Fiscal Policy

Karan Sahu

Fiscal Policy Meaning

• The word “Fisc” means ‘State Treasury’ and fiscal policy refers to policy concerning the use of ‘state treasury’ or the Government finances to achieve the macroeconomic goals.

Definition

• It refers to the revenue and expenditure policy of the govt. which is generally used to cure recession and maintain economic stability in the country.

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

Rest of World

HouseholdsFirms

G

Circular Flow Diagram

G

Total Produced

National Income generated from production

National Income - Taxes + Transfers

to

NX

I

pay

GT

S

C

Objectives of Fiscal Policy

Economic Growth

Employment Generation

Stabilization

Economic equality

Balanced regional development

Price stability

INSTRUMENTS OF FISCAL POLICY

Government Expenditure

Government Revenue

Public Debt

Budgetary surplus and deficit

Government Expenditure

It includes

• Government spending on purchase of goods and services.

• Payment of wages and salaries of govt. servants.

• Public investment

• Transfer payments

Government Revenue- Taxation

Transfer of private income into public coffers by means of Tax. It is classified in to :

1. Direct tax: Income tax, Wealth tax, Corporate tax

2. Indirect tax: Excise duty, Customs duty, VAT,CST

The following tax system is followed to

decide the tax rate :

• Progressive Tax

• Proportional Tax

• Regressive Tax

Public Debt

• Internal borrowings

• Borrowings from the public by means of treasury bills and govt. bonds.

• Borrowings from the Central Bank

• External Borrowings

• Foreign investments

• Market borrowings

• International organization like World Bank & IMF.

Budgetary surplus and deficit

• “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.

• It is also known as Annual Financial Statement of the year.

Tools of Fiscal PolicyTools of

Fiscal Policy

Public RevenuePublic

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

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