Fiscal Policy

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. G.K. Shaw“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.” - G.K. Shaw

Objectives of Fiscal Policy It has 2 major objectives: i.GENERAL obj-. aimed at achieving macroeconomic goals ii.SPECIFIC obj-. relating to any typical problems of an economy

Fiscal Policy And Macroeconomic Goals Economic Growth: By creating conditions for increase in savings & investment. Employment: By encouraging the use of labour- absorbing 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

Budgetary surplus and deficit “A budget is a detailed plan of operations for some specific future period” Keeping budget balanced (R=E) or deficit (R E) as a matter of policy is itself a fiscal instrument. An accumulated deficit over several years (or centuries) is referred to as the government debt A deficit is a flow. And a debt is a stock. Debt is essentially an accumulated flow of deficits

Stances of fiscal policy 1. Neutral fiscal policy 2. Expansionary fiscal policy 3. contractionary fiscal policy

Government Expenditure  It includes : Government spending on the purchase of goods & services. Payment of wages and salaries of government servants Public investment Transfer payments

Taxation Meaning : Non quid pro quo transfer of private income to public coffers by means of taxes. Classified into 1. Direct taxes- Corporate tax, Div. Distribution Tax, Personal Income Tax, Fringe Benefit taxes, Banking Cash Transaction Tax 2. Indirect taxes- Central Sales Tax, Customs, Service Tax, excise duty.

Public debt Internal borrowings 1.Borrowings from the public by means of treasury bills and govt. bonds 2.Borrowings from the central bank (monetized deficit financing) External borrowings 1.foreign investments 2.international organizations like World Bank & IMF 3.market borrowings

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

BUDGET FINANCIALS

Where The Rupee Comes From

Where Does The Rupee Goes To

Tax policy function 1. Revenue function 2. regulatory function

Fiscal Responsibility And Budget Management (FRBM) Bill Introduced in Lok Sabha in December Objectives include: 1.Long-term macroeconomic stability 2.Inter-generational equity in fiscal management. It aimed at: 1.Reducing revenue deficit 2.Reducing gross fiscal deficit 3.Reducing the Public debt 4.No Borrowing from the RBI

Sticking to FRBM Targets ItemsUnits * Central Government Finances Revenue deficit/ GDP% Fiscal deficit/ GDP% Gross Tax/ GDP% Expenditure/ GDP% ** Debt/ GDP% *From Budget proposals ** SBI share transfer excluded

Thank You “We need faster growth because, at our level of incomes, there can be no doubt that we must expand the production base of the economy if we want to provide broad-based improvement in the material conditions of living of our population, But growth alone is not enough if it does not produce a flow of benefits that is sufficiently wide-spread. We, therefore, need a growth process that is much more inclusive, and which also ensures access to essential services such as health and education for all sections of the community”. -Dr. Manmohan Singh, Prime Minister