Fiscal Policy and Budget

Presented By: Group 3

 Fiscal Policy-Meaning
• The word fisc means ‘state treasury’ and fiscal
policy refers to policy concerning the use of
‘state treasury’ or the govt. finances to achieve
the macroeconomic goals.
• “any decision to change the level, composition
or timing of govt. expenditure or to vary the
burden ,the structure or frequency of the tax
payment is fiscal policy.”
- G.K. Shaw
 Objectives of Fiscal Policy
• Improving growth performance of the
economy
• Ensuring social justice to the people
• Implying a more equitable distribution
of income
• Political stability.
ECONOMIC STABILIZATION
There are two forms of fiscal policy responses
to instability in an economy:
1.Automatic Stabilizers
2.Discretionary fiscal policy
 Automatic Stabilizers
• An automatic stabilizer is tax law that
automatically increases expenditures when
when an economy enters a recession and
automatically decreases expenditures when
an economy enters a period of inflation.
 DISCRETIONARY POLICY
• It implies deliberate changes undertaken by
the government of a country in the tax rates
and planned outlays in an effort to stabilize
the economy.
 Fiscal Policy And
Macroeconomic Goals
• Economic Growth: By creating conditions for increase in
savings & investment.
• Employment: By encouraging the use of labour-
absorbing technology
• Stabilization: fight with depressionary trends and
booming indications in the economy
• Economic Equality: By reducing the income and wealth
gaps between the rich and poor.
• Price stability: employed to contain inflationary and
deflationary tendencies in the economy.
 Instruments of Fiscal Policy
• Budgetary surplus and deficit
• Government expenditure
• Taxation- direct and indirect
• Public debt
 Budgetary surplus and deficit
• “A budget is a detailed plan of operations for
some specific future period”
• Keeping budget balanced (R=E) or deficit (R<E)
or surplus (R>E) as a matter of policy is itself a
fiscal instrument.
• An accumulated deficit over several years (or
centuries) is referred to as the government debt
• A deficit is a flow. And a debt is a stock. Debt is
essentially an accumulated flow of deficits
 Government Expenditure
 It includes :
• Government spending on the purchase of
goods & services.
• Payment of wages and salaries of
government servants
• Public investment
• Transfer payments
 Taxation
• Meaning : Non quid pro quo transfer of private
income to public coffers by means of taxes.
• Classified into
1. Direct taxes- Corporate tax, Div. Distribution Tax,
Personal Income Tax, Fringe Benefit taxes, Banking
Cash Transaction Tax
2. Indirect taxes- Central Sales Tax, Customs,
Service Tax, excise duty.
 Public debt
• Internal borrowings
1. Borrowings from the public by means of treasury bills
and govt. bonds
2. Borrowings from the central bank (monetized deficit
financing)
• External borrowings
1. foreign investments
2. international organizations like World Bank &
IMF
3. market borrowings
SOME PROBLEMS IN FISCAL
POLICY
• Lags in fiscal policy
• Problems in tax policy
• Burden of public debt
• The dangers of deficit financing
 BUDGET
• “A budget is a detailed plan of operations
for some specific future period”
• It is an estimate prepared in advance of the
period to which it applies.
 OBJECTIVES
• Reallocation of sources in line with social
and economic considerations.
• Redistribution of income and wealth to
reduce inequalities by expenditure on social
security, subsidies,public works etc.
 COMPONENTS OF BUDGET
• Revenue receipts
• Capital receipts
• Revenue expenditure
• Capital expenditure
 ENACTMENT OF BUDGET

• Presentation of Budget
• General Discussion
• Voting on Demands for Grants
• Passing of Appropriation Bill
Where The Rupee Comes From
non-tax revenue service & other taxes
10% 7%

non-debt capital reciepts

1% excise
17%

borrowings
19%

customs
12%

corporation tax
income tax
21%
13%
Where Does The Rupee Goes To
other non plan exp. state's share of
taxes & duties
11%
18%
subsidies
7%
non plan assistance
to states
5%
defence
12% planned state
assistance
7%

interest central plan

20% 20%
 Fiscal Responsibility And Budget
Management Act (FRBM act)
• Effective from July 5,2004
• It specifies annual targets for reduction of
fiscal and revenue deficits
• It also provides greater transparency in
fiscal operation,quaterly review and
regulating direct borrowing from RBI.
 Fiscal Responsibility And Budget
Management (FRBM) Bill
• Introduced in Lok Sabha in December 2000.
• Objectives include:
1. Long-term macroeconomic stability
2. Inter-generational equity in fiscal management.
• It aimed at:
1. Reducing revenue deficit
2. Reducing gross fiscal deficit
3. Reducing the Public debt
4. No Borrowing from the RBI
 Sticking to FRBM Targets
2005- 2006- 2007-
Items Units 06 07 08*

Central Government Finances 

Revenue deficit/ GDP % 2.6 2 1.5
Fiscal deficit/ GDP % 4.1 3.7 3.3
Gross Tax/ GDP % 10.3 11.4 12.0
Expenditure/ GDP % 14.2 14.1 14.0**
Debt/ GDP % 65.1 64.4 58.6

*From Budget proposals ** SBI share transfer excluded

 APPRAISAL OF FRBM ACT
• Misgivings of the revenue deficit target
• Low levels of capital expenditure
• Neglect of equity and economic growth
• lack of seriousness about financing public
expenditure
• Flawed assumptions
 GROUP MEMBERS
• RAMYA.R
• PUSHYAMI KRISHNA
• PUSHYA L SWAMY
• SHARTH KUMAR
• SAJAN
• SALIM MOHAMAD