FISCAL POLICY

INTRODUCTION

 It refers to the policy of government with regard to

taxation, public borrowing & public expenditure so
as to have desirable effects on national income,
production, employment & general price level
OBJECTIVES

 Increasing the rate of investment

 Encouraging a socially optimum pattern of investment
 Reducing inequalities in income
 Reducing unemployment
 Controlling inflationary tendencies
INTRODUCTION

 Affects AD, general price level, state of financial

markets, money supply, rate of interest, growth rate
of economy

 Reflected in annual presentation of budget

 Lays down prudential norms for govt. exp & limits for
fiscal deficit
INSTRUMENTS OF FISCAL POLICY

 Taxation
 Public borrowing/ debt
 Public expenditure
 Deficit financing
 (1) TAXATION

 Compulsory levy imposed by govt on economic

units without any corresponding entitlement of
direct quid pro quo
 Most important source of public revenue
 Direct taxes (on firms & individuals) & Indirect taxes
(on gods & services)

Taxation as an instrument of fiscal policy can involve:

 Changes in tax rates

 Changes in tax base

 Changes in taxation mix

 Changes in tax administration

TAXATION AS A CONTRA- CYCLICAL DEVICE

 Tool for economic stability

 Recession/ depression- lowering of tax structure
to restore income & AD
(2) PUBLIC EXPENDITURE
 Participation of state required in certain areas

 Increase/decrease in govt exp- brings a multiple

change in NY (multiplier)

 Public exp mainly financed by tax & non tax revenue,

market borrowings, deficit financing
 Public exp. as an instrument of fiscal policy can
involve:

 Size of public exp

 Direction of exp
 Administration of public exp

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PUBLIC EXP AS A CONTRA- CYCLICAL
DEVICE
 Tool for economic stability & countering business
cycles
 Inflation- decline in govt spending, to reduce AD
(3) PUBLIC BORROWING/ DEBT

 Different from taxes since all borrowing from the

public must be repaid

2 types:
 Voluntary loan
 Compulsory loan
 Public borrowing- transfer of money from public to govt

 Debt redemption/ retirement- transfer from govt to

public

 Unsustainable high levels of debt- debt trap

 Average cost on public debt depends on:

 Rates of interest at which debt is contracted

 Market’s evaluation of rates of interest expected to
prevail in future
 Conditions & characteristics of financial markets
 Transaction costs
PUBLIC DEBT AS A CONTRA- CYCLICAL
DEVICE
 Tool for economic stability & countering business
cycles
 Inflation- raise public debt, to reduce AD
 Caution has to be taken regarding the time of
redeeming debt
(4) DEFICIT FINANCING

 Developed countries: covering budgetary gaps

through loans
 Developing countries: Printing of currency notes
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FISCAL IMBALANCE
 Fiscal deficit

 Revenue deficit

 Primary deficit
Deficit Concepts
 Fiscal deficit: It is most widely used indicator of fiscal
performance of government. It reflects the total borrowing
requirements of the government

 Revenue deficit: It tells to what extent the running expenses

of the government exceed the regular sources of revenue

 Primary deficit: It indicates how much borrowings are

required to service past debts. A low value of the deficit
indicates that new borrowings are used to service past debts

18
Item Description
A. Revenue
1. Tax revenue Taxes
2. Non tax revenue Interest earned dividends, earnings from
various administrative services
3. Revenue receipts (1 +2)

4. Capital receipts Recovery of loans, disinvestments,

governments borrowings
5. Total receipts (3+4)

B. Expenditure
6. Revenue expenditure General administration defense, police,
subsidies, interest payments
7. Capital Expenditure
Asset creation
8. Total expenditure (6+7)

8-5 Fiscal deficit

6-3 Revenue deficit
Fiscal deficit- interest payment Primary deficit

19
Table (page 3)

http://www.icra.in/Files/ticker/ICRA%20Budget
%202016-17.pdf
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hard-part.html
FISCAL MANAGEMENT
 Improve tax/ GDP ratio
 Improve quality of public expenditure
 Bring direct & indirect taxes to international levels
 Expand tax base
 Adopt comprehensive system of service taxation
 Modernise tax administration system
 Control revenue expenditure
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