EFFECTIVE FISCAL POLICY

Date: 2015-10-07; view: 621.

Ukrainian: What's the essence of effective fiscal policy?

Foreigner: You are raising a difficult question. In general, fiscal policy is the policy adopted by a government for raising revenue to meet expenditure.

U.: Yes, it's common knowledge that fiscal policy is a powerful tool in the hands of governments, it is a major factor determining macroeconomic performance. Substantial evidence exists, however, that some countries use this tool badly. As a result they have problems of internal and external balance, low growth rates and huge deficits.

F.: You are right, they do. But quite a number of governments seeking to overcome fiscal problems, work to design adequate fiscal policies. They give increasing attention to expenditure priorities and the structure of taxation.

U.: They introduce new taxes, don't they?

F.: Well, such measures are most unpopular. Governments give emphasis to raising tax elasticity, which enhances the ability of the tax system to generate increases in revenue without resort to new tax measures or rate increases. Countries try to broaden the tax base, reduce tax exemptions, and achieve a simplified and morel easily administered tax system.

U.: More often than not, however the budget deficit remains a problem for many countries. How do countries most often reduce, the burden of budget deficit?

F.: It all depends on the country's economic and financial position. In principle, the ways are only too well-known: borrowing from domestic bank and non-bank sources and borrowing from "the rest of the world", as economists say. Fiscal deficits can be rather easily reduced by countries having well-developed capital markets.

U.: True, but my feeling is that under fiscal crises, governments, first of all, cut spendings.

F.: Well, yes, some do. But governments seeking to pursue effective fiscal policy do their best to maintain the public deficit at a level consistent with other macroeconomic objectives like controlling inflation, promoting private investment and maintaining external creditworthiness. They work for most effective utilization of scarce government sector resources, for the allocation of resources to achieve growth and equity objectives.

U.: I see. Thus, tax and expenditure policy issues are central to an effective fiscal policy.

F.: Exactly. As far as I know, in Ukraine most of the revenue comes from four taxes. I mean the profit tax, the value-added tax (VAT), the personal income tax, and excise taxes.

U.: Yes, you are right. These taxes account for the bulk of the revenue. But in general, the system is still complicated more than 150 taxes are collected in Ukraine: federal, regional and local.

F.: What about non-tax revenue, where does it come from in Ukraine?

U.: Mainly from privatization and sale of government securities. In spite of the efforts to improve the budget system, we still have a lot of confusion and intermingling of functions in our fiscal sphere.

F.: Streamlining of intergovernmental fiscal relations is a serious task for many governments.

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