Fiscal Policy

Learning outcomes

Understanding the concept of fiscal policy

Analysing the fiscal policy tools in different situations
FISCAL POLICY
• MEANING

• Fiscal policy is the means by which a government

adjusts its spending levels and tax rates to monitor
and influence a nation's economy. It is the sister
strategy to monetary policy through which a central
bank influences a nation's money supply.
• It is the policy concerning the revenue expenditure
and debt of the government for achieving certain
objectives like control of inflation, public expenditure.
DEFINITION
 According to Prof. D.C. ROWAN, “fiscal policy is defined as the
discretionary action by the government to change (1) the level of
government expenditure on goods and services and transfer
payment and (2) the yield of taxation at any given level of output”.

 Fiscal policy is defined as “the conscious attempt of government

to achieve certain macro goals of policy by altering the volumes
and pattern of its revenue and expenditure and balance between
them”.
Meaning Of Fiscal Policy

“It refers to a policy concerning the use of state treasury or the

government finances to achieve the macro-economic goals”

or

“Government policy of changing its taxation and public expenditure

programmes intended to achieve its objective”.

or

“Government uses its expenditure and revenue program to produce

desirable effects on National Income , production and employment”.
Who/What formulates the fiscal policy in
India?

• A. The planning commission

• B. Finance ministry
• C. The reserve bank of India
• D. SEBI
Objectives of Fiscal Policy

1. In order to stabilize the pricing level in the economy.

2. The main objective is to achieve and maintain the level of
full employment in the country.
3. Also, to stabilize the growth rate in the economy.
4. Also, promote the economic development in a country.
5. In order to maintain the level of balance of payment in the
economy.
OBJECTIVES OF FISCAL POLICY
 Full employment
It means that man power is ready to work at a prevailing wage rate
without any dispute.
Government increase pubic expenditure to raise demand and tax
rate decreased. Results private sector gets incentive to spend more
when aggregate demand increases and total production and
employment increases. e.g.mgnrega

 Reduction in economic inequality The prominent aim

of fiscal policy is to remove economic inequality. so, that the burden
of such taxes generally falls on rich people.
 Price stability
When price rises then inflation exist in economy. Its aim is to
decrease the demand and expenditure and tax rate increase.
extra purchasing power of people goes into the hand of general
public and demand decreases because of excess supply,
prices automatically godown because of fear of stock.

 Economic development
To achieve development of a country, fiscal policy acts as a
source of capital formation because as capital formation is
increased, production and employment also increased.
Which one of the following is the largest item of expenditure
of the Government of India on revenue account?

• a) Defence
• b) Subsidies
• c) Pensions
• d) Interest payments
 Tools of Fiscal Policy
Tools of
Fiscal Policy

Public
Public Revenue
Expenditure

Revenue Capital Revenue Capital

Receipt Expenditure Expenditure
Receipt

Tax Non- Tax

Direct Tax Indirect Tax

PUBIC REVENUE
Income of government from all the sources is called
public revenue. These are of two types-
1) revenue receipt
2) capital receipt

3) Revenue receipt- Government receipts which

neither
(i) create liabilities nor (ii) reduce assets are
called revenue receipts. These are proceeds of taxes,
interest and dividend on government investment,
cess and other receipts for services rendered by the
government. These are current income receipts of
the government from all sources. E.g., taxes, interest
received, fees and fines etc.
A) Tax- is a financial charge or other levy imposed
upon a taxpayer.
Direct tax- these are taxes that are directly paid to the
government by the taxpayer. It is a tax applied on
individuals and organizations directly by the government
E.G. Income tax, corporation tax, wealth tax etc.
Indirect tax- these are applied on the manufacture or sale
of goods and services. E.g., sales tax, custom duty, etc.

B) Non tax- receipts are those revenue receipts

which are not generated by taxing the public. Interest
which the government earns on the money lent by it
to external or internal borrowers. e.g., interest
receipt, fees and fines, external grant, etc.
CAPITAL RECEIPT
 Capital receipts refer to those receipts which
either create a liability or cause a reduction in the
assets of the government.

 Examples-
Recovery of loans
disinvestment
borrowings
provident funds
Which one of the following is a capital receipt in
government budget?

• a) Interest receipts on loans given by the government to other parties

• b)Dividends and profits from public sector undertakings
• c) Borrowing of the government from public
• d) Income tax receipts
PUBLIC EXPENDITURE
Public expenditure is spending made by the government
of a country on collective needs and wants such as
pension, provision, infrastructure.
a) Revenue expenditure
b) Capital expenditure
Concept of Deficit
Deficit:
Total government expenditure is more than government receipts.

Budgetary Deficit: Total Expenditure – Total Revenue

Revenue Deficit: Revenue Expenditure – Revenue Receipts

Fiscal Deficit: Total Expenditure – Total Revenue (Excluding Govt Borrowing)

Primary Deficit: Fiscal Deficit – Interest Payments
Fiscal deficit implies:

•  a) Total expenditure – (Revenue receipts + Recovery of loans +

Receipts from disinvestment)
• b) Total expenditure – Total receipts from all sources ,including
borrowings
• c) Total expenditure – (Revenue receipts + Fresh loans)
• d) Total expenditure – Disinvestment receipts
Kinds of Fiscal Policy

Fiscal Policy

Non- Discretionary /
Discretionary
Automatic
Fiscal
Fiscal Policy
Policy

Anti- Recessionary Anti – Inflationary

Fiscal Policy Fiscal Policy
 Anti- Recessionary
Fiscal Policy

Increase In Govt
Reduction In Taxes
Expenditure
Which of the following is not a component of
revenue receipts of the union government?

• a) Corporate tax receipts

• b) Dividends and profits
• c) Disinvestment receipts
• d) Interest receipts
 Anti-Inflationary
Fiscal Policy

Reducing Govt
Increase In Taxes
Expenditure