FISCAL POLICY

FISCAL POLICY


Fiscal policy is the use of government revenue
collection (mainly taxes) and expenditure
(spending) to influence the economy
 In order to make fiscal policy effective, country
prepare its budget every year which clearly
explains the estimated receipts and estimated
expenditure which reflects the taxation and
expenditure policy of the government.
GOVT. INCOME
(From tax , GOVT. EXPENDITURE
(Public expenditure,
public debt deficit financing, etc.)
etc.)
TOOLS OF FISCAL POLICY

1. TAXATION POLICY
2. GOVT EXPENDITURE
3. PUBLIC DEBT POLICY
4. Budgetary surplus and deficient (DEFICIT FINANCING)
1.TAXATION POLICY
 Govt. earns revenue through taxes
 Two types of taxes:-

a)Direct tax( e.g. Income tax )

b)Indirect tax( e.g GST)
 Taxes reduce the purchasing power of people
 Or create inflation in economy
 So, every change in taxes changes the real income(e.g higher
tax leads to lower income)
 So, income decreases, and as a result demand decreases.
 Contractionary fiscal Policy- At the time of boom, taxes can be
increased in order to reduce inflation level in the economy by
reducing such that income in the economy.
 Expansionary Fiscal policy- At the time of recession, taxes can
 2.GOVT EXPENDITURE
 Government expenditure is a term used to describe money that a government
spends.
 Government can reduce or increase its expenditure depending on the phase of
business cycle.
 In expansionary fiscal policy- Govt expenditure is increased.
 In Contractionary Fiscal policy- Govt expenditure is reduced.
 Government spending or expenditure includes all government consumption,
investment, and transfer payments
Some examples of government final consumption include the creation and maintenance
of the infrastructure, military, police, emergency, and firefighting organizations. Others
examples include programs such as health care, food stamps, and housing assistance
for disabled or severely low-income citizens. Public education and public
transportation infrastructure are other main categories of this form of government
expenditure.
………………GOVT EXPENDITURE

 It bears an important effect on aggregate demand.

 If govt. expenditure increases ,aggregate demand increases and vice versa.
 Public/govt. expenditure is of 2 types:-
a) For attainment of goods and services: it affects directly aggregate demand
b) Public expenditure for pension ,education , health ,social security etc. It is
also known as transfer expenses. It affects total demand in indirect manner
and increases aggregate demand.
3. Public debt policy

 Government debt is the debt owed by government. It is one method of

financing government operations
 Two types:-
a) Internal debt (owed to lenders within the country) e.g government bonds,
treasury bills etc.
b) External debt (owed to foreign lenders) e.g. sovereign wealth funds..
4. Deficit Financing

 Taxes collected by government is the revenue earned and government

expenditure is the expenditure. There can be two possibilities here.
 Revenue is more than Expenditure In that case There is budget Surplus

 Revenue is less than Expenditure In that case There is budget deficit.

 When Govt. lends from Central Bank to cover its deficit in its budget, this is
called deficit financing.
 It simply means issuing of more currency or notes at the time of emergencies
OBJECTIVES OF FISCAL POLICY

 TO ACHIEVE FULL EMPLOYMENT(fully utilization of resources)

 TO BRING PRICE STABILITY(inflation and deflation)
 TO PROVIDE ECONOMIC STABILITY IN THE COUNTRY
 ACCELERATING(Increasing) THE PACE(SPEED) OF ECONOMIC DEVELOPMENT
 TO INCREASE EMPLOYMENT OPPORTUNITIES
 TO MINIMIZE INEQUALITIES OF INCOME AND WEALTH THROUGH TRANSFER
OF INCOME
Stages or Types:
1)Neutral fiscal policy : It is usually undertaken when an
economy is in equilibrium. Government spending is fully
funded by tax revenue and overall the budget outcome has a
neutral effect on the level of economic activity.
2) Expansionary fiscal policy: It involves government spending exceeding tax
revenue, and is usually undertaken during recessions.
3)Contractionary fiscal policy: It occurs when government spending is lower than tax
revenue, and is usually undertaken to pay down government debt.
Objectives:
 Economic stabilization
 Economic growth
 Employment generation
 Reduction in inequalities of income and wealth
 Price stability and control of inflation
 Effective mobilization of resources
 Balanced regional development
 Increase in national income
 Development of infrastructure
 Foreign exchange earnings
ADVANTAGES

 CAPITAL FORMATION
 RESOURCE MOBILISARION
 INCENTIVES TO PRIVATE SECTOR
 ENCOURAGES SAVING
 POVERTY ALLEVIATION AND EMPLOYMENT GENERATION
 REDUCTION IN INEQUALITY OF INCOME AND WEALTH
 EXPORT PROMOTION
Conclusion:
 India’s fiscal situation requires immediate attention, high growth and low interest
rate will not take care of the problem in the long run.
 In, fact growth rate in recent years have been significantly lower, at present India's
economic growth rate is 3.986 % in the last quarter of 2013.
 India’s external position is relatively strong, in terms of trade flow, reserves,
foreign exchanges, but up to some extent monetary and exchange rate policies are
biased to compensate the fiscal deficit.
 Coordination of fiscal policy with monetary and exchange rate policy would be
better than letting later to adjust fiscal looseness.
 A narrow focus on deficit or debt can lead to neglect the long run growth.
 Govt. has to think about revenue enhancing tax reforms because there has ample
scope of improving indirect tax structure. Tax reform is an essential step towards
increasing govt. revenue as well as reduce microeconomic distortion.
 Fiscal adjustment is going to major agenda for the govt. they have to plan it
intelligently rather than seeing as a crisis.
 Govt. has to reconstruct their expenditure.
 Hence we can say that fiscal measures reduce the intensity of business fluctuations
(Inflation & Recession) but only these alone are not sufficient to correct
fluctuations significantly , therefore the role of discretionary fiscal policy and
explicit changes in tax rates and Govt. Expenditure are required to cure recession
and curb inflation.