Fiscal Policy and Monetary Policy

Chapter VI

Fiscal Policy and M

Policy

Fiscal Policy
 Fiscal Policy
Meaning & Concept:
Fiscal policy is a policy concernin
and expenditures theofcountry of gov
It refers to the budgetary policy
the o
government.
It operates through changes in the
Contin…. expenditures, taxation and public

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 Contin….
According to Arthur Smithies
refers to, “a policy under whi
government uses its expendit
revenue programmes to prod
effects and avoid undesirable
national production and emp
Continue…

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 Continue…
In short, fiscal policy is the p
concerned with the effects of
expenditure, taxation and pu
borrowing on income, produ
employment
Instruments of Fiscal Policy

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 Instruments of Fisca
There are mainly four instrume
constituents of the fiscal polic
These are:
(i) budget
(ii) public expenditure
(iii) public revenue and
(iv) public debt.
All these constituents must work to
the fiscal policy sound and effect
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 Budget

A budget is an estimate of gove

expenditures and revenues fo
year, usually presented to the
by the finance minister

In Nepal, the budget is submitt

parliament by the finance min
month of Ashadh, each fiscal
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 There are three types of budgeta
Balanced budget policy
: When the governme
total expenditure equal to its revenue, as
it means it has adopted a balanced budge

Deficit budget policy

: When the government
than its expected revenue, as a matter of
pursuing a deficit budget policy.

Surplus budget policy

: When the government
policy of keeping its expenditure substan
current revenue, it is following a surplus
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 Public Expenditure
Public expenditure refers to the exp
public authorities and central and
governments

Expenditure made on education, he

and communication, public works
familiar examples of public expen

In the modern welfare state, the gov

Public expenditure can be classified in three ways:

undertake a number of social and

activities for which it has to incur
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 Public expenditure can be cl
three ways:
Current Expenditure and Cap
Expenditure
Direct Expenditure and Trans
Expenditure
Productive and Unproductive

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 Current Expenditure and Capi
Expenditure

Current Expenditure :
Theexpenditure
is incurred on civil administration
police, parliament, government sta
judiciary etc. They are also referre
developmental expenditure.

Capital expenditures
: Capital expendit
intended for the creation of net pr
capacity of the nation
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 Direct Expenditure and Transfe

Direct expenditure
: Expenditure incur
defence, civil services, educational
educational services, judiciary, po
investment expenditure etc. are ex
expenditure.

Transfer expenditures
: On the other ha
expenditures which take the form
made without corresponding retur
services.
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 Productive and Unproductive E
Productive expenditures:
are those expend
which add to the productive capac
of the economy. E.g machinery, fac
human capital like education, train
Unproductive expenditures:
Those expendi
which do not add to the productive
economy directly. E.g consumption
administration, defense, justice, m
and order are considered unprodu
However, does not imply that these e
wasteful and avoidable.
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 Public Revenue:

The government needs income

performing a variety of funct
income of the government wh
obtained through sources suc
grants, fees and borrowing, et
Contn..
public income or public reven

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 Contn..
A fund raised through various t
referred to a tax revenue. A ta
compulsory payment. It has to
the person on whom it is levie
Tax may direct
be orindirect.
According to Dalton,
“A direct tax is
paid by the person on whom it
imposed. The indirect tax is im
one person but paid partly or w
another.”
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 Tax may also be classified as pro
progressive and regressive.
Aregressive
tax is one in which the rate
decreases as the tax payer’s incom

A tax is called
progressive
when the rate of
increases as the tax payer’s income

A tax is called
proportional
when the rate of
taxation remains constant as the in
payers increases
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 Public Debt
Public debt is the debt which th
owes to its subject or to the na
other countries
According to Prof. P.E. Taylor,
The de
the form of promises by the tre
the holders of these promises a
and in most instances interest
principal. Borrowing is restore
provide funds for financing cu
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 Internal and External Public D

According to Prof. Dalton,

“A loan is
internal, if subscribed by perso
institutions within the area con
the public authority which rais
external if subscribed by person
institutions outside this area.”
Objectives of Fiscal Policy

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 Objectives of Fiscal P
1.Optimum Allocation of Resour
2.Full Employment
3. Price Stability
4.Equitable Distribution of Incom
Wealth
5.Economic Growth
The objective of fiscal policy in a developing country

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 The objective of fiscal
a developing country
1.Mobilization of Resources
2.Capital Formation
3.Minimize the Inequalities of I
Wealth
4.Increase Employment Oppor
5.Counteract Inflation
Monetary Policy

6.To Correct Disequilibrium in

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 Monetary Policy
Monetary policy is basically c
the monetary system of the co

It refers to the policy measur

by the Central Bank to influe
Cont… supply as an investment for a
objectives of general economi

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 Cont…
Monetary policy helps in the
of such objectives such as opt
output and employment,
price stab
and economic growth by influ
level of aggregate demand an
supply and thereby the level o
Cont….
income

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 Cont….
According to A. J. Shapiro, “
Policy is the exercise of the C
control over the money suppl
instrument for achieving the
economic policy”.
Cont….

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 Cont….
The Central Bank of a countr
traditional agent, which form
operates monetary policy in a

Monetary policy is only a mea

not an end in itself
Instruments of Monetary Policy

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 Instruments of Mone
Policy
The instruments of monetary p
two types:
1. Quantitative Controls
a. Bank rate policy.
b. Open market operat
Cont..
c. Changes in cash rese

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 Cont..
2. Selective Credit Control
a. Regulation of consum
b. Regulation of margi
requirements
c. Credit rationing
d. Direct action
e. Moral suasion.
Types of Monetary Policy

f. Publicity.
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 Types of Monetary Po
1.Restrictive Monetary Policy
A monetary policy designed to curt
demand is called restrictive (or dea
policy. It is used to overcome an inf

The central bank starts a restrictiv

Cont…
in order to lower aggregate consum
investment by increasing the cost a
bank credit
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 Cont…
2.Expansionary Monetary Policy
A monetary policy designed to incre
demand is called expansionary mon

Central bank purchases governmen

the open market, lowers the reserve
of member banks, lowers the discou
encourages consumer and business
Objectives of Monetary Policy

selective credit measures

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 Objectives of Mone
Policy
1. Neutrality of Money
2. Exchange Rate Stability
Equilibrium
3. Price Stability
4. Full Employment
Monetary Policy in Developing Countries

5. Economic Growth with S

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 Monetary Policy in Dev
Countries
1. To Correct Inflationry P
2. To Correct BOP Disequil
3. Formulation of Effective
Rate Policy
4. To Develop Banking and
System
5. Price Stability
6. Debt Management
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 The End

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