FISCAL POLICY

FORMS OF FISCAL POLICY

• Expansionary fiscal policy refers to increases in
government expenditures and/or decreases in
taxes to achieve macroeconomic goals.
• Contractionary fiscal policy attempts to decrease
government expenditures and/or increases in taxes
to achieve macroeconomic goals.
• Discretionary Fiscal Policy is deliberate changes of
government expenditures and/or taxes to achieve
particular economic goals.
• Automatic Fiscal Policy is changes in government
expenditures and/or taxes that occur automatically
without (additional) congressional action.
 Classification
1. Capital and revenue expenditure
2. Productive and non-productive expenditure
3. Transfer and non-transfer expenditure
4. Plan and non-plan expenditure
• Other classification
 1. Capital & Revenue expenditure
• Capital expenditure of the Govt refers to the
expenditure which results in creation of fixed
assets. Ex: expenditure on building, durable
assets like highways, multipurpose dams,
irrigation projects, buying machinery, etc
• Revenue expenditure are current or
consumption expenditures incurred on civil
administration, defense forces, public health
and education, etc
 2. Developmental and non-developmental
expenditure/Productive and non-productive
expenditure
• All expenditures that promote economic growth
development are termed as development
expenditure.
Ex: expenditure on infrastructure development, public
enterprises, development of agriculture, etc
• Non-productive or non-development expenditure
refers to those expenditures which do not yield any
income.
Ex: interest payment, expenditure on law and order,
public administration, etc
 3. Transfer and Non-transfer expenditure
• Transfer expenditure refers to those kind of
expenditures against which there is no corresponding
return.
Eg: national old age pension schemes, interest payments,
subsidies, unemployment allowances.
• The non-transfer expenditure relates to that
expenditure which results in creation of income or
output. The non-transfer expenditure includes
development as well as non-development expenditure.
Eg: economic infrastructures such as power, transport
and social infrastructure such as education, irrigation,
etc.
 4. Plan and non-Plan expenditure
The plan expenditure is incurred on
development activities outlined in ongoing
five year plan.
The non-plan expenditure is incurred
on those activities which are not included in
five-year plan.
 Other classification
(Mrs. HICKS)
Mrs. Hicks classified Public expenditure on the
basis of duties of Govt. It is as follows.
 Defense expenditure
 Civil expenditure
 Development expenditure
Development activities financed by public
expenditure
• Infrastructure development
• Public enterprises development
• Support to private sector
• Social welfare and Employment programs
• Increase production
• Exploitation and development of mineral resources
• Promote price stability
• Promote balanced growth
• Reduce inequality of income
 PUBLIC REVENUE
• Govt needs to perform various activities in the
field of political, social and economic
environment to maximize social and
economic welfare.
• In order to perform these duties and functions
govt require large amount of resources.
• These resources are called Public Revenue.
 C O M M O N TY P ESO FD IR EC TA X ESIN IN D IA

Some of the most common types of direct

tax implemented in India are as follows-
1. Income Tax
The most common type of direct tax in India is
income tax. It is imposed on the income you earn
in a financial year based on the income tax slabs of
the IT department. The tax is paid by individuals as
well as businesses directly to the IT department.
For individual taxpayers, there are also several tax
deductions available under various sections of the
IT Act.
2. Securities Transaction Tax
If you are involved in stock trading, each of your trade also
has a small constituent known as the securities transaction
tax. Irrespective of whether you made money on the trade
or not, you will have to pay this tax. The broker collects this
tax from you and passes on to the securities exchange,
which then pays it to the government.
3. Capital Gains Tax
Every time you make capital gains, you will be required to
pay capital gains tax. This capital gain could come from the
sale of a property or from investments. Based on the capital
gains and the duration for which you held the investment,
you will be required to pay either LTCG (Long-Term Capital
Gains) tax or STCG (Short-Term Capital Gains) tax.
 COMMON TYPES OF INDIRECT TAXES IN INDIA
Some of the most important types of indirect tax in
India are as follows-
1. Goods and Services Tax (GST)
GST subsumed as many as 17 different indirect taxes in
India like Service Tax, Central Excise, State VAT, and
more. It is a single, comprehensive, indirect tax which is
imposed on all the goods and services as per the tax
slabs laid by the GST council. One of the biggest
benefits of GST is that it mostly eliminated the
cascading or tax-on-tax effect of the previous tax
regime.
2. Customs Duty
When you purchase something that needs to be imported
from a foreign country, you are required to pay customs duty
on it. Irrespective of whether the product has come to India
by air, land, or sea, you will have to pay the customs duty on
it. The goal of imposing this indirect tax is to make sure that
every product entering India is taxed.
3. Value Added Tax (VAT)
A VAT is a type of consumption tax imposed on products
whenever its value increases throughout the supply chain. It is
imposed by the state government, which also decides the VAT
percentage on different goods. While GST has mostly
eliminated VAT, it is still imposed on some products such as
items that contain alcohol.
Non tax revenue
The union government gets revenue from
other sources as well. They are collectively
called as non-tax revenues. Thus, revenues
mobilized from sources other than taxes
are called non-tax revenues.
Sources:
 Fees
 Penalty
 Licenses
 Patents and trade marks
 Grants and gifts
Capital receipts:
When revenue mobilised through tax and non-tax
sources is insufficient to meet its expenditures,
the central Govt will try to mobilise income
through capital receipts.
Sources of capital receipts:
• Internal and external borrowings
• Small savings
• Provident funds
• Loan recovery
• Public deposits
 MERITS OF FISCAL POLICY
• Capital formation in the public & private sector
• Mobilizes resources through taxation and public debt
• Incentives to raise the savings rate both in house hold
and corporate sector
• Inducement to private sector (tax exemption, tax
concession, subsidies, etc.
• Reduction of inequalities while distributing income
and wealth
• Export promotion through budgetary policy
• Poverty eradication and employment generation
programs
 DEMERITS OF FISCAL POLICY

• Failed to attain stability in the economy

• Tax structure has failed to raise the productivity
of direct taxes
• Negative returns on capital invested in public
sector units
• It is failed to reduce inequalities in the
distribution of income and wealth
• Increase in the volume of public expenditure and
deficit financing resulted demand-pull inflation