The government should incur public debt by borrowing money from private sector only during inflation when it is essential to reduce the excessive purchasing power from the public, thereby reducing the pressure of excess money demand. -During depression only public expenditure in excess of current public revenue may be met by deficit financing, i.e., printing additional currency notes.

Objectives of Fiscal Policy - Full employment -Economic stabilisation -Economic growth -Social justice or equity in the distribution of income and wealth.