FISCAL POLICY
• Fiscal policy is one of the most important instrument of
Government Intervention.
• Fiscal policy is the means by which the government adjusts
its spending levels and tax rates to monitor and influence
nation’s economy.
• Fiscal policy is result of several component policies or mix of
policy instruments.
• These include, policy on taxation, subsidy, welfare
expenditure, etc; investment or disinvestment strategies;
and debt or surplus management.
• One major function of Government is to stabilize the
economy.
• Stabilization can be achieved in part by manipulating
the Public budget – government spending and tax
collections – to increase output and employment or
to reduce inflation.
Objectives of Fiscal Policy
• First and the foremost objective is to maintain
and achieve full employment in the country.
• To stabilize the general price level in the
economy.
• To stabilize the growth rate of the economy.
• To maintain equilibrium in the Balance of
Payments.
• To promote the economic development of a
country.
• Capital formation and Investment
Types of Fiscal Policy
Expansionary Fiscal Policy:
• It is generally used for giving boost to the economy
i.e. to speed up the rate of growth of the economy or
during a recession when growth in national income is
not sufficient enough to maintain the present
standards of living of the population.
• A tax cut and/or an increase in government spending
would be implemented to boost economic growth and
lower unemployment rates. This is not a sustainable
policy, as it leads to budget deficits and thus, should
be used with caution by the government.
Contractionary Fiscal policy:
• It involves raising taxes or cutting
government spending, so that the
government spending is less than the tax
revenue.
• It cuts up on the aggregate demand in the
economy and thus economic growth leading
to a reduction in inflationary pressures in the
economy.
Components of Fiscal Policy:
• There are four key components of Fiscal Policy
are as follows:
• Taxation Policy
• Expenditure Policy
• Investment & Disinvestment Policy
• Debt and Surplus Management
Instruments of Fiscal Policy
• Public Expenditure
• Public Revenue
• Public Debt
Public Expenditure
• Public expenditure refers to Government expenditure
incurred for maintaining itself as well as the
economy as a whole.
• The expenditure incurred by public authorities like
central, state and local governments to satisfy the
collective social wants of the people is known as
public expenditure.
Types of Public Expenditure
• Revenue Expenditure & Capital Expenditure
• Productive & Non productive Expenditure
• Transfer & Non transfer Expenditure
• Plan & Non Plan Expenditure
• Revenue expenditure: are current or consumption
expenditures incurred on civil administration, defence
forces, public health and education, maintenance of
government machinery. This type of expenditure is of
recurring type which is incurred year after year.
• Capital expenditures: are incurred on building durable
assets, like highways, multipurpose dams, irrigation
projects, buying machinery and equipment. They are non
recurring type of expenditures in the form of capital
investments. Such expenditures are expected to improve
the productive capacity of the economy.
• Transfer expenditure: relates to the expenditure
against which there is no corresponding return.
• Such expenditure includes public expenditure on :-
✔ National Old Age Pension Schemes,
✔ Interest payments,
✔ Subsidies,
✔ Unemployment allowances,
✔ Welfare benefits to weaker sections, etc.
• The non-transfer expenditure : relates to expenditure
which results in creation of income or output.
• The non-transfer expenditure includes development
as well as non-development expenditure that results
in creation of output directly or indirectly.
✔ Economic infrastructure such as power, transport,
irrigation, etc.
✔ Social infrastructure such as education, health and
family welfare.
✔ Internal law and order and defence.
✔ Public administration, etc.
• Productive Expenditure : Expenditure on
infrastructure development, public enterprises or
development of agriculture increase productive
capacity in the economy and bring income to the
government.
• Unproductive Expenditure : Expenditures in the
nature of consumption such as defence, interest
payments, expenditure on law and order, public
administration, do not create any productive asset
which can bring income or returns to the
government.
Effects of Public Expenditure
• Effects on Production
• Effects on Economic Growth
• Effect on Income Generation and Distribution
• Effects on Economic Stability
Public Revenue
To meet the public expenditure , Government need
funds . Such funds called public revenue are raised from
various sources.
The common sources are: Taxes, borrowings deficit
financing ,foreign aid etc.
Tax Revenue
Taxes are the first and foremost sources of public revenue. Taxes are
compulsory payments to government without expecting direct benefit
or return by the tax payer.
The government collect tax revenue by way of direct & indirect
taxes.
Direct taxes includes; Corporate tax; personal income tax capital
gain tax and wealth tax.
Indirect taxes includes custom duty, excise duty, VAT and service
tax , entertainment tax , stamp duty, securities transaction tax etc.
Now we have a common indirect tax called GST
Domestic Company AY 2020-21 AY 2021-22
Total Turnover / Gross
Receipt
25% NA
for FY 2017-18 up to
Rs.400 crore
Total Turnover / Gross
Receipt
NA 25%
for FY 2018-19 up to
Rs.400 crore
Any other
30% 30%
domestic company
GST
• GST was introduced in India on 1st July 2017
• GST is a type of value added tax and a proposed comprehensive
indirect tax levy on manufacture, sale and consumption of goods
as well as services at the national level
• It will replace all indirect taxes levied on goods and services by
the Indian central and state governments.
• Types of GST
– CGST, Central Goods and Service Tax, Click here to read in detail about
CGST.
– SGST, State Goods and Service Tax. The information about SGST in brief
is given here.
– IGST, Integrated Goods and Service Tax.
• GST Tax Slab Rates List 2019: 5%, 12%, 18% and 28%
Non Tax Revenue
• Fees
• Fines & Penalties
• Surplus from Public enterprises
• Special assessment of betterment of levy
• Grants & Gifts
• Deficit Financing
Public Debt
• When the state finds it difficult to match its inflows
with outflows it resort to public debt.
• Government debt (also known as public debt and
national debt) is the debt owed by a central
government
• Government debt is one method of financing
government operations
• Government debt can be categorized as internal debt
(owed to lenders within the country) and external
debt (owed to foreign lenders)
Advantages of Public Debt
• Meeting Wartime Expenditure
• Fighting against Contingencies
• Coping with Depression
• Financing Development Projects
• Providing for Social Services
• Containing Inflationary Pressure
Disadvantages of Public Debt
• Unproductive Loans
• Public debts leads to Extravagance
• It hampers the Economic Conditions
• Challenge to Political Freedom
• National Wealth Flows out
Deficit Financing
• Deficit financing, practice in which a government spends
more money than it receives as revenue, the difference
being made up by borrowing or minting new funds
• Deficit financing is a policy where the government finances
expenditures (large spending) via borrowing money instead
of increasing taxes. When the government is faced with a
budget deficit because there is a gap between public
revenue and public expenditure, deficit financing begins
• Deficit financing may lead to inflation. Due to deficit
financing money supply increases & the purchasing power
of the people also increase which increases the aggregate
demand and the prices also increases.
Budget
• According to Article 112 of the Indian
Constitution, the Union Budget of a year, also
referred to as the annual financial statement, is a
statement of the estimated receipts and
expenditure of the government for that particular
year.
• Union Budget keeps the account of the
government's finances for the fiscal year that runs
from 1st April to 31st March. Union Budget is
classified into Revenue Budget and Capital
Budget.
• Revenue budget includes the government's revenue receipts and
expenditure. There are two kinds of revenue receipts - tax and
non-tax revenue. Revenue expenditure is the expenditure
incurred on day to day functioning of the government and on
various services offered to citizens. If revenue expenditure
exceeds revenue receipts, the government incurs a revenue
deficit.
Capital Budget includes capital receipts and payments of the
government. Loans from public, foreign governments and RBI
form a major part of the government's capital receipts. Capital
expenditure is the expenditure on development of machinery,
equipment, building, health facilities, education etc. Fiscal deficit
is incurred when the government's total expenditure exceeds its
total revenue
• Revenue Deficit
• Fiscal Deficit
• Budgetary Deficit
• Primary Deficit
Fiscal Policy in Inflation
• Control over Public expenditure
• Increase in Taxes
• Increase in Public borrowing
• Delay in payment of old debts
• Surplus Budget
• Over – valuation of money
Fiscal Policy in Deflation
• Increase in Public expenditure
• Decrease in Taxes
• Increase in Social welfare expenditure
• Price support Policy
• Deficit Financing
• Pump priming
Difference between
Fiscal policy and Monetary policy
Fiscal Policy Monetary Policy
Fiscal policy is managed by Government Monetary Policy is maintained by central
MoF bank
Fiscal policy gives the direction of Monetary policy controls the supply of
economy of a nation. money in the nation.
It relates to the economic position of a It regulate the money supply
nation-economic growth
It administers the taxation structure of It helps to stabilize the economy of the
the nation country.
It speaks of the government’s revenue It sets the program of banks and credit
and expenditure control.
