Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
To reduce inflation, the government can increase taxes (such as income tax and VAT) and cut spending. This improves the government’s budget situation and helps to reduce demand in the economy.
To combat inflation, the government could use contractionary fiscal policy. In this case, it might raise taxes and decrease government spending in an attempt to reduce the total level of spending.
Typically, when the aggregate demand exceeds the aggregate supply, an inflationary gap arises. Therefore, the Government can take these fiscal measures to control inflation:
1. Take steps to decrease the overall Government expenditure and transfer payments.
2. Increase the rate of taxes causing individuals to decrease their total expenditure, leading to a decrease in demand and a drop in the money supply in the economy.
The government can also use a combination of the two to obtain a reasonable control over inflation.
