CHAPTER NO.

15

FISCAL POLICY:
CONCEPTUAL ASPECTS

Course Instructor: Ms. Ismat Nasim

Lecturer, Department of Economics

GSCWU, Bahawalpur
 WHAT IS A FISCAL POLICY?

Fiscal policy is concerned with the determination of the type, time and procedure to be followed in making
government expenditure and in obtaining government revenue.

It includes the policies relating to the expenditure pattern of government for various development and non
development purposes and policies governing the manner in which a government raises revenue both meet its
current requirement and to economic development.

It refers to adjustment in government revenue and expenditure to attain various macro economic goals, e.g. full
employment economic stability and economic development.
Course Instructor: Ms. Ismat Nasim 2
objectives
Fiscal policy has various objectives. Objectives which are of significant importance are as follows :

Full employment

Resource mobilization

Resources allocation

Maintenance of Economic stability

Course Instructor: Ms. Ismat Nasim 3

Income Redistribution
 FULL EMPLOYMENT
This is the ideal goal, so to this end,
fiscal policy is designed to limit
unemployment and
underemployment. Public spending
and public sector investment are key
methods used to stimulate the
economy and create jobs.

Private spending can also

be encouraged using tax
breaks, tax credits and other
incentives for companies to
invest in communities and
increase employment.
Course Instructor: Ms. Ismat Nasim 4
 RESOURCES MOBILIZATION

Resources mobilization for economic growth is the most compelling objective of fiscal policy in
developing economics. Fiscal mechanism attempts to create a climate conducive to savings and investment
by influencing their profitability.

Resource mobilization is the fiscal sector take place two channels; i.e. revenue receipt and capital receipt.
Revenue receipt of federal and the provincial government of tax and non tax source of revenue.

Course Instructor: Ms. Ismat Nasim 5

Capital receipt include external borrowing and internal non
bank borrowing. If total receipt are not adequate to finance
expenditure, resource is also made to deficit financing to
meet both development and non development expenditure.
Resource mobilization has the following aspects:

The structure of
taxation.
The contribution of external
resources to total government
finance.

Deficit financing.
Fiscal relationship between
federal and provincial
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government.
 RESOURCES ALLOCATION

Allocation for different purposes and for sector and regions are made through the budgetary mechanism.

The main allocative task of minimizing non developing expenditure and ensuring an optimal level and composition
of investment developing resources.

Course Instructor: Ms. Ismat Nasim 7

 RESOURCE ALLOCATION CAN BE INFLUENCED BY
FISCAL MEASURES IN THE FOLLOWING TWO
WAYS:

Fiscal incentive and disincentives including subsidies in order to courage or discourage certain resource
allocation patterns consumption production trends.

Balance between development and non development expenditure.

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The absorption of goods and services in an economy is made up of domestic production plus import minus export.

The manner in which these three categories are taxed determines the composition of domestic consumption and the
distribution of national output between export and home market.

The other aspect of fiscal policy to maintain a balance between development and non development expenditure.

Course Instructor: Ms. Ismat Nasim 9

 MAINTENANCE OF ECONOMIC STABILITY

Fiscal measures, to a larger extent, promote economic stability in the face of short-run international cyclical
fluctuations.

These fluctuations cause variations in terms of trade, making the most favourable to the developed and unfavourable
to the developing economies.

So, for the purpose of bringing economic stability, fiscal methods should incorporate built-in-flexibility in the
budgetary system so that income and expenditure of the government may automatically provide compensatory effect
on the rise or fall of the nation’s income.

Course Instructor: Ms. Ismat Nasim 10

Therefore, fiscal policy plays a leading role in maintaining economic stability in the face of internal and external forces.

The instability caused by external forces is corrected by a policy, popularly known as ‘tariff policy’ rather than
aggregative fiscal policy. In the period of boom, export and import duties should be imposed to minimize the impact of
international cyclical fluctuations.

The use of additional purchasing power, heavy import duty on consumer goods and luxury import restrictions are
essential. During the period of recession, government should undertake public works programmes through deficit
financing. In nut shell, fiscal policy should be viewed from a larger perspective keeping in view the balanced growth of
various sectors of the economy.

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 INCOME REDISTRIBUTION

It is needless to emphasize the significance of equitable distribution of income and wealth in a growing economy.

Generally, inequality in wealth persists in such countries as in the early stages of growth, it concentrates in few
hands. It is also because private ownership dominates the entire structure of the economy.

Besides, extreme inequalities create political and social discontentment which further generate economic
instability. For this, suitable fiscal policy of the government can be devised to bridge the gap between the
incomes
Course ofMs.the
Instructor: Ismatdifferent
Nasim sections of the society. 12
 Tools of fiscal policy

To achieve the objectives a government has two major tools at her disposal. These are
Government expenditure
Taxes

Course Instructor: Ms. Ismat Nasim 13

 Demand Management

Fiscal policy

Government Revenue Government expenditure

Tax Revenue Non tax surcharges Current Expenditure Development

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Revenue Expenditure
 GOVERNMENT EXPENDITURE

Government spending includes the purchase of goods and services - for example, a fleet of new cars for government
employees or missiles for national defence. Government spending is a fiscal policy tool because it has the power to raise
or lower real GDP. By adjusting government spending, the government can influence economic output.

In addition to the primary effect of government spending on the economy, this spending multiplies through the economy
as it affects businesses who sell the goods and services bought by the government. Consumers then go on to spend the
pay checks they earn from those businesses, stimulating real GDP even more.
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 CAUSES OF INCREASE IN GOVERNMENT
EXPENDITURE
Increase in Area and Population

Higher Price Level

Increase in National Wealth and a Higher Standard of Living

War and Prevention of War

Incidence of Democracy

Defective Financial and Civil Administration

Planned Economic Development

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 CANNONS OF GOVERNMENT EXPENDITURE

The Canon of Benefit

The Canon of Economy

The Canon of Sanction

The Canon of Elasticity

No Adverse Influence on Production or Distribution

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 CLASSIFICATION OF GOVERNMENT
EXPENDITURE

Old Classification

●
Current Expenditure
●
Capital Expenditure

Recent Classification

●
Development Expenditure
●
Non-Development Expenditure

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 MAIN HEADS OF GOVERNMENT EXPENDITURE
(CURRENT/ NON-DEVELOPMENT)

General Administration

Defence Expenditure

Law and Order

Community and Economic Services

Subsidies

Debt Servicing

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 TAXATION

What is Tax?

●
The most important source of public revenue.
●
Charges paid by the community to the government to cover the costs of collection goods that the community obtains.
●
Taxes serve both functions of a revenue system;
●
Provide funds
●
Reduce the private consumption and investment spending
●
Taxes are a fiscal policy tool because changes in taxes affect the average consumer's income, and changes in consumption lead to changes in real GDP. So, by adjusting taxes, the
government can influence economic output. Taxes can be changed in several ways. Firstly, marginal tax rates can be raised or lowered. Secondly, they can be eliminated entirely, or
the tax rules can be modified.

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 ADAM SMITH’S CANON OF TAXATION

The Canon of Equality.

The Canon of Certainty

The Canon of Convenience

The Canon of Economy

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 SOME OTHER CANONS OF TAXATION

The Canon of Elasticity

The Canon of Simplicity

The Canon of Diversity

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 CLASSIFICATION OF TAXATION

Proportional and Progressive Tax

Regressive and Digressive Tax

Specific and Ad-Valorem Tax

Direct and Indirect Tax

Direct taxes. Indirect Taxes.
On Income On commodities
On Property On transaction
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 MAJOR TYPES OF TAXES

Income Tax
Custom Duties
Sales Tax
Excise Duty
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 OTHER SOURCES OF REVENUE

Fee

Price

Special Assessment

Rates
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 OTHER SOURCES OF REVENUE IN
PAKISTAN

Income from Property and Enterprise

Profit from Post Office and Telegraph

Trading Profit

Interest Receipts

Surcharges
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 FEDERAL BUDGET

A budget is a financial statement which forecasts the income and expenditure for
the financial year ahead.

A report on the actual revenue and expenditure during the last year just needed.

Federal Budget is divided into two sections:

• The Revenue Budget
• The Capital Budget

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 Yo u
nk
T ha

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