I C Y

P O L
C A L
F I S BY,
MANISH SAHEWALA ,23
RUCHIKA GILADA,34
KISHORE BABU,14
SEC : C
PG-09-11/T2
 ol i c y
cal p
Fi s
 es s io n
ea t de pr
G r
Price levels
Consumption levels
Capital formation
EMPLOYMENT
Equal distribution of money
Degree of inflation
Instruments of Fiscal Policy
Budgetary surplus and deficit

Government expenditure

Taxation- direct and indirect

Public debt
 Budgetary surplus and deficit
“A budget is a detailed plan of operations for some
specific future period”
Keeping budget balanced (R=E) or deficit (R<E) or
surplus (R>E) as a matter of policy is itself a fiscal
instrument.
An accumulated deficit over several years (or
centuries) is referred to as the government debt
A deficit is a flow. And a debt is a stock. Debt is
essentially an accumulated flow of deficits
 Government Expenditure

Government spending on the purchase of goods &

services.
Payment of wages and salaries of government servants
Public investment
Transfer payments
 Taxation
 Meaning:  is to impose a financial charge or
other levy upon a taxpayer by a state or the
functional equivalent of a state
1. Direct taxes- Corporate tax, Personal Income Tax,
Fringe Benefit taxes, Banking Cash Transaction
Tax
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
3. market borrowings
FISCAL METHODS to cure RECESSION
Two methods to get the economy out of recession:
Increase in Govt. Expenditure
Reduction Taxes
Recession – Increase in Govt Exp
Govt can increase expenditure by starting public works,
like building roads, dams, ports, telecommuniction links,
irrigation works, electrification of new areas etc
Direct effect: Increase in incomes of those who sell
materials and supply for these projects.
Indirect effect: In the form of multiplier effect. Those who
get more incomes spend them further on consumer goods
and the relative mpc impact. (Keynes recognized this
effect)
MPC ( Marginal Propensity to Consume) refers to the
change in consumption to the change in income, thus
giving us a figure between 0 and 1.
 MPC
For example, suppose you receive a bonus with your paycheck,
and it's $500 on top of your normal annual earnings. You
suddenly have $500 more in income than you did before. If you
decide to spend $400 of this marginal increase in income on a
new business suit, your marginal propensity to consume will be
0.8.

MPC = a/b

where a is the change in consumption, and b is the change in disposable income that
produced the consumption.
Recession – Reduction of Taxes

Reduction in taxes increases the disposable income of

society and consumption picks up
For example, a reduction of Rs.200 crores in taxes will
lead to Rs.150 crores in consumption, assuming mpc =
0.75 or ¾
FISCAL METHODS to cure INFLATION
o INCREASE IN TAXES

o DECREASE IN PUBLIC EXPENDITURE

 DRAWBACKS
OF
FISCAL POLICY

TIMING

POLITICS
Where Does The Rupee Goes To
other non plan exp. state's share of
taxes & duties
11%
18%
subsidies
7%
non plan assistance
to states
5%
defence
12% planned state
assistance
7%

interest central plan

20% 20%
Where The Rupee Comes From
non-tax revenue service & other taxes
10% 7%

non-debt capital reciepts

1% excise
17%

borrowings
19%

customs
12%

corporation tax
income tax
21%
13%
Thank - U