Fiscal Stimulation vs Fiscal Deficit:

Difficult choice for Government

Group No.: 3
Brajesh Lahoti 2015090
Radhika Chamedia 2015110
Shital Gupta 2015115
Shreya Sharma 2015117
Surabhi Kumari 2015121
Surendra Saini 2015122
Uday Bisht 2015124

Fiscal Stimulation
An economic stimulus is the use of monetary or fiscal policy
changes to kick start a lagging or struggling economy. To
accomplish this governments can use tactics such as
1. lowering interest rates
2. increasing government spending
3. quantitative easing

Types of Fiscal Stimulation:

4. Neutral fiscal policy
5. Expansionary fiscal policy
6. Contractionary fiscal policy

Objectives of Fiscal Policy:

Economic growth
Full employment
Optimum allocation of economic resources
Increasing rate of investment
Reducing inequality of wealth and income
Controlling inflation

Instruments of fiscal policy

Following instruments operate through government
budget
1. Public revenue

a. Direct tax
b. Indirect tax
2. Public expenditure

a. Development expenditure
b. Non-development expenditure

3. Public borrowing
a. Internal debt
b. External debt
c. Deficit financing

Fiscal Deficit

When a government's total expenditures exceed the

revenue that it generates (excluding money from
borrowings).

The effects of fiscal deficit are visible in the short run

while the effects of fiscal stimulation are visible in
the long run.

Implications of Fiscal Deficit:

Debt trap: The vicious cycle that is created when the

government takes loans to repay previous loans.

Inflation: as the government borrows from RBI , the RBI

prints currency notes which increases money supply and
creates inflationary pressure.

Foreign Dependence: Borrowings from abroad.

Hampers future growth: Borrowings affect the future

growth and developments for the country

Sources of Financing Fiscal Deficit:

Borrowings: these can be either from internal or

external sources.

Deficit Financing (Printing of new currency):

government borrows from RBI against its securities and

RBI prints currency notes for this purpose.

Relationship Between Fiscal Deficit &

Fiscal Stimulation

Fiscal stimulation is used by government to stimulate

economy but it results in fiscal deficit, inflation and
slowdown in growth

Fiscal deficit causes high inflation

A fiscal deficit occurs when tax revenues are

insufficient to fund government spending, meaning that
the state must borrow money, usually in the form of
government bonds.

continued

Fiscal deficit might also be the effect of a government

choosing to use expansionary fiscal policy to boost
aggregate demand, output and employment at a time
when private sector demand is stagnant or falling.

Keynesian economists have long favored the use of

targeted and timely fiscal stimuli such as labor intensive
public works and other infrastructure investment
projects, designed at kick-starting an economy suffering
from a chronic lack of demand and income.

Thank you!