Fiscal Policy. Meaning The word ‘fiscal’ is derived from the Greek word ‘fisc’ meaning basket. The word ‘fisc’ was used to denote the income and expenditure.

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Presentation transcript:

Fiscal Policy

Meaning The word ‘fiscal’ is derived from the Greek word ‘fisc’ meaning basket. The word ‘fisc’ was used to denote the income and expenditure operations of the government while the income generating operations relate to taxation and govt. borrowing, the expenditure operations relates to govt.spending. The income of the govt. from various sources is called public revenue. It includes income from taxes : both direct and indirect.

Contd. Direct taxes include personal income tax, corporation tax,wealth and gift taxes. Indirect taxes include custom duties, excise duties and sales tax. Taxes constitute the bulk of govt. incomes. Other sources include profits generated by public sector enterprises, fines, fees, gifts and grants. Other sources are referred to as non-tax revenue of the govt. Similarly,the govt. makes expenditure on various activities which includes social and community services,economic services, general services.

Definition Prof. Ursula Hicks says that “ fiscal policy is concerned with the manner in which the different elements of public finance may collectively be geared to forward the aim of economic policy”. According to them, Fiscal policy serves two major economic functions, namely: (i)It sets national priorities, allocates national output among private and public consumption and investment,and (ii)It provides incentives to increase or decrease output in the particular sectors of the economy.

Objectives (1)High level of employment (2)Sustained Economic Growth (3)Economic Stability (4)Social justice and Equity: (a)Increasing the rate of investment and capita;l formation (b)Encouraging a socially optimum pattern of investment (c)Reducing income inequalities (d)Controlling inflationary pressures in the economy

Instruments of Fiscal policy Discretionary Fiscal Policy: (1)Anti-recessionary or Expansionary Fiscal Policy (a)Compensating Increase in Govt. Expenditure: K= 1/ 1-MPC (b) Tax reduction as an instrument of Anti-recessionary Fiscal Policy (2) Anti-inflationary or Contractionary Fiscal Policy Non-discretionary Fiscal Policy (Automatic Stabilizers): (1)Personal Income Tax and Corporate Income tax

Contd. (2) Transfer Payments (3) Corporate dividends

Limitations of Fiscal Policy (1)Long Time-span between Cyclical Shock and Effective Response (2)Difficulty in Raising Taxes and Reducing Expenditures (3) Large Fiscal Deficits and Lack of Upward Flexibility