Fiscal Policy

Fiscal policy
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. Fiscal Policy is that part of government policy, which is concerned with raising revenue through taxation and other means and deciding on the level and pattern of expenditure. The fiscal policy operates through the budget, which is an estimate of Govt. expenditure and revenue for the ensuing financial year.

Objectives of Fiscal Policy

Main objectives:
i. GENERAL obj-. aimed at achieving
macroeconomic goals ii. SPECIFIC obj-. relating to any typical problems of an economy

Macroeconomic Goals
Economic Growth: By creating conditions for

increase in savings & investment. Employment: By encouraging the use of labour-absorbing technology Stabilization: To combat with depressionary trends and booming (overheating) 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 Deficit financing

Budgetary surplus and deficit

A budget is a detailed plan of revenues
and expenditure for the coming financial year Keeping budget balanced (R=E) or deficit (R<E) or surplus (R>E) as a matter of policy is itself a fiscal instrument.

COMPONENTS OF BUDGET
Revenue receipts- e.g. revenue from
taxes. Capital receipts e.g. market loans, external borrowings etc. Revenue expenditure Current exp. of govt. on administration, salaries etc. Capital expenditure capital transactions

Government Expenditure
Rise in Govt./ public expenditure will increase the standard of living. The guiding force in respect of public expenditure relates to the size of expenditure, direction of the expenditure and combination of the expenditure.

Taxation
Classified into
1. Direct taxes- Corporate tax, Div.
Distribution Tax, Income Tax, Wealth tax etc.

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.

External borrowings
1. Foreign investments 2. International organizations like World Bank
& IMF

Deficit Financing
Deficit financing is defined as financing the
budgetary deficit through public loans and creation of new money. Deficit financing means the expenditure which is in excess of current revenue and public borrowing. The government may cover the deficit in the following ways. 1. By running down its accumulated cash reserve from RBI.

2. Issue of new currency by government it self.

3. Borrowing from RBI

Relation between fiscal policy and monetary policy.

The two policies are highly inter related and
complimentary to each other. Both work towards achieving of common economic goals by applying different measures. Fiscal policy operates as a tool of economic stabilization through income and expenditure of the Govt., whereas the monetary policy operates through changes in the supply of money which influence the level of the aggregate demand.

Contd.
Fiscal policy brings about changes in money
supply through budgetary deficit. High level of fiscal deficit requires control of inflation through monetary policy and low fiscal deficit leads to liberal monetary policy. Similarly, monetary policy compliments fiscal policy by extending credit facilities to developmental programmes and by regulating money supply, it enables the Govt. to raise considerable finance from the public etc.