Too often in recent history liberal government have been wrecked on rocks of loose fiscal policy.

- Franklin D Roosevelt

FISCAL POLICY AND BUDGET AT A GLANCE

Presented by Group 6

Contents • Public Finance as Over the Years• Public Finance, Keynes and Beyond• Issues Related to Aggregate

Demand• Instruments of Fiscal Policy

– Instruments of Policy in Inflation– Crowding Out Effect (Recession)– Instruments of Fiscal Policy to Cure

Recession– The Essence of Taxation– Government Expenditure– Measures of Deficit– India’s Fiscal Deficit

• Budget at a Glance• Dream Budget

Public Finance As Over the Years

• A balanced budget• Public debt considered a

burden• Everything true of an

individual or family is also true of government

• Equal tax collection• Policy of laissez-faire

Adam Smith

Alfred Marshall

David Ricardo

Thomas Malthus J B Say

Irving Fisher

Public Finance, Keynes and Beyond

• The Great Depression• Government

Intervention• Focus on Aggregate

Demand

• Emerging importance of the Fiscal Policy

Issues Related to Aggregate Demand

Y

OXY1 Y2

ΔY

E

G

HR

C + I

C + I + G

Z

45⁰

Multiplier = 1 1- MPC

Slope is equal to MPC

National Income

C, I,

G

INSTRUMENTS OF FISCAL POLICY

- Government Expenditure- Taxation

Instruments of Fiscal Policy in Inflation

Y

OXYF Y2

ΔY

E

Inflationary Gap

H

C + I + G1#

C + I + G2

Z

45⁰

#ΔY = ΔG* 1 [1– MPC*(1-t)]

Expe

nditu

re (C

, I, G

)

National Income

J

C + I + G1

Y1

ΔG

Crowding Out Effect (Recession)

E3

E2

E1

I

Y2Y1 YF

45

C+I1+G2

C+I2+G2

C+I1+G1

45

C +

I + G

Y

O XNational Income

Inte

rest

I2 I1

r1

r2

O

Y

X

I

I

I

Investment

Instruments of Fiscal Policy to Cure Recession

Y

O XY1 YF

ΔY

E1

ΔG

HR

C + I1 + G1

C + I1 + G2

45⁰

45⁰

Expe

nditu

re

GNP Gap

Deflationary Gap

ΔY = ΔG* 1 1 - MPC

National Income

Y

O XMs1 Ms

2

E1 E2

Md1

Md2

r

Rate

of i

nter

est

Quantity of money

The Essence of TaxationT/ Y

YIncomeO

% o

f inc

ome

paid

in ta

xes

Progressive

Proportional

Regressive

The Laffer CurveTax Rate

Tax RevenuesR2R1

50%

60%

Maximum Tax Revenues

Government Expenditure

Measures of Deficit

• Revenue Deficit = Expenditure – Receipts

• Fiscal Deficit = (Total Expenditure) - (Revenue Receipts + Non-debt Capital Receipts)

• Primary Deficit = Fiscal Deficit – Interest Payments

India’s Fiscal Deficit

BUDGET AT A GLANCE

- Revenue Receipts- Capital Receipts- Total Receipts- Non-Plan Expenditure- Plan Expenditure- Total Expenditure- Revenue Deficit- Fiscal Deficit- Primary Deficit

Dream Budget

• Broadening of Tax Base• Reform in Subsidies • Resettlement of Slum Dwellers• Employment for All• Food for All• Education for All• Health and Social Security• Justice for All