ASSIGNMENT

ON
Fiscal Policy of Bangladesh

Submitted to:
Course Teacher : MK Alam
Name of course : Business Environment
Program : BBA
Department : Business administration
The Millennium University

Submitted by:
Name (in full) : Muhammad Ibrahim Sohel
ID No. : 112 BBA 0021
Batch : 21st (Class with 16th)
Semester : 8th
Program : BBA
Department : Business administration
The Millennium University

Total Pages: 03

DATE OF SUBMISSION
29 Dec 12
What is the Fiscal Policy?
Fiscal policy is a government policy for dealing with the budget (especially with taxation and
borrowing). [Ref. Web definition]

Government spending policies that influence macroeconomic conditions. These policies affect tax
rates, interest rates and government spending, in an effort to control the economy. It is the sister
strategy to monetary policy with which a central bank influences a nation's money supply. These
two policies are used in various combinations in an effort to direct a country's economic goals.
[Ref. Investopedia]

In economics and political science, fiscal policy is the use of government revenue collection
(taxation) and expenditure (spending) to influence the economy.[1] The two main instruments of
fiscal policy are government taxation and changes in the level and composition of taxation and
government spending can affect the following variables in the economy. [Ref. Wikipedia]

Fiscal policy is the use of government spending and taxation to influence the economy. When the
government decides on the goods and services it purchases, the transfer payments it distributes, or
the taxes it collects, it is engaging in fiscal policy. [Ref. Library of Economics and Liberty]

The Budget:

Fiscal policy operates through the budget. In fact, fiscal policy is also known as budgetary policy.
Budget is An estimation of the revenue and expenses over a specified future period of time. A
budget can be made for a person, family, group of people, business, government, country,
multinational organization or just about anything else that makes and spends money. A budget is a 
microeconomic concept that shows the tradeoff made when one good is exchanged for another. 
[Ref. Investopedia]

The Revenue:

1. For a company, this is the total amount of money received by the company for goods sold
or services provided during a certain time period. It also includes all net sales, exchange of
assets; interest and any other increase in owner's equity and is calculated before any
expenses are subtracted. Net income can be calculated by subtracting expenses from
revenue.
2. 2. For the government, the increase in assets of governmental funds that do not increase
liability or recovery of expenditure. This revenue is obtained from taxes, licenses and fees.
[Ref. investorwords]

The income generated from sale of goods or services, or any other use of capital or assets,
associated with the main operations of an organization before any costs or expenses are deducted.
Revenue is shown usually as the top item in an income (profit and loss) statement from which all
charges, costs, and expenses are subtracted to arrive at net income. [Ref. businessdictionary]

Expenditure:
Expenditure of the government may be revenue expenditure and capital expenditure. revenue
expenditure includes expenditure on social and community services, economic services and grants
in aid to the state government. Capital expenditure includes expenditure on general services, social
and community services, economic services and loans and advances. Government expenditure may
al be classified as developmental and non-developmental. [Ref. k aswathappa, essential of business
environment]

Expenditure Budge:
The primary purpose of an Expenditure Budget is to define an economic policy, with respect to the
financial spendings made for infrastructural and equipment purposes, which include their making
and maintenances.
In an Expenditure Budget, capital expenses are described in terms of the construction, refurbish,
lease or buying of assets like software, machineries and other facilities. [Ref. k aswathappa,
essential of business environment]

Evaluation / Criticism of Fiscal Policy:

1. Disincentives of Tax Cuts. Increasing Taxes to reduce AD may cause disincentives to work, if
this occurs there will be a fall in productivity and AS could fall. However higher taxes do not
necessarily reduce incentives to work if the income effect dominates.
2. Side Effects on Public Spending. Reduced govt spending to Increase AD could adversely
effect public services such as public transport and education causing market failure and
social inefficiency.
3. Poor Information Fiscal policy will suffer if the govt has poor information. E.g.  If the govt
believes there is going to be a recession, they will increase AD, however if this forecast was
wrong and the economy grew too fast, the govt action would cause inflation.
4. Time Lags. If the govt plans to increase spending this can take along time to filter into the
economy and it may be too late.Spending plans are only set once a year. There is also a
delay in implementing any changes to spending patterns.
5. Budget Deficit Expansionary fiscal policy (cutting taxes and increasing G) will cause an
increase in the budget deficit which has many adverse effects.Higher budget deficit will
require higher taxes in the future and may cause crowding out (see below
6. Other Componenets of AD. If the governmentt uses fiscal policy its effectiveness will also
depend upon the other components of AD, for example if consumer confidence is very low,
reducing taxes may not lead to an increase in consumer spending.
7. Depends on Multiplier And change in injections may be increased by the multiplier effect,
therefore the size of the multiplier will be significant.
8. Crowding Out Increased Govt spending (G) to increased AD may cause “Crowding out”
Crowding out occurs when increased government  spending results in decreasing the size of
the private sector.
 For example if the govt increase spending it will have to increase taxes or sell bonds and
borrow money, both method reduce private consumption or investment. If this occurs
AD will not increase or increase only very slowly.
 Also Classical economists argue that the govt is more inefficient in spending money than
the private sector therefore there will be a decline in economic welfare
 Increased government borrowing can also put upward pressure on interest rates. To
borrow more money the interest rate on bonds may have to rise, causing slower growth
in the rest of the economy.
9. Monetarist Critique. Monetarists argue that in the LR AS is inelastic therefore an increase in
AD will only cause inflation to increase.
[Ref. http://www.economicshelp.org]

.___The End___.