Fiscal policy

1) What is Fiscal Policy ?

Fiscal policy in India is the guiding force that helps the government decide how much
money it should spend to support the economic activity, and how much revenue it must
earn from the system, to keep the wheels of the economy running smoothly. In recent
times, the importance of fiscal policy has been increasing to achieve economic growth
swiftly, both in India and across the world. Attaining rapid economic growth is one of the
key goals of fiscal policy formulated by the Government of India. Fiscal policy, along
with monetary policy, plays a crucial role in managing a country’s economy.

2) What is meant by Fiscal Policy in India? Example of Fiscal Policy in India.

Through the fiscal policy, the government of a country controls the flow of tax revenues
and public expenditure to navigate the economy. If the government receives more
revenue than it spends, it runs a surplus, while if it spends more than the tax and non-
tax receipts, it runs a deficit. To meet additional expenditures, the government needs to
borrow domestically or from overseas. Alternatively, the government may also choose
to draw upon its foreign exchange reserves or print additional money.

For example, during an economic downturn, the government may decide to open up its
coffers to spend more on building projects, welfare schemes, providing business
incentives, etc. The aim is to help make more of productive money available to the
people, free up some cash with the people so that they can spend it elsewhere, and
encourage businesses to make investments. At the same time, the government may
also decide to tax businesses and people a little less, thereby earning lesser revenue
itself.

Following are the main objectives of Fiscal Policy in India:

 Economic growth: Fiscal policy helps maintain the economy's growth rate so

that certain economic goals can be achieved. The economic development in
India followed socialist-inspired politicians for most of its independent history,
including state-ownership of many sectors; India's per capita income increased
at only around 1% annualized rate in the three decades after its independence.
  Price stability: It controls the price level of the country so that when the
inflation is too high, prices can be regulated. Businesses and individuals
making plans need some confidence that money will have something like the
same value in the future that it has today. It isn't that everything has to stay
absolutely fixed, and advanced economies usually have a little inflation.
Inflation in India is measured by the Consumer Price Index (CPI) and
Wholesale Price Index (WPI). CPI measures the change in retail prices of
goods and services when they reach the consumers, whereas the WPI
measures the changes in prices in goods by the whole-sellers.

 Full employment: It aims to achieve full employment, or near full

employment, as a tool to recover from low economic activity. India's job
problem is one of the hottest and most contested topics- a topic that has the
capability to topple governments in India. Because of overpopulation. Because
most of them are not fit for the job . and most of them only wants the salary
and not willing to do any job. This is one of the biggest challenge face by the
fiscal policy in India.

4) What is the difference between fiscal policy and monetary policy?

The government uses both monetary and fiscal policy to meet the county’s economic
objectives. The central bank of a country mainly administers monetary policy. In India,
the Monetary Policy is under the Reserve Bank of India or RBI. Monetary policy majorly
deals with money, currency, and interest rates. On the other hand, under the fiscal
policy, the government deals with taxation and spending by the Centre.

5) .Importance of Fiscal Policy in India:

a) In a country like India, fiscal policy plays a key role in elevating the rate of capital
formation both in the public and private sectors.
b) Through taxation, the fiscal policy helps mobilize considerable amount of resources
for financing its numerous projects.
C) Fiscal policy also helps in providing stimulus to elevate the savings rate.
d) The fiscal policy gives adequate incentives to the private sector to expand its
activities.
e) .Fiscal policy aims to minimize the imbalance in the dispersal of income and wealth.
6) Types of Fiscal Policy -

Separate from monetary policy, fiscal policy mainly focuses on increasing or cutting
taxes and increasing or decreasing spending on various projects or areas. But,
depending on the signals from the current state of the economy, fiscal policy may focus
more on restricting economic growth (often done to mediate inflation), or attempt to
expand economic growth by reducing taxes, encouraging borrowing and spending, or
spending on projects to stimulate the economy or increase employment.

A) Expansionary Fiscal Policy-

Expansionary fiscal policy is used by the government when attempting to balance out
the contraction phase of the business cycle (especially when in or on the brink of a
recession), and uses methods like cutting taxes or increasing government spending on
things like public works in an attempt to stimulate economic growth. Expansionary fiscal
policy, therefore, attempts to fix a decrease in demand by giving consumers tax cuts
and other incentives to increase their purchasing power (and, how much they spend).

The goal behind expansionary fiscal policy is to lower tax rates and increase consumer
aggregate demand, which will increase demand for products, requiring businesses to
hire more employees to support the higher demand - and thus, increase employment.
For example, the Economic Stimulus Act of 2008 gave taxpayers between $600 to
$1,200 depending on various factors in hopes of stimulating spending and market
participation - the whole package of which cost the government $152 billion.

But expansionary fiscal policy treads a thin line, needing to balance economic
stimulation while keeping inflation as low as possible. For this reason, expansionary is
sometimes detrimental to the economy. For example, if the government decides to
lower tax rates to foster more spending, an influx of cash and demand may increase
inflation, which will decrease the value of the money.

B) Contractionary Fiscal Policy -

On the other hand, contractionary fiscal policy entails increasing tax rates and
decreasing government spending in hopes of slowing economic growth for various
reasons. In this way, the government may deem it necessary to halt or deter economic
growth if inflation caused by increased supply and demand of cash gets out of hand.

In this manner, contractionary fiscal policy reduces the amount of money in circulation,
and, therefore - the amount available for consumers to spend. If an economy is
booming and growing too rapidly (as may be caused by expansionary fiscal policy) -
which, according to normal rates, should be no more than 3% per year - contractionary
fiscal policy may be required to right it
So, contractionary fiscal policy is often employed when the growth of the economy is
unsustainable and is causing inflation, high investment prices, unemployment below
healthy levels and recession.

However, because the point of contractionary fiscal policy is to reduce the amount of
money in circulation and allow the economy to grow at a healthier rate, it is often very
unpopular due to how it generally increases taxes, cuts or reduces subsidy and welfare
programs, or cuts government jobs

And, this unpopularity often leads to an increase in the budget deficit via the
government issuing more treasury bonds - which, given the imbalance of GDP to debt,
will cause interest rates to increase due to how holders of the treasury bonds become
anxious over not being repaid by the indebted government. Still, increased interest rates
simply perpetuate many of the problems.

Among a few others, President Bill Clinton employed contractionary monetary policy
during his presidency by enacting the Omnibus Budget Reconciliation Act of 1993, also
known as the Deficit Reduction Act, that raised the top income tax rate to 36% from
28% for those earning over $115,000 per year, as well as increased corporate income
tax and taxed some Social Security benefits.

Still, both contractionary and expansionary fiscal policies have never been fully
effective, as the United States continues to operate under a huge budget deficit.

7) Who Does Fiscal Policy Affect?

Unfortunately, the effects of any fiscal policy are not the same for everyone. Depending
on the political orientations and goals of the policymakers, a tax cut could affect only the
middle class, which is typically the largest economic group. In times of economic decline
and rising taxation, it is this same group that may have to pay more taxes than the
wealthier upper class.

Similarly, when a government decides to adjust its spending, its policy may affect only a
specific group of people. A decision to build a new bridge, for example, will give work
and more income to hundreds of construction workers. A decision to spend money on
building a new space shuttle, on the other hand, benefits only a small, specialized pool
of experts, which would not do much to increase aggregate employment levels.

That said, the markets also react to fiscal policy. Stocks rose on December 21, 2017, for
the first time in three days following passage of the Trump administration's $1.5 trillion
U.S. tax bill, the Tax Cuts and Jobs Act.2 3 The Dow Jones Industrial Average gained
99 points or 0.4%, the S&P 500 Index rose 0.25%, and the Nasdaq Composite Index
was up 0.14%.

The law also retains the current structure of seven individual income tax brackets, but in
most cases it lowers the rates: the top rate falls from 39.6% to 37%, while the 33%
bracket falls to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15%
bracket to 12%. The lowest bracket remains at 10%, and the 35% bracket is also
unchanged. These changes are set to expire after 2025.

8) Fiscal Policy Advantages -

A) Unemployment Reduction – When unemployment is high, the government can

employ an expansionary fiscal policy. This involves increasing spending or purchases
and lowering taxes. Tax cuts, for example, can mean people have more disposable
income, which should lead to increased demand for goods and services. To meet the
growing demand, the private sector will increase production, creating more job
opportunities in the process

B) Budget Deficit Reduction -  A country has a budget deficit when its expenditures
exceeds revenue. Since the economic effects of this deficit include increased public
debt, the country can pursue contraction in its fiscal policy. It will, therefore, reduce
public spending and increase tax rates to raise more revenue and ultimately lower the
budget deficit.

C) Economic Growth Increase - The various fiscal measures a country employs

facilitate expansion of the national economy.  For example, when the government
reduces tax rates, businesses and individuals will have a greater incentive to invest and
steer the economy forward. To boost the U.S. economy during the Great Recession in
2008, for instance, the government enacted the Economic Stimulus Act of 2008, which
provided a range of fiscal measures, including tax incentives to encourage business
investment.

9) Fiscal Policy Disadvantages -

A) Conflict of Objectives -- When the government uses a mix of expansionary and

contractionary fiscal policy, a conflict of objectives can occur.  If the national
government wants to raise more money to increase its spending and stimulate
economic growth, it can issue bonds to the public. Since government bonds offer a
range of benefits to buyers, individuals and businesses will buy them heavily. According
to the Michigan Institute of Technology, the private sector consequently will have little
money left to invest. With reduced investment activity, the economy can slow down.

B) Inflexibility - There are usually delays in the implementation of fiscal policy, because
some proposed measures may have to go through legislative processes. A good
demonstration of implementation delays is illustrated by the Great Recession. According
to the National Bureau of Economic Research, it began in December 2007, and the
country was only able to enact the Economic Stimulus Act in February 2008.  Even
when the government increases its spending, it takes some time before the money
trickles down to people's pockets.

10 ) Fiscal Policy Tools-

A government has two tools at its disposal under the fiscal policy – taxation and public
spending.

A) Taxation includes taxes on income, property, sales, and investments. On the one
hand, more taxes means more income for the government, but it also results in less
income in the hand of the people.

B) Public spending includes subsidies, transfer payments, like salaries to a govt.

employee, welfare programs, and public works projects. Those who get the funds have
more money to spend.

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