THE FISCAL POLICY

Submitted by

Pritimah MUNGROO
AGENDA
 INTRODUCTION
WHAT IS FISCAL POLICY ?
Fiscal policy refers to the taxation, expenditure
and borrowing by the government and is an effective
tool of stabilizing the economy.
GOALS OF FISCAL POLICY.
• Achieving economic stability
• Controlling inflation and recession
• Achieving price stability.
• DISCRETIONARY FISCAL POLICY:
Deliberate change in government expenditure and taxes to
influence national output and prices.

• NON-DISCRETIONARY FISCAL POLICY:

Built-in tax and expenditure mechanism so designed that
taxes and government spending vary automatically with
changes in national income.
• Tool to cure recession.
Recession is a phase when there is a lot of
idle or unutilized productive capacity. There
are two fiscal methods to get the economy
out of recession.
- Increase in government expenditure
- Reduction of taxes.
• Tool to control inflation:
Inflation is a period when there is an
increase in demand leading to increase in
prices in the economy. Fiscal policy measures
to control inflation are:
- Reducing government expenditure.
- Increasing taxes.
 Non-discretionary fiscal policies automatically raise
aggregate demand in times of recession and reduce
aggregate demand in times of inflation. It includes a
built-in tax and expenditure pattern that vary with the
changes in the National Income.

Such taxes are:-

Personal Income Tax

Corporate Income Tax

Transfer Payments
Corporate Dividend Policy
To mobilize resources for economic growth
Capital formation is of strategic importance in the
matter of rapid economic development and hence
the importance of public finance in underdeveloped
countries.
- Tools for mobilizing resources
Taxation
Government borrowings
 Taxation is an important instrument of resource
mobilization to raise savings to national income ratio and
also cuts down consumption and thereby controls
inflation.

Taxes can be imposed :

• Directly through highly progressive taxes on income and
profits.
• Indirectly through excise duties and sales tax on luxury
goods.
 ROLE OF TAXATION IN SAVINGS AND
INVESTMENT
The following measures can be taken to promote
investments and savings:
• Interest on private savings such as bank deposits,
National Savings Certificates be exempted from tax.
• Provide tax holidays to promote private investments.
• Reduction in excise duties on domestically produced
goods.
• In developing economies government borrow in
order to finance schemes of economic
development.
• Government borrowings takes two forms:
- Market loan: Government sells to the public
negotiable government securities of varying
terms and duration.
- Small savings: Public borrowing which are not
negotiable and are not bought and sold in capital
market.
• High degree of fiscal deficit leads to excess
market borrowing by the government which
leads to inflationary situation.
• To check the rate of inflation fiscal deficit has
to be reduced through raising revenue of
government and by reducing government
expenditure.
FISCAL POLICY AND BUDGET DEFICIT
 In Indian context the following measures can
be adopted to reduce government
expenditure:
 Reduction in expenditure on major subsidies.
 Reduction in expenditure on Leave Travelling
Concessions
 Reduction of interest payments on past debts.
 Increase revenue from taxation:
• Adopting policy of moderate taxes as high rates of
direct taxes leads to tax evasion.
• Preventing hoarding of black money through strict
enforcement of tax laws.
• Only 2% of population pay income tax therefore to
increase revenue from taxation tax base should be
increased
 INDIAN SCENARIO-FRBM ACT
• The FRBMA was notified on July 2, 2004 and came
into force on July 5, 2004. This Act requires the
reduction of fiscal deficit and elimination of revenue
deficit by March 31, 2009.
• The FRBMA requires the Government of India to
reduce fiscal deficit by a minimum of 0.3 per cent of
the GDP every year and revenue deficit by 0.5 per
cent each year, so that the fiscal deficit is not more
than 3 per cent of the GDP by March 31, 2009.
The reduction in fiscal deficit by adopting
measures of reducing public expenditure and
increasing public revenue will prevent excess
demand in the economy thus helping in
controlling inflation and achieving price
stability.