UNIT 3

FISCAL POLICY
INTRODUCTION
• Fiscal policy deals with everything regarding the
government’s income and spending. From budgeting to
taxation, measures of fiscal policy deal with the most
important areas of the economy. In India, fiscal policy is
divided into three parts. Government receipts, Government
expenditures, and Public Debt. The fiscal policy is set by the
Ministry of Finance with assistance from NITI Ayog. 
MEANING
• Fiscal policy refers to the use of government spending and tax
policies to influence economic conditions, especially
macroeconomic conditions, including aggregate demand for
goods and services, employment, inflation, and economic
growth.
• The major purpose of these measures is to stabilize the
economy
 Objectives of Fiscal policy

• Price stability: Fiscal policy measures are deployed to control the

inflationary tendencies of the economy.
• Accelerating the rate of economic development: Fiscal measures
such as taxation, public borrowing and deficit financing, etc. are
engaged effectively to enhance production, consumption, and
distribution and thereby increase the national per capita income.
• Optimum allocation of resources: Fiscal policy measures guide
public expenditure. Government reallocates resources towards
equitability and enhanced social security for the weaker sections.
Spending on subsidies, incentives, etc are the best examples of such
interventions.
• Economic stability: The budgeting system should have built-in
flexibility so that the government's income and
expenditures automatically offer a compensatory effect on the
increase or fall of the nation's income and prevent the economy from
external shocks.
• Attainment of full employment: It is of supreme importance to
developing countries to avoid unemployment if not attained full
employment. The state, therefore, has to spend on social and
economic overhead in order to create employment.
• Capital formation and growth: Capital formation is crucial to a
developing economy. India’s fiscal policy has given a lot
of importance to capital formation in order to bring the country out
of poverty. The fiscal policy continues to prioritize investing in capital
TOOLS OF FISCAL POLICY
• Government Spending: Government spending can have
an impact on economic output. Government expenditure can
be classed as Government Final Consumption
Expenditure since it comprises the acquisition of goods and
services for the benefit of the community. The government
through its spending can redirect its fiscal priorities.
• Transfer Payments: Government payments to individuals
through social welfare programs, student subsidies, and Social
Security are referred to as transfer payments.
• Taxes: Taxes are a fiscal policy tool since they allow for
changes in the economy.
COMPONENTS OF FISCAL POLICY
• The components of the Fiscal Policy can be categorized as
• Government Receipts
• Government Expenditures
• Public Accounts of India
GOVERNMENT RECEIPTS
• government's income in the form of Taxes, interests, and earnings on investments,
cess, and other receipts for services rendered are altogether known as government
receipts. This is the total amount of money received by the government from all
sources.
• Revenue Receipts
• Receipts that neither create liabilities nor reduce assets
• Revenue Receipts can be subdivided into two: Tax and non-tax revenues.
• Tax revenues are of two types: direct and indirect taxes
• Nontax revenue sources are interest and dividend on government investment, cess and other
receipts for services rendered by the government, income through licenses, permits, fines, penalties,
etc.
• Capital Receipts
• The government raises funds for its functioning in different ways which are known as capital
receipts. These ways could either incur liabilities to the government or could be by disposing of
its assets. Incoming cash flows is another term used for capital receipts.
• All kinds of borrowings, loans, etc. are treated as debt receipts as the government has to repay this
money and, with its interests in some cases.
GOVERNMENT EXPENDITURE
• Revenue expenditures
• They are short-term expenses used in the current period or typically within one year.
• Revenue expenditures include the expenses required to meet the ongoing operational costs of
the government, and thus are essentially the same as operating expenses (OPEX).
• Ordinary repair and maintenance costs of state owned assets
• They are recurring expenses in contrast to the one-off nature of most capital expenditures.
• Example: Salaries and employee wages, utilities, rents, property taxes on government-owned
properties, etc.
• Capital Expenditure
• Investments made by the government in capital to maintain or to expand its business and
generate additional revenue.
• Purchase of long-term assets, buying fixed assets, which are physical assets such as
equipment. As a result, capital expenditures are typically for larger amounts than revenue
expenditures.
• Example: purchase of factory equipment, purchases for business, other government purchases
like furniture, spending on infrastructure, etc.
PUBLIC ACCOUNT OF INDIA
• The Public Account of India accounts for flows for those
transactions where the government is merely acting as a
banker.
• This fund was constituted under Article 266 (2) of the
Constitution. It accounts for flows for those transactions
where the government is merely acting as a banker.
• Examples: provident funds, small savings, etc. These funds
do not belong to the government, but rather have to be paid
back at some time to their rightful owners. Therefore
expenditures from the public account are not required to be
approved by the Parliament