Fiscal Policy

Dr. Kavita Srivastava

Deptt Of Management
Deptt.
ITS, Ghaziabad

Meaning & Definition

z

Fisc means State Treasury. Fiscal Policy refers to the policy

concerning the use of state treasury or the government finances to
g
achieve the macroeconomic goals.

Fiscal Policy is a policy under which the government uses its

expenditure and revenue programmes to produce desirable effects on
the national income, production and employment.

IIn order
d tto attain
tt i these
th
objectives,
bj ti
the
th governmentt off India
I di has
h been
b
formulating its fiscal policy incorporating the revenue, expenditure and
public debt component in a comprehensive manner.

12/7/2009

Dr. Kavita Srivastava

Objectives of the Fiscal Policy:

To mobilise adequate resources for financing various
programmes and projects adopted for the economic
development.
p
To raise the rate of savings and investment.
To attain economic stability
To remove poverty and unemployment
To reduce regional disparities
To reduce the inequality of income and wealth.
To maintain growth rate in the economy

12/7/2009

Dr. Kavita Srivastava

Also called budgetary policy where revenue

and expenditure of government are dealt
with.

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Dr. Kavita Srivastava

Scope of Fiscal Policy

z
z
z

Includes the number of fiscal instruments and

target variables.
Fiscal instruments are the variables that
government can change at its own discretion.
It includes budgetary policy,
policy government
expenditure policy, taxation , public debt & deficit
financing.
financing
Target variables are macro variables like
di
disposable
bl iincome, aggregate
t consumption
ti ,
savings & investment, imports & exports and the
generall prices.
i

12/7/2009

Dr. Kavita Srivastava

Fiscal instruments
Budgetary Policy:
z Balance Budget
z Surplus Budget
z Deficit Budget

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Dr. Kavita Srivastava

Public Expenditure
Government Expenditure is on the following:
z Public spending on purchase of goods and
services
i
z Payment
y
for wages
g and salaries of
government servants
z Public investments
z Transfer payments
Government expenditure is an injection to the
economy , it adds to the aggregate demand
12/7/2009

Dr. Kavita Srivastava

Development of infrastructure
z Development of public enterprises
z Support to the private sector
z Social Welfare and employment
programmes

12/7/2009

Dr. Kavita Srivastava

Taxation
z

Tax is
T
i a non Quid
Q id pro quo paymentt by
b the
th
people to the government
z Direct & indirect taxes
z Direct tax includes taxes on personal
income, corporation tax, wealth & property.
z In 2002-03, personal income tax contributed
17.0 percent and corporation tax 21.3
percent of the gross tax revenue
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Dr. Kavita Srivastava

Indirect Taxes
z

IIndirect
di t taxes
t
includes
i l d taxes
t
on production
d ti
and sale of the goods and services.
z Also called commodity taxes
z Excise duty and custom
z In 2002-03, central excise duty yielded 38.1
percent and customs 20.7 percent of the
gross tax revenue.

12/7/2009

Dr. Kavita Srivastava

10

Public Debt
z

Internal Debt : (i) Borrowing from the

public by means of government bonds and
treasury bills
bill (ii) Borrowing
i from
f
the
h
central bank , i.e., deficit financing
z External Borrowings: ( i ) Borrowing from
foreign government,(ii)
government (ii) International
organizations, (iii) Market Borrowings

12/7/2009

Dr. Kavita Srivastava

11

Deficit Financing
z

Is a situation where expenditure of the

government acceedes its revenue in the
p
account.
current and capital

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Dr. Kavita Srivastava

12

Kinds of fiscal policy

Compensatory fiscal policy

Surplus budgeting
During the period of inflation, expenditure is lower than
the revenue, high rate of tax is imposed this reduces the
purchasing power of individuals as their disposable income
decreases as a result the aggregate demand decreases.
decreases
A cut in government expenditure also reduces the
aggregate demand .

12/7/2009

Dr. Kavita Srivastava

13

 Deficit

Budgeting
During the period of deflation, expenditure
is more than the revenue, low rate of tax is
imposed this increases the purchasing
power of individuals as their disposable
i
income
increases
i
as a result
l the
h aggregate
demand increases.
An increase in government expenditure
also increases the aggregate demand .

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Dr. Kavita Srivastava

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Discretionary fiscal policy

z

Government makes deliberate changes in:

The level and pattern of taxation
Size and pattern of its expenditure
The size and composition of public debt

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Dr. Kavita Srivastava

15

Changes in Taxation
z

Includes changes in direct and indirect taxes

as
z Increasing or decreasing the tax rates
z Imposition of new taxes or abolition of old
taxes
z Imposition of taxes on new tax bases

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Dr. Kavita Srivastava

16

Changes in Government
Expenditure
z

Includes:
z Change in the size of government
expenditure
z Composition of government expenditure
z The method of financing government
expenditure
z Transfer payments
z Methods of deficit financing
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Dr. Kavita Srivastava

17

Fiscal Policy
&
Macroeconomic Goals
z

Fiscal Policy for economic growth:

z Given the manpower , technology & the
natural resources,
resources the growth rate of a
country depends on the rate of savings and
investment.
investment

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Dr. Kavita Srivastava

18

In order to promote savings,

z the rate of income tax is enhanced
z than the tax incentives are provided for
savings
z corporate sector is provided with number of
incentives and concessions for promoting
private
i t investments
i
t
t
z Incentives and concessions include tax
holiday, investment subsidies, exemption
from the import duties and so on.
on
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Dr. Kavita Srivastava

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These methods often prove inadequate for

raising savings due to:
z Low level of per capita income and high
ate of
o MPC
C
rate
z A small fraction of population with taxable
income
z Inadequate
q
growth
g
of population
p p
and social
overhead capital
z Lack of effective aggregate demand

12/7/2009

Dr. Kavita Srivastava

20

Government is required to play the role of a

prime mover.
mover
z Progressive taxation policy
z Widespread taxation of all kinds of
consumer goods
z Taxation of luxury goods
z Imposition of exorbitantly high duty on
import of consumer goods

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Dr. Kavita Srivastava

21

Public Borrowings &Economic

Growth
z

Internal borrowings include market

borrowing and deficit financing
z External borrowings is from the
international organizations to finance
growth projects.
projects

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Dr. Kavita Srivastava

22

Fiscal Policy & Employment

z
z
z
z
z
z

Heavy taxation on capital intensive goods

S b idi i off labour
Subsidization
l b
intensive
i
i goods.
d
Heavy duty on imports of capital intensive technology
Concession
i on imports
i
off inputs
i
for
f labour
l b
intensive
i
i
products
G
Government
t allocation
ll ti off funds
f d for
f labour
l b
intensive
i t i public
bli
works like construction of roods, dams, canals and bridges.
Promotion of schemes like JRY etc.
etc

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Dr. Kavita Srivastava

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THANK YOU

12/7/2009

Dr. Kavita Srivastava

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