Fiscal Policy

Definition of Fiscal Policy: Fiscal policy involves the Government changing the levels of Taxation and Govt. Spending in order to influence Aggregate Demand (AD) and therefore the level of economic activity. (AD is the total level of planned expenditure in an economy (AD = C+ I + G + X M)

The purpose of Fiscal Policy:

Reduce the rate of inflation, Stimulate economic growth in a period of a recession. Basically, fiscal policy aims to stabilize economic growth, avoiding the boom and bust economic cycle.

Instruments of Fiscal Policy:

Reduction of Govt. Expenditure Increase in Taxation Imposition of new Taxes Wage Control Rationing Public Debt Increase in savings Maintaining Surplus Budget

Definition of Fiscal Policy

Fiscal Policy is the main part of Economic and Fiscal Policy's first word Fiscal is taken from French word Fisc it means treasure of Govt. So we can define fiscal policy as the revenue and expenditure policy of Govt. It is prime duty of Government to make fiscal policy. By making this policy, Govt. collects money from his different resources and utilizes it in different expenditure. Thus fiscal policy is related to development policy. All welfare projects are completed under this policy

Objectives of Fiscal Policy

There are following objectives of fiscal policy:1. Development of Country:For development of Country, every country has to make fiscal policy. With this policy, all work is done govt. planning and proper use of fund for development functions. If govt. does not make fiscal policy, then it may happen that revenue may be misused without targeted expenditure of govt. 2. Employment:Getting the full employment is also objective of fiscal policy. Govt. can take many actions for increase employment. Government can fix certain amount which can be utilized for creation of new employment for unemployed peoples. 3. Inequality:In developing country like Pakistan, we can see the difference one basis of earning . 10% of people are earning more than Rs. 100000 per day and other are earning less than Rs.200 per day. By making a good fiscal policy, govt. can reduce this difference. If govt. makes it as his target. 4. Fixation of Govt. Responsibility:It is the duty of Govt. to effective use of resources and by making of fiscal policy different minister's accountability can be checked.

Techniques of Fiscal Policy:

1. Taxation Policy Taxation policy is relating to new amendments in direct tax and indirect tax . Govt. of Pakistan passes finance bill every year. In this policy govt. determines the rate of taxes. Govt. can increase or decrease these tax rates and amend previous rules of taxation .Govt.'s earning's main source is taxation. But more tax on public will adverse effect on the development of economy. If Govt. will increase taxes, more burdens will be on the public and it will reduce production and purchasing power of public. If Govt. will decrease taxes, then public's purchasing power will increase and it will increase the inflation.

Govt. analyzes both the situation and will make his taxation policy more progressive. 2. Govt. Expenditure Policy There are large number of public expenditure like opening of govt schools, colleges and universities, making of bridges, roads and new railway tracks. In all above projects govt has paid large amount for purchasing and paying wages and salaries all this expenditure are paid after making govt. expenditure policy. Govt. can increase or decrease the amount of public expenditure by changing govt. budget. So, govt. expenditure is technique of fiscal policy by using this , govt. use his fund first on very necessary sector and other will be done after this . 3. Deficit Financing Policy If Govt.'s expenditures are more than his revenue, then govt. should have to collect this amount. This amount is deficit and it can be fulfilled by issuing new currency by central bank of country. But, it will reduce the purchasing power of currency. More new currency will increase inflation and after inflation value of currency will decrease. So, deficit financing is very serious issue in the front of govt. Govt. should use it, if there is no other source of govt. earning. 4. Public Debt Policy If Govt. thinks that deficit financing is not sufficient for fulfilling the public expenditure or if govt. does not use deficit financing, then govt. can take loan from World Bank, or take loan from public by issuing govt. securities and bonds. But it will also increase the cost of debt in the form of interest which govt. has to pay on the amount of loan. So, govt. has to make solid budget for this and after this amount is fixed which is taken as debt. This policy can also use as the technique of fiscal policy for increase the treasure of govt. Limitation of Fiscal Policy

1. After issuing new notes for payment of govt. of expenses, inflation of Pakistan is increasing
rapidly and in this inflation, prices of necessary goods are increasing very fastly. Living of poor person has become difficult. So, these sign shows the failure of Pakistani fiscal policy.

2. Govt. fiscal policy has failed to reduce the black money. Even large amount of past minister is in
the form of black money which is deposited in Swiss Bank.

3. After taking loan from World Bank under the fiscal policy's debt technique, govt. has to obey the

rules and regulations of World Bank and IMF. These rules are more harmful for developing small domestic business of Pakistan. These organizations are inter related with WTO and they want to stop Pakistani domestic Industry.

4. After expending large amount for generating new employment under fiscal policy, rate of

unemployment is increasing fastly and big lines on govt. employment exchange can be seen generally in working days. Database of employment exchanges are full from educated unemployed candidates.

Definition of Monetary Policy

Monetary policy is that part of economic policy in which central bank controls the cost and supply of money and credit by applying different techniques. It is also main function of central bank.

OR
The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault.

OR
Monetary Policy is used to describe the activities undertaken by a government agency, typically the central bank of a country, to moderate the supply of money, availability of money, and cost of money or rate of interest to help promote economic growth, price stability, high employment, and a stable currency for use in international trade transactions.

Objective of Monetary Policy

To control the supply of money. To control the cost of money and credit. Exchange stability Full employment

Technique of Monetary Policy:1. Bank Rate Bank rate is that rate which is charged by Central bank for issue loan to the member banks. changing it, central bank can control the credit. By

If Central bank increase this bank rate, all commercial banks will increase their interest rate by this loan become costly and flow of fund in the form of credit will decrease. If central bank wants to expand credit, then Central bank will decrease bank rate, after this commercial bank can get advance and loan at cheap rate and by this way, they also decrease their interest rate. After this flow of cash in the form of loan will increases. 2. Open Market Operation Open market operation is the all action which is done by central bank for purchase and sale of member banks' security in open market. 3. Cash Reserve Ratio:Cash reserve ratio is the minimum percentage of the deposit to be kept as reserve by the banks with central bank. It can be used as the technique of monetary policy. 4. Changes in Marginal Requirement of loan:Marginal requirement is the difference between value of security and actual loan accepted by bank. Suppose a person wants to take loan of Rs. 80 , we has to give security of Rs. 100 then marginal requirement is Rs. 100 - Rs. 80 = Rs. 20 . 5. Moral Persuasion / Inspiration Central bank of country can control credit with moral persuasion. Under this persuasion, Central bank can call a meeting of all commercial bank and give advice in discussion that they should not give loan for speculative purposes. 6. Rationing of Credit Central bank has right to create ration of credit under monetary policy. It can be done by following way: To fix the amount of loan for a particular bank. To fix Quota for all banks. To fix Quota for different traders. 7. Regulation of consumer credit In case inflation, prices are increased. To control prices central bank contract credit to reduce the total amount of installment for payment. In case of deflation, prices are decreased to control prices central bank expand credit to increase the amount of installment.