Introduction and Tools of Fiscal Policy

Introduction:
• Fiscal Policy is a part of Macroeconomics
• Fiscal policy is the use of government spending and taxation/tax policies to
influence the economic conditions especially macroeconomic condition.
• In simple terms, is an estimate of taxation and government spending that
impacts the economy.
Sound
Taxation + Spending =
Economy

According to Paul Samuelson:

• “Fiscal policy means public expenditure and tax policies”.

Meaning of Fiscal policy:

• The word fisc means “state treasury” and fiscal policy refers to policy concerning the
use of “state treasury” or the government finance is to achieve the microeconomic
goals.
• Fiscal Policy involves the decisions that a government makes regarding collection of
revenue through taxation and about spending that revenue.

Types of Fiscal Policy

1.Expansionary
2.Contractionary

➢ Expansionary Policy:

Taxes. Spending
 • Expansionary fiscal policy uses increased government spending videos taxes
or combination of the two.
• The chief extension objective of a fiscal is to increase aggregate demand for
goods and services across the economy, as well as to reduce unemployment.
➢ Contractionary policy:

Taxes Spending

• Slow economic growth in case of high inflation.

• Raises taxes and cuts spending.

Objectives:
• Economics stability
• Price stability and control of inflation
• Full employment
• Allocation of resources
• Encouraging investment
• Economic development
• Capital formation and growth
• Increasing national income

Tools of fiscal policy:

➢ Taxation
➢ Spending

Taxation:
• Tax is legal compulsory payment paid to the government by the people.
• This the most common and effective way for the government to influence the
aggregate demand in economy.

Direct tax:
• It is the tracks where the liability to pay and the incidence lie on the same person .
 • For example, income tax, corporate tax, property tax etc.

Indirect tax:
• When the liability to pay and the incidence of the tax lie on different person.
• For example, sale tax VAT service tax etc.

Spending:
• Spending is used as a told for fiscal policy to drive government money to specific
sectors needing an economic boost.
• For example, welfare programs government salaries subsidies.
Instruments of fiscal policy
• Budgetary policy
• Taxation
• Public expenditure
• Public debt

➢ Budgetary Policy

• Budget is prepared annually to determine expenditure saving and investment

of government.
➢ Taxation:
• If money supply is high government increase tax and if money supply is low
government can decrease.
➢ Public Expenditure:
• Helps to promote physical interest and facilities.
➢ Public debt:
• When government take loan from domestic or foreign market.

How does fiscal policy work?

• Changing the level and types of taxes, the extent and composition of
spending, and the degree and form of borrowing .

Who sets fiscal policy?

 • Finance minister of country.

Importance of fiscal policy

• It mobilizers resources of financing projects
• Development activities like expenditure on railways, infrastructure etc.
• Non development activities include spending on subsidies salaries pensions
etc.
• It minimize is income and wealth inequalities.
• Stabilizers price and helps control inflation.

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