Fiscal Instruments: Fiscal Policy is implemented through fiscal instruments also called ‘fiscal tools’ or fiscal levers: Government expenditure, taxation and borrowing are the fiscal tools.
(I) Taxation:
1. Taxes transfer income from the people to the Government.
2. Taxes are either direct or indirect.
3. An increase in tax reduces disposable income.
4. So taxation should be raised to control inflation.
5. During depression, taxes are to be reduced.
(II) Public Expenditure:
1. Public expenditure raises wages and salaries of the employees and thereby the aggregate demand for goods and services.
2. Hence public expenditure is raised to fight recession and reduced to control inflation.
(III) Public debt:
1. When Government borrows by floating a loan, there is transfer of funds from the public to the Government.
2. At the time of interest payment and repayment of public debt, funds are transferred from Government to public.
