It refers to a policy concerning the use of state treasury or the government finances to achieve the macro-economic goals
or
Government policy of changing its taxation and public expenditure programmes intended to achieve its objective.
or
Government uses its expenditure and revenue program to produce desirable effects on National Income , production and employment. Counter Cyclical Fiscal Policy Fiscal or Budgetary Policy: Are the Revenue and Public Expenditure Policy
It is based on the relationship between them
It generates additional purchasing power during depression
Contracts purchasing power during expansion
Importance of Fiscal Policy
Government activities are enlarged.
Tax- Revenue and Expenditure accounts for large proportion of GNP.
Government effects the Economic activities through gap between government receipts and borrowings.
It indicates the level of overall borrowings by the government.
It is the indicator of fiscal health of the economy.
Objectives of Fiscal Policy
To mobilise resources for Economic Growth
To promote growth in Private Sector
Equitable distribution of Income and wealth
Restrain inflationary forces in the Economy Tools of Fiscal Policy Tools of Fiscal Policy Public Revenue Public Expenditure Revenue Receipt Capital Receipt Revenue Expenditure Capital Expenditure Tax Non- Tax Direct Tax Indirect Tax
PUBLIC EXPENDITURE (Payments) Revenue Expenditure
Interest Payments Major Subsidies Defense Capital Expenditure
Expense on administration Repayment of Loans Extension of fresh loans to the state govt by the central Loans to public enterprise Expense on Irrigation project Sectoral development
PUBLIC REVENUE (Receipts) Revenue Receipts
Tax
Non- Tax Receipts Fines and Penalties Fees Profits of PSU Govt Interest Grants and Gifts
Capital Receipts
Recovery of Govt loans Disinvestment of PSU Market Borrowings Internal and International sources
Public Revenue (Receipts) Direct Tax
Income Tax Corporate Tax Wealth Tax Gift Tax Indirect Tax
Sales Tax Excise Tax Custom Service Tax
Effect of Public Expenditure on the Economy
Public Expenditure
An increase in PE raises the level of GNP. PE increases the purchase of goods and services Increases household incomes Increases Govt Indirect tax revenues
Increase the flow of funds in the economy Increases private Income and thereby the Private Expenditure
Effect of Public Revenue on the Economy Public Revenue
Total amount received. Taxation is a measure of transferring funds from private purses to the public coffers. Withdrawal of funds from the private use. Has a deflationary impact on GNP Reduces Disposable income and reduces private expenditure
Concept of Deficit
Deficit: Total government expenditure is more than government receipts.
Budgetary Deficit: Total Expenditure Total Revenue
Fiscal Deficit: Total Expenditure Total Revenue (Excluding Govt Borrowing) Primary Deficit: Fiscal Deficit Interest Payments
What is Fiscal Deficit? Fiscal deficit: Is the difference between what the government spends and what it earns.
It is expressed as a percentage of GDP.
India's fiscal deficit was brought down to 3.17% (Rs 1,43,653 crore) of the gross domestic product in 2007-08 from 3.8% in 2006-07.
The government has promised to cut the deficit further to 2.5% of GDP (Rs 1,33,287 crore) by the end of 2008-09, Q1 Receipts & Expenditure of the central Govt S.No Item 1996-97 1997-98 1998-99 1 Revenue Receipts 1,26,279 1,33,886 1,49,510 a) Tax Revenue 93,701 95,672 1,04,652 b) Non- Tax Revenue 32,578 38,214 44,858 2 Revenue Expenditure 1,58,933 1,80,336 2,17,419 a) Interest Payments 59,478 65,637 77,882 b) Major Subsidies 14,041 18,248 21,269 c) Defence Expense 20,977 26,174 29,861 3 Revenue Deficit (1-2) 32,564 46,450 67,909 4 Capital Receipt 50,872 82,435 1,06,824 A Recovery of Loan 7,540 8,310 10,633 B Other Receipt ( PSU disinvestment) 455 912 5,874 c Borrowing and Other Liabilities 42,877 73,205 90,922 5 Capital Expenditure 31,403 35,985 38,920 6 Total Receipts ( 1+ 4) 7 Total Expenditure 8 Fiscal Deficit ( 1 + 4a + 4b 7) 9 Budget Deficit ( 6 -7) 13,185 Nil Nil 10 Primary Deficit ( 8- 2a) Q2 Receipts & Expenditure of the central Govt S.No Item 2004-05 2005-06 1 Revenue Receipts a) Tax Revenue 2,24,857 2,73,466 b) Non- Tax Revenue 80,330 77,734 2 Revenue Expenditure 3,84,745 4,46,512 a) Interest Payments 1,26,540 1,33,945 b) Major Subsidies 44,633 46,358 c) Defence Expense 43,967 48,625 3 Revenue Deficit (1-2) 4 Capital Receipt 1,93,261 163,144 A Recovery of Loan 60,862 12,000 B Other Receipt ( PSU disinvestment) 4,424 0 5 Capital Expenditure 1,13,703 67,832 6 Total Receipts ( 1+ 4) 7 Total Expenditure 8 Fiscal Deficit 10 Primary Deficit ( 8- 2a) Calculate Revenue Receipt, Revenue Deficit, Fiscal Deficit? Kinds of Fiscal Policy Fiscal Policy Discretionary Fiscal Policy
Non- Discretionary / Automatic Fiscal Policy
Anti- Recessionary Fiscal Policy Anti Inflationary Fiscal Policy
Taxation
A Tax is a compulsory contribution. Canons of Taxations: Smiths Canons Canon of Equity. Canon of Certainty. Canon of Convenience Canon of Economy
Modern Canons Canon of Simplicity Canon of Productivity Canon of Elasticity Canon of Diversity . Direct and Indirect Taxes
Impact - Shifting- Incidence Direct Taxes
Merits Demerits
I Just and Equitible i Arbitrary ii Progressive ii Unpopular iii Elastic iii Inconvenient iv Productive iv Evasion v Economical v Uneconomical vi Effective vi Narrow base vii Certain vii Tax on Honesty viii Educative Value Indirect Taxes Merits Demerits
i Convenient i Unjust ii No Evasion ii Inequitable iii Broad Tax Base iii Inflationary iv Social Value iv Uncertain v Economical v Savings Affected vi Effective vi Not Economical vii No Pinch vii No Link between Tax-Payers & Govt viii Progressive viii Tax by Cruelaty Deficit Financing Deficit financing occurs when there are budgetary deficits. Budgetary Deficit is excess of total expenditure both revenue and capital over total receipts. 20 Besides taxation, the governments other major revenue source is borrowing. Deficit Financing refers to financing the difference of expenditure over revenue through borrowings. Higher deficit implies higher borrowings and thus higher interest payments. 21 05/07/12 Deficits have generally been the rule (although there was a surplus from 1999 to 2000). Deficit (as fraction of GDP) was highest in mid-1980s. 23 Deficit Financing And Inflation Deficit financing creates monetary incomes and demand for goods and services increases. Though there is increased demand, availability of consumer goods takes time & prices rise. Also increase in money supply lead to credit creation which aggravates inflationary conditions. 24 Limitation of Deficit Financing Deficit financing is inevitable under planned economic development to activate unutilized resources or step up tempo of economic process. It is necessary to the extent it can promote capital formation and economic development. 25 MEANING OF BUDGET BUDGET (FROM FRENCH WORD BOUGETTE, PURSE) GENERALLY REFERS TO A LIST OF ALL PLANNED EXPENSES AND REVENUES. ... AN ANNUAL PROPOSAL THAT OUTLINES THE ANTICIPATED FEDERAL REVENUE AND DESIGNATES PROGRAM EXPENDITURES FOR THE UPCOMING FISCAL YEAR.
DEFINITIONS TAYLOR A BUDGET IS THE MASTER FINANCIAL PLAN OF THE GOVERNMENT. IT BRINGS TOGETHER ESTIMATES OF ANTICIPATED REVENUE AND PROPOSED EXPENDITURE FOR THE BUDGETED YEARS. According to BASTABLE THE BUDGET HAS COME TO MEAN THE FINANCIAL ARRANGEMENTS OF A GIVEN PERIOD, WITH THE USUAL IMPLICATIONS THAT THEY HAVE BEEN SUBMITTED TO THE LEGISLATURE FOR APPROVAL According to FINDLAY SHIRRAS THE BUDGET IS AN ANNUAL STATEMENT OF EXPENDITURE AND REVENUE TO MEET THAT EXPENDITURE PREPARED BY PUBLIC AUTHORITIES AND USUALLY COVERS ATLEAST TWO FISCAL PERIODS-THE CLOSING PERIOD AND THE PERIOD TO COME . IN THE WORDS OF MUNRO BUDGET IS A PLAN OF FINANCING FOR THE INCOMING FISCAL YEAR.THIS INVOLVES AN ITEMISED ESTIMATE OF ALL REVENUES ON THE ONE HAND AND ALL EXPENDITURES ON THE OTHER A SUMMARY OF THE ABOVE DEFINITIONS ON THE BASIS OF THE DEFINITIONS WE CAN STATE THAT A BUDGET IS : 1. A statement of expected revenue and proposed expenditure; 2. It has to sanctioned by the authority; 3. It is for a particular period-a year; 4. It puts forth conditions regarding the procedures involved in the collection of revenue and the expenditure to be incurred. MEANING OF BUDGET HENCE A BUDGET IS A STATEMENT OF THE ESTIMATED REVENUE AND EXPENDITURE OF THE GOVERNMENT IN RESPECT TO A PARTICULAR FINANCIAL YEAR. IMPORTANCE OF BUDGET 1. It sets a frame work for policy formulation 2. Budgeting is a means of policy implementation 3. A budget is a means of legal control 4. It is a tool of accountability 5. It is a tool of management 6. It is an instrument of economic policy
BUDGET IS CONCERNED WITH THREE PERIODS 1. THE ACTUAL REVENUE AND EXPENDITURE OF THE PREVIOUS YEAR [if the current year is 2009-10 then 2008-09 will be the preious year] 2. THE REVISED ESTIMATES OF REVENUE AND EXPENDITURE OF THE CURRENT YEAR. 3. ESTIMATES OF REVENUE AND EXPENDITURE FOR THE NEXT FINANCIAL YEAR. COMPONENTS OF BUDGET Revenue receipts Capital receipts Revenue expenditure Capital expenditure
THUS A BUDGET HAS TWO MAIN COMPONENTS :[A] RECEIPTS ,[B] EXPENDITURE. COMPONERNTS OF BUDGET RECEIPTS A. REVENUE RECEIPTS [1+2 ] 1. TAX REVENUE 2. NON TAX REVENUE B. CAPITAL RECEIPTS [3+5] 3.RECOVERY LOANS 4.OTHER RECEIPTS 5.BORROWING & OTHER LIABILITIES TOTAL RECEIPTS = A+B A.REVENUE RECEIPTS D.REVENUE EXPEND. A.1.TAX REVENUE 6.ON NON PLAN ACC. 2.NONTAX REV 7.ON PLAN ACCOUNT B.CAPITAL RECEIPTS. [3+4+5] E.CAPITAL EXP.[8+9] 3.RECOVERY OF LOAN 8.ON NON PLAN ACC. 4.OTHERB RECEIPTS 9.ON PLAN ACCOUNT 5.BORROWINGS AND OTHER LIABILITIES F.TOTAL EXP.[D+E] G.BUDGE.DEFI-F-C H.REV. DEFI D-A C.TOTAL RECEIPTS-A+B I.FISCAL DEFICIT[F_(A+3+4)] EXPENDITURE EXPENDITURE A. REVENUE EXPENDITURE [1+2] 1 ON PLAN ACCOUNT 2 ON NON PLAN ACCOUNT B.CAPITAL EXPENDITURE RECEIPT ITEMS OF THE BUDGET RECEIPT ITEMS OF BUDGET REVENUE RECEIPTS CAPITAL RECEIPTS REVENUE RECEIPTS TAX REVENUE + NON-TAX =REVENUE RECEIPTS TAX REVENUE TAX REVENUE INCLUDES ALL THE REVENUES EARNED THROUGH VARIOUS KINDS OF TAXES.TAXES ARE BROADLY DIVIDED INTO DIRECT & INDIRECT TAXES.
DIRECT TAXES 1. CORPORATION TAX 2. INCOME TAX 3. INTEREST TAX 4. WEALTH TAX 5. GIFT TAX 6. EXPENDITURE TAX INDIRECT TAX 1. CUSTOM DUTIES 2. EXCISE DUTIES 3. SALES TAX 4. SERVICE TAX NON TAX REVENUE IT INCLUDES THE REVENUE ACCRUING TO THE GOVERNMENT FROM SOURCES OTHER THAN TAX.THESE ARE ; 1. INTEREST RECEIPTS 2. DIVIDENDS 3. GRANTS 4. FINES CAPITAL RECEIPTS THESE INCLUDE BORROWING OF THE GOVERNMENT.SINCE THESE RECEIPTS HAVE TO BE REPAID BY THE GOVERNMENT ,THE CAPITAL RECEIPTS ARE LIABILITIES.CAPITAL RECEIPTS INCLUDE PUBLIC BORROWING ,RECIVERY OF LOANS AND RESALE OF SHARES AND BONDS HELD BY THE GOVERNMENT. EXPENDITURE ITEMS EXPENDITURE REVENUE EXPENDITURE CAPITAL EXPENDITURE REVENUE EXPENDITURE IT IS THE EXPENDITURE INCURRED FOR THE DAY-TO-DAY FUNCTIONONG OF THE GOVERNMENT DEPARTMENTS AND VARIOUS SERVICES OFFERED TO THE PEOPLE, PAYMENT OF INTEREST ON BORROWINGS,SUBSIDIES ETC. REVENUE EXPENDITURE WILL NOT RESULT IN THE CREATION OF ASSETS REVENUE EXPENDITURE IT IS THE EXPENDITURE INCURRED FOR THE DAY-TO-DAY FUNCTIONONG OF THE GOVERNMENT DEPARTMENTS AND VARIOUS SERVICES OFFERED TO THE PEOPLE, PAYMENT OF INTEREST ON BORROWINGS,SUBSIDIES ETC. REVENUE EXPENDITURE WILL NOT RESULT IN THE CREATION OF ASSETS CAPITAL EXPENDITURE CAPITAL EXPENDITURE IS THE EXPENDITURE INCURRED ON CREATING PERMANENT ASSETS.SUCH EXPENDITURE IS INCURRED ON ITEMS LIKE CONSTRUCTION OF BUILDINGS,ROADS,BRIDGES,CANALS,POWER PLANTS,CAPITAL EQUIPMENTS REVENUE RECEIPTS THE REVENUE RECEIPTS REFER TO ALL RECEIPTS RECEIVED DURING BY THE GOVERNMENT FRM Taxation Meaning : Non quid pro quo transfer of private income to public coffers by means of taxes. Classified into 1. Direct taxes- Corporate tax, Div. Distribution Tax, Personal Income Tax, Fringe Benefit taxes, Banking Cash Transaction Tax 2. Indirect taxes- Central Sales Tax, Customs, Service Tax, excise duty. Government Expenditure It includes : Government spending on the purchase of goods & services. Payment of wages and salaries of government servants Public investment Transfer payments