You are on page 1of 52

Fiscal Policy

Meaning Of Fiscal Policy



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

Revenue Deficit: Revenue Expenditure Revenue Receipts

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

You might also like