FISCAL POLICY

“Fiscal policy is attached with the

determination of time, type and
procedure to be followed in making
revenues and government
expenditure”
Prof. Lindbalm

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 1

 FISCAL POLICY
“Fiscal policy is concerned with all
those arrangements which are
adopted by the government to collect
the revenue and make the
expenditure so that economic
stability can be attained/maintained
with out inflation or deflation”
Samuelson

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 2

 INSTRUMENTS

(1)Government Expenditure
(2)Taxes, both direct & indirect
(3)Deficit financing
(4)Subsidies
(5)Transfer payments

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 3

 OBJECTIVES

(1)Price Stability
• Fiscal medicines –i.e. government
expenditure & Taxes
• In inflation, G is reduced and T is
increased
• Multiplier effect comes into action and NI
is reduced many a times

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 4

 OBJECTIVES
• During deflation, G is increased and
T is reduced
• NI will be increased many a times
because of multiplier effect
• Economic depression will come to an
end
In developing countries, G is rigid
downwards and influenced by
political considerations so difficult to
control
M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 5
 OBJECTIVES
(2) Influencing the consumption pattern
• When government wants to reduce the
consumption of a commodity, it can increase
tax on that commodity
• If government wants to increase the
consumption of a commodity, it will give
subsidy on it.
• Imports can be checked by higher duties on
luxurious imports

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 6

 OBJECTIVES
(3) Raising the level of employment
• If G, on the basis of deficit financing,
is increased and T is lowered then NI
will increase many a times
• This will have a positive impact on the
level of employment
• According to Phillips, there exists a
positive relationship between
M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 7
 OBJECTIVES
inflation and unemployment.

(4) Redistribution of income

• In UDCs, there is low per capital
income with greater inequalities in
income distribution
• To check it, progressive system of
taxation is advocated.
M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 8
 OBJECTIVES
(5) Economic Development
• A process whereby the real national
income and per capital income of the
country increases over a long period
of time.
• UDCs have shortage of financial
resources
• Easy fiscal policy can be adopted
here
M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 9
 OBJECTIVES
• The process of economic development
can not merely be started with easy
fiscal policy. Resources shall have to
be developed.

(6) Removal of deficit in BOP

• In case of a deficit in BOP,
government can adopt a strict fiscal
policy.
M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 10
 OBJECTIVES
• Through decrease in G and increase in
T, NI is reduced
• So there will be deflationary tendencies
in the economy
• Exports will increase
• Imports will decrease
• BOP deficit will be controlled

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 11