Fiscal Policy

GROUP MEMBERS1. Ambreen Abbas

F13ba1382. Hina Zaheer

F13ba1393. Saira Asad

F13ba1194. Sundas Tahir

F13ba112

What is Fiscal Policy?

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy.

It is the sister strategy to monetary policy through which a central bank influences a nation's money supply.

Fiscal policy can be distinguished from monetary policy, in that fiscal policy deals with taxation and government spending and is often administered by an executive under laws of a legislature, whereas monetary policy deals with the money supply, lending rates and interest rates and is often administered by a central bank.

Objectives of Fiscal Policy

The following are the objectives of fiscal policy: 1.Full employment: To maintain and achieve full employment. 2.Price stability: stabilize the price level. 3.Redistribution of wealth: To stabilize the growth rate of the

economy. 4.Equilibrium in BOP: To maintain equilibrium in the balance of

payments. 5.Economic Development: To promote the economic development

of underdeveloped countries.

Fiscal Policy for Economic Growth The role of fiscal policy for economic growth relates to the

stabilization of the rate of growth of an advanced country. Fiscal policy through variations in government expenditure and

taxation profoundly affects national income, employment, output and prices An increase in public expenditure during depression adds to the aggregate demand for goods and services.

Reduction of public expenditure during inflation reduces aggregate demand, national income, employment, output and prices.

Thus the government can control deflationary and inflationary pressures in the economy by a judicious combination of expenditure and taxation programs. For this, the government follows compensatory fiscal policy.

Instruments of Fiscal policy

Government Expenditure (G) Taxes (T)- both direct and indirect Deficit Financing Subsidies Transfer payment like pension, scholarship, unemployment allowance.

Role of fiscal policy in income determination

How can government expenditure and taxation be used to affect the level of economic activity?

The government can use fiscal policy (tax, expenditure and borrowing measures) through the budget to affect the overall level of economic activity.

The basic idea is simple. If the government calculates that there is likely to be a deflationary gap

(i.e. where the overall level of spending is too low to maintain national income at an appropriate high level), then they should aim to increase injections in the economy.

This can be done through increasing government expenditure (without increasing taxation) e.g. through borrowing, or alternatively reducing taxation (without reducing government expenditure).

(Cont.…)

This is known as expansionary fiscal policy and is usually associated with the running of budget deficits.

Alternatively if there is already too much spending in the economy leading to n inflationary gap, then the government should aim to increase withdrawals.

Again this can be done in two ways - reducing government expenditure without reducing taxation, or increasing taxation without increasing government expenditure.

This generally leads to a surplus on the budget account. This deliberate use of the budget to influence economic activity is

known as discretionary fiscal policy.

Fiscal policy of Pakistan budget 2015 Pakistan Atomic Energy Commission (PAEC) budget has also been reduced

from Rs59.3 billion to Rs30.4 billion for the new fiscal year. According to a copy of the ‘Budget in Brief’ document, a total of Rs.1514

billion have been allocated for Public Sector Development Projects (PSDP) Out of which Rs.700 billion have been set aside for federal development

projects And the remaining Rs.814 billion for provincial development projects. The developmental budget of Baluchistan is Rs.45 billion. Khyber Pakhtunkhwa (KP) budget for development projects is Rs.124

billion. The developmental budget of Sindh has been set of Rs.192 million.

A sum of Rs.1150 billion has been allocated for debt servicing- both internal and external.

(Cont.…)

According to details, the government has set a 5.5 percent economic growth target for the fiscal year 2015-16.

Trade deficit stays at $17.70 billion, while the government is expected to set a $43.30 billion import target.

Economic issues and their solutions

One thing sure that there will be no increase in the income of ordinary man. The number of poor men will also increase in Pakistan.

In 2011 the population was 175 million this means that some 70 million people will live in absolute poverty.

It also means that more than 40 percent of population of Pakistan will be in absolute poverty.

The main reason is most of these poor people live in urban areas and towns and they have less opportunity as compared with country side poors.

Economic problems

Economic Loss Due To War On Terrorism Energy Crisis Low FDI And Huge Debt Trap Poorly Managed Tax System Low Export And High Import Inflation Influx Of Local People From War Ridden Areas And Their Rehabilitation Lack Of Tourism

Solutions

The gap between rich and poor must be decreased by ensuring equal distribution of wealth

Dispensation of free and quick justice be ensured by strengthening judiciary

There is a sheer need to curb corruption at all levels. the institutions of NAB and FIA should be made more powerful to curb corruption

The curriculum of schools need to be reviewed so that children can receive scientific and secular education in their mother tongue. Moreover there is a need to develop critical and creative thinking

(Cont.…) Health care education and free health care needs be provided to all

citizens Provisions of equal rights to all citizens especially women and minorities

be ensured Poverty alleviation programs be initiated to reduce poverty and child labor Population growth is controlled by spreading awareness about the

advantage of small families among the masses through media Energy crisis must be resolved priority basis to revitalize the dying

economy New dams should be built and new methods of producing electricity

should be utilized Youth be equipped with technical education and new industries be set up

to provide employment.