Fiscal Policy

Fiscal Policy-definition

Fiscal policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nations economy. Fiscal policy is that part of government policy which is concerned with razing revenue through taxation and other means and deciding on the level and pattern of expenditure. In other wards the term fiscal policy refers to the expenditure a government undertakes to provide goods and services and to the way in which the government finances these expenditures.

Fiscal Policy-Meaning

The word fisc means state treasury and fiscal policy refers to policy concerning the use of state treasury or the govt. finances to achieve the macroeconomic goals.

any decision to change the level, composition or timing of govt. expenditure or to vary the burden ,the structure or frequency of the tax payment is fiscal policy.

Objectives of Fiscal Policy

To achieve desirable price level:
To Achieve desirable consumption level: To Achieve desirable employment level: To achieve desirable income distribution: Increase in capital formation: Degree of inflation:

Fiscal Policy And Macroeconomic Goals

Economic Growth: By creating conditions for

increase in savings & investment. Employment: By encouraging the use of labourabsorbing technology Stabilization: fight with depressionary trends and booming (overheating) indications in the economy Economic Equality: By reducing the income and wealth gaps between the rich and poor. Price stability: employed to contain inflationary and deflationary tendencies in the economy.

Instruments of Fiscal Policy

Budgetary surplus and deficit
Government expenditure

Taxation- direct and indirect

Public debt

Deficit financing

The Golden Rule

Fiscal policy framework The Government's fiscal policy framework is based on the five key principles set out in the Code for fiscal stability - transparency, stability, responsibility, fairness and efficiency. the golden rule: over the economic cycle, the Government will borrow only to invest and not to fund current spending; the sustainable investment rule:

Fiscal Policy In Action

The rise in AD leads to an increase in real national income, ceteris paribus, unemployment would fall to 3% but at a cost of higher inflation If government reduces taxes (remember the subtleties) and or increases spending, it will have various effects: Assume an initial equilibrium position with a level of National Income giving an unemployme nt rate of 5% (U = 5%) AD therefore shifts to the right to AD1

AD=C+I+G+(XM)

Apart from G, C and I are also likely to be affected directly or indirectly by the policy change.

BUDGET
A budget is a detailed plan of operations for some specific future

period It is an estimate prepared in advance of the period to which it applies.

COMPONENTS OF BUDGET

Revenue receipts Capital receipts Revenue expenditure Capital expenditure

Where The Rupee Comes From

non-tax revenue 10% non-debt capital reciepts 1% service & other taxes 7% excise 17%

borrowings 19%

customs 12%

corporation tax 21%

income tax 13%

Where Does The Rupee Goes To

other non plan exp. 11% subsidies 7% non plan assistance to states 5% defence 12% planned state assistance 7% state's share of taxes & duties 18%

interest 20%

central plan 20%

Government Income
Tax Revenue

Sale of Government Services e.g. prescriptions, passports, etc. Borrowing (PSNCR)

bn
100 200 300 400 500 600 700 0 Public sector total receipts1 billion Public sector total receipts1 % GDP

Public Sector Income

Year 33 34 35

19 90 19 91 91 19 92 92 19 93 93 -9 19 4 94 19 95 95 19 96 96 19 97 97 19 98 98 19 99 99 20 00 00 20 01 01 20 02 02 20 -03 03 -0 20 43 04 20 053 05 20 063 06 20 073 07 20 083 08 -0 93

36

%GDP

37

38

39

40

41

Government Income ($ billion)

Government Income ($ billion)

Government Income Inland Revenue 2008-09

Methods of funding
This expenditure can be funded in a number of different

ways:
Taxation Seignorage, the benefit from printing money Borrowing money from the population, resulting in a fiscal deficit

Consumption of fiscal reserves.

Sale of assets (e.g., land).

Funding the deficit Consuming the surplus

Economic effects of fiscal policy

Governments use fiscal policy to influence the level of

aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment, and economic growth. The government can implement these deficit-spending policies to stimulate trade due to its size and prestige. In the classical view, fiscal policy also decreases net exports, which has a mitigating effect on national output and income. When government borrowing increases interest rates it attracts foreign capital from foreign investors.