The Operation of Fiscal Policy

Chapter

12
The Operation of Fiscal Policy
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The Operation of Fiscal Policy

FISCAL POLICY
It is the policy under which the government of a country uses taxation, public expenditure and public debt programmes to achieve pre-determined economic and social goals and to solve specific problems in the economy.

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The Operation of Fiscal Policy

OBJECTIVES OF FISCAL POLICY

Attainment of full employment of resources; High rate of economic growth; Optimum allocation of economic resources; Equitable distribution of wealth and income Price stability; Control of business cycles; Balanced growth; and Export development.

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The Operation of Fiscal Policy

INSTRUMENTS OF FISCAL POLICY AND THEIR MECHANISM

Taxation A tax is a compulsory levy imposed by the government on economic units. Taxes can basically be classified into direct and indirect taxes. A direct tax is generally defined as the one the incidence of which rests upon the person or institution who bears the impact also. If the incidence is passed on to others, it is called indirect tax. Income tax, wealth tax, corporation tax, and estate duty are examples of direct tax. Custom duties, excise duty, value

added tax and sales tax are indirect taxes.

Cont
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The Operation of Fiscal Policy

Public Expenditure Public expenditure, as an instrument of fiscal policy, involves a change in any one or more of the following:

Size of public expenditure;

Composition of expenditure (consisting of revenue expenditure and capital expenditure and its sub-categories);

Direction of expenditure (i.e. its allocation pattern); and

Institutions and administration of public expenditure.

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The Operation of Fiscal Policy

Public Debt
Public borrowings or changes in public debt immediately affect money and credit supply and, in later rounds, rate of interest, aggregate demand, price

level and eventually the rate of growth.

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The Operation of Fiscal Policy

Conclusion
Fiscal operations of the government have profound effect on the business sector of an economy

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