VIVEKANAND COLLEGE FOR BBA

INTRODUCTION
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. any decision to change the level, composition or timing of govt. expenditure or to vary the burden ,the structure or frequency of the tax payment is fiscal policy Federal taxation and spending policies designed to level out the business cycle and achieve full employment, price stability, and sustained growth in the economy. Fiscal policy basically follows the economic theory of the !th"century #nglish economist $ohn %aynard &eynes that insufficient demand causes unemployment and excessive demand leads to inflation. 't aims to stimulate demand and output in periods of business decline by increasing government purchases and cutting taxes, thereby releasing more disposable income into the spending stream, and to correct overexpansion by reversing the process. (or)ing to balance these deliberate fiscal measures are the so"called built"in stabili*ers, such as the progressive income tax and unemployment benefits, which automatically respond countercyclically. Fiscal policy is administered independently of %onetary +olicy by which the Federal ,eserve -oard attempts to regulate economic activity by controlling the money supply. The goals of fiscal and monetary policy are the same, but &eynesians and %onetarists disagree as to which of the two approaches wor)s best. .t the basis of their differences are questions dealing with the velocity /turnover0 of money and the effect of changes in the money supply on the equilibrium rate of interest /the rate at which money demand equals money supply. %easures employed by governments to stabili*e the economy, specifically by ad1usting the levels and allocations of taxes and government expenditures. (hen the economy is sluggish, the government may cut taxes, leaving taxpayers with extra cash to spend and thereby increasing levels of consumption. .n increase in public" wor)s spending may li)ewise pump cash into the economy, having an expansionary effect. 2onversely, a decrease in government spending or an increase in taxes tends to cause the economy to contract. Fiscal policy is often used in tandem with monetary policy. 3ntil the 456!s, fiscal policy aimed at maintaining a balanced budget7 since FISCAL POLICY
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VIVEKANAND COLLEGE FOR BBA then it has been used 8countercyclically,8 as recommended by $ohn %aynard &eynes, to offset the cycle of expansion and contraction in the economy. Fiscal policy is more effective at stimulating a flagging economy than at cooling an inflationary one, partly because spending cuts and tax increases are unpopular and partly because of the wor) of economic stabili*ers. Fiscal policy is manifested in a government9s policies on taxation and expenditures. To obtain funds for their operation, government units generally collect some form of taxes. The expenditure of these funds not only provides goods and services for constituents, but has a direct impact on the economy. For example, if expenditures are larger than the funds received by the government, the resulting deficit tends to stimulate the economy, as goods and services are produced for government purchase. 'n contrast, if a government runs a surplus by not spending all the funds it collects, economic growth will generally be curtailed, as the surplus funds are removed from circulation in the economy

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DEFINITION OF FISCAL POLICY

Fiscal policy is the means by which a government ad1usts its levels of spending in order to monitor and influence a nations economy. Fiscal policy is that part of government policy which is concerned with ra*ing revenue through taxation and other means and deciding on the level and pattern of expenditure. 'n other wards the term fiscal policy refers to the expenditure a government underta)es to provide goods and services and to the way in which the government finances these expenditures.

Objectives of Fiscal Policy

1. To achieve desirable price level: The stability of general prices is necessary for economic stability. The maintenance of a desirable price level has good effects on production, employment and national income. Fiscal policy should be used to remove; fluctuations in price level so that ideal level is maintained 2. To Achieve desirable consumption level: A desirable consumption level is important for political, social and economic consideration. Consumption can be affected by expenditure and tax policies of the government. Fiscal policy should be used to increase welfare of the economy through consumption level. 3. To Achieve desirable employment level: The efficient employment level is most important in determining the living standardof the people. It is necessary for political stability and for maximi ation of production. Fiscal policy should achieve this level.

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VIVEKANAND COLLEGE FOR BBA

4. To achieve desirable income distribution: The distribution of income determines the type of economic activities the amount of savings. In this way, it is related to prices, consumption and employment. Income distribution should be e!ual to the most possible degree. Fiscal policy can achieve e!uality in distribution of income. 5. Increase in capital formation: In under"developed countries deficiency of capital is the main reason for under"development. #arge amounts are re!uired for industry and economic development. Fiscal policy can divert resources and increase capital. 6. e!ree of inflation: In under"developed countries, a degree of inflation is re!uired for economic development. After a limit, inflationary be used to get rid of this situation

Fiscal Policy And Macroeconomic Goals

#conomic :rowth; -y creating conditions for increase in savings < investment. #mployment; -y encouraging the use of labour"absorbing technology =tabili*ation; fight with depressionary trends and booming /overheating0 indications in the economy #conomic #quality; -y reducing the income and wealth gaps between the rich and poor.

+rice stability; employed to contain inflationary and deflationary tendencies in the economy.

The purpose of Fiscal Policy:

,educe the rate of inflation. =timulate economic growth in a period of a recession. -asically, fiscal policy aims to stabili*e economic growth, avoiding the boom and bust economic cycle. FISCAL POLICY
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VIVEKANAND COLLEGE FOR BBA

Instruments of Fiscal Policy

-udgetary surplus and deficit :overnment expenditure Taxation" direct and indirect +ublic debt >eficit financing Budgetary surplus and deficit . budget is a detailed plan of operations for some specific future period? &eeping budget balanced /,@#0 or deficit /,A#0 or surplus /,B#0 as a matter of policy is itself a fiscal instrument. .n accumulated deficit over several years /or centuries0 is referred to as the government debt . deficit is a flow. .nd a debt is a stoc). >ebt is essentially an accumulated flow of deficits

Government expenditure
't includes ; :overnment spending on the purchase of goods < services. +ayment of wages and salaries of government servants +ublic investment Transfer payments

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axation! direct and indirect

%eaning ; Con quid pro quo transfer of private income to public coffers by means of taxes. 2lassified into ". #irect taxes! 2orporate tax, >iv. >istribution Tax, +ersonal 'ncome Tax, Fringe -enefit taxes, -an)ing 2ash Transaction Tax $. Indirect taxes! 2entral =ales Tax, 2ustoms, =ervice Tax, excise duty.

Public debt
'nternal borrowings

4. -orrowings from the public by means of treasury bills and govt. bonds . -orrowings from the central ban) /moneti*ed deficit financing0 #xternal borrowings

4. foreign investments . international organi*ations li)e (orld -an) < '%F 6. mar)et borrowings

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%e Golden &ule
Fiscal policy framewor) The :overnment9s fiscal policy framewor) is based on the five )ey principles set out in the 2ode for fiscal stability " transparency, stability, responsibility, fairness and efficiency. The 2ode requires the :overnment to state both its ob1ectives and the rules through which fiscal policy will be operated. The :overnment9s fiscal policy ob1ectives are; over the medium term, to ensure sound public finances and that spending and taxation impact fairly within and between generations7 and over the short term, to support monetary policy and, in particular, to allow the automatic stabilisers to help smooth the path of the economy. These ob1ectives are implemented through two fiscal rules, against which the performance of fiscal policy can be 1udged. The fiscal rules are; the golden rule; over the economic cycle, the :overnment will borrow only to invest and not to fund current spending7 and the sustainable investment rule; public sector net debt as a proportion of :>+ will be held over the economic cycle at a stable and prudent level. Dther things being equal, net debt will be maintained below E! per cent of :>+ over the economic cycle. The fiscal rules ensure sound public finances in the medium term while allowing flexibility in two )ey respects; the rules are set over the economic cycle. This allows the fiscal balances to vary between years in line with the cyclical position of the economy, permitting the automatic stabilisers to operate freely to help smooth the path of the economy in the face of variations in demand7 and the rules wor) together to promote capital investment while ensuring sustainable public finances in the long term. The golden rule requires the current budget to be in balance or surplus over the cycle, allowing the :overnment to borrow only to fund capital spending. The sustainable investment rule ensures that borrowing is maintained at a prudent level. To meet the sustainable investment rule with confidence, net debt will be maintained below E! per cent of :>+ in each and every year of the current economic cycle. FISCAL POLICY
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Fiscal policy in action

the effects of the fiscal policy in action as follow The rise in .> leads to an increase in real national income, ceteris paribus, unemployment would fall to 6F but at a cost of higher inflation .> therefore shifts to the right to .>4 .>@2G'G:G/H"%0 .part from :, 2 and ' are also li)ely to be affected directly or indirectly by the policy change. 'f government reduces taxes /remember the subtleties0 and or increases spending, it will have various effects; .ssume an initial equilibrium position with a level of Cational 'ncome giving an unemployment rate of IF /3 @ IF0 Fiscal +olicy influences .> in the short term but can be used to affect .= in the long run J depending on the nature of the policy. Try your hand at Fiscal +olicy by going to the Kirtual #conomy

the graph are shown in the ppt slid

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B'#G( . budget is a detailed plan of operations for some specific future period? 't is an estimate prepared in advance of the period to which it applies.

)OMPO*(* + OF B'#G( ,evenue receipts 2apital receipts ,evenue expenditure 2apital expenditure

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VIVEKANAND COLLEGE FOR BBA

ot%er non plan exp. ""/ subsidies 1/

state,s s%are of taxes - duties "./

defence "$/

non plan assistance to states 0/ planned state assistance 1/

interest POLICY FISCAL $2/

central plan $2/

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VIVEKANAND COLLEGE FOR BBA

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VIVEKANAND COLLEGE FOR BBA

Government Income Tax ,evenue =ale of :overnment =ervices J e.g. prescriptions, passports, etc. -orrowing /+=C2,0

Public +ector Income

Government Income 34 billion5

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VIVEKANAND COLLEGE FOR BBA

Inland "evenue Income Tax $gross of tax credits% Income Tax Credits Corporation Tax 0indfall Tax 1##$% ## &&.' "+.( .,., /.1###% && ().* "+.& .'.. ,., ,.( /.+ /.+ -.( )-.' 1#6.5 2&&&% &1 +,-.+ "+., ./.' ,., +.) ../ /./ &./ -,.213.4 2&&1% &2 ++,.. "/.. ./., ,., +.. .., /.' *., -../ 216.$ 2&&2% &3 ++/."..' /(.) ,., +., +./.' *.) -'.215.$ 2&&3% &4 ++&.. "'.. /&.+ ,., +./ /./ /.) *.) */.) 22$.&

1etroleum 2evenue Tax ,.) Capital 3ains Tax Inheritance Tax 4tamp 5uties 6ICs /., +.& '.)).+

Total Inland "evenue 1$3.2

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VIVEKANAND COLLEGE FOR BBA

)ustoms and +(cise 7AT Fuel 5uties Tobacco 5uty 4pirits 5uties 0ine 5uties :eer and Cider 5uties

1##$% ## )/.. /+.&./ +.+.) /.*

1###% && )-.' //.) ).* +.& +.* .., +.) ,.( +.' ,.' ,., ,., /., #*.3

2&&&% &1 )&.) //.*.+.& +.& .., +.) +., +.* ,.) ,., ,., /.+ 1&2.2

2&&1% &2 -+., /+.( *.& +.( /., ..+ +.' ,.& +.( ,.) ,.,., /., 1&4.#

2&&2% &3 -..) //.+ &.+ /.. +.( ..+ +.. ,.& /.+ ,.) ,.& ,./ +.( 1&$.*

2&&3% &4 -(.+ //.& &.+ /.' /., ../ +.. ,.& /.. ,.,.& ,.. +.( 115.*

:etting and 3aming 5uties +.) Air 1assenger 5uty Insurance 1remium Tax #and Fill Tax Climate Change #evy Aggregates #evy ,.& +./ ,.. ,., ,.,

Customs 5uties and #evies /.+ Total )ustoms and +(cise #4.&

1##$% ## 785 9il 2oyalties :usiness 2ates Council Tax 9ther Taxes and 2oyalties 'et Ta(es and 'I)s conts Interest and 5ividends '.,.. +'.* +/./ *.) 316.6 ).,

1###% && '.( ,.' +).' +..+ *.( 335.4 '..

2&&&% &1 '.. ,.+-.. +'.+ &.) 35#.3 -.,

2&&1% &2 '.. ,.) +*.( +)./ (.' 36#.1 '.*

2&&2% &3 '.. ,.' +&.) +-.( +,./ 3*4.# '.)

2&&3% &4 '.& ,., +&.' +&.& ++./ 1#6.* '.' 17

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VIVEKANAND COLLEGE FOR BBA

3ross 9perating 4urplus and 2ent 9ther 2eceipts and Accounting Ad;ustments )urrent "eceipts +&./ +&.+ +&.& +(.( +(., +(.'

").. 334.5

",.* 35*.2

"..& 3$&.4

").* 3$*.#

")./ 3#3.2

"+.& 41$.*

Government Income 6 Inland &evenue $227!28

Government Income 6 )ustoms and (xcise $227!28

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VIVEKANAND COLLEGE FOR BBA

Ot%er Government Income $227!28

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VIVEKANAND COLLEGE FOR BBA

Fiscal policy is the economic term that defines the set of principles and decision of government in setting the level of public expenditure and how the expenditure is funded. 'n economics, fiscal policy is the use of government spending and revenue collection to influence the economy Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabili*e the economy by controlling interest rates and the supply of money. The two main instruments of fiscal policy are government spending and taxation. 2hanges in the level and composition of taxation and government spending can impact on the following variables in the economy;

.ggregate demand and the level of economic activity7 The pattern of resource allocation7 The distribution of income.

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VIVEKANAND COLLEGE FOR BBA Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three possible stances of fiscal policy are neutral, expansionary, and contractionary;

. neutral stance of fiscal policy implies a balanced budget where : @ T /:overnment spending @ Tax revenue0. :overnment spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.

.n expansionary stance of fiscal policy involves a net increase in government spending /: B T0 through rises in government spending, a fall in taxation revenue, or a combination of the two. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had, or a deficit if the government previously had a balanced budget. #xpansionary fiscal policy is usually associated with a budget deficit.

. contractionary fiscal policy /: A T0 occurs when net government spending is reduced either through higher taxation revenue, reduced government spending, or a combination of the two. This would lead to a lower budget deficit or a larger surplus than the government previously had, or a surplus if the government previously had a balanced budget. 2ontractionary fiscal policy is usually associated with a surplus.

Methods of funding
:overnments spend money on a wide variety of things, from the military and police to services li)e education and healthcare, as well as transfer payments such as benefits. This expenditure can be funded in a number of different ways;

Taxation =eignorage, the benefit from printing money -orrowing money from the population, resulting in a fiscal deficit 2onsumption of fiscal reserves. FISCAL POLICY
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=ale of assets /e.g., land0.

Funding the deficit

. fiscal deficit is often funded by issuing bonds, li)e treasury bills or consols. These pay interest, either for a fixed period or indefinitely. 'f the interest and capital repayments are too large, a nation may default on its debts, usually to foreign creditors.

Consuming the surplus

. fiscal surplus is often saved for future use, and may be invested in local /same currency0 financial instruments, until needed. (hen income from taxation or other sources falls, as during an economic slump, reserves allow spending to continue at the same rate, without incurring additional debt.

Economic effects of fiscal policy

:overnments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic ob1ectives of price stability, full employment, and economic growth. &eynesian economics suggests that ad1usting government spending and tax rates are the best ways to stimulate aggregate demand. This can be used in times of recession or low economic activity as an essential tool for building the framewor) for strong economic growth and wor)ing toward full employment. The government can implement these deficit"spending policies to stimulate trade due to its si*e and prestige. 'n theory, these deficits would be paid for by an expanded economy during the boom that would follow7 this was the reasoning behind the Cew >eal. :overnments can use budget surplus to do two things; to slow the pace of strong economic growth, and to stabili*e prices when inflation is too high. &eynesian theory posits that removing funds from the economy will reduce levels of aggregate demand and contract the economy, thus stabili*ing prices. =ome classical and neoclassical economists argue that fiscal policy can have no stimulus effect7 this is )nown as the Treasury Kiew, which &eynesian economics FISCAL POLICY
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VIVEKANAND COLLEGE FOR BBA re1ects. The Treasury Kiew refers to the theoretical positions of classical economists in the -ritish Treasury, who opposed &eynes9 call in the 456!s for fiscal stimulus. The same general argument has been repeated by neoclassical economists up to the present. From their point of view, when government runs a budget deficit, funds will need to come from public borrowing /the issue of government bonds0, overseas borrowing, or the printing of new money. (hen governments fund a deficit with the release of government bonds, interest rates can increase across the mar)et. This is because government borrowing creates higher demand for credit in the financial mar)ets, causing a lower aggregate demand /.>0, contrary to the ob1ective of a budget deficit. This concept is called crowding out7 it is a 8sister8 of monetary policy. 'n the classical view, fiscal policy also decreases net exports, which has a mitigating effect on national output and income. (hen government borrowing increases interest rates it attracts foreign capital from foreign investors. This is because, all other things being equal, the bonds issued from a country executing expansionary fiscal policy now offer a higher rate of return. 'n other words, companies wanting to finance pro1ects must compete with their government for capital so they offer higher rates of return. To purchase bonds originating from a certain country, foreign investors must obtain that country9s currency. Therefore, when foreign capital flows into the country undergoing fiscal expansion, demand for that country9s currency increases. The increased demand causes that country9s currency to appreciate. Dnce the currency appreciates, goods originating from that country now cost more to foreigners than they did before and

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