Fiscal policy 1

Meaning  Fisc means State Treasury  Fiscal policy may be defined as that part of governmental economic policy which deals with taxation, expenditure, borrowing and the management of public debt in an economy. 2

Fiscal instruments 1) Taxation 1) Government Expenditure 2) Public Borrowing 3

Taxation  A tax is a compulsory contribution imposed by a public authority, irrespective of the exact amount of service rendered to the taxpayer in return, and not imposed as a penalty for any legal offence.  Compulsory contribution  Common benefits to all  No direct benefits 4

Trends in gross tax revenue YearTax revenue% of GDP , Budget ,32,

Direct and Indirect taxes  Direct taxes is one which the state demands from those very people who are expected to bear its burden eventually.  An indirect taxes is one which is demanded from the people who can shift its burden to others 6

Types Direct taxes  Income tax  Corporate tax Indirect taxes  Excise duty  Custom duty  Service tax 7

Share of direct and indirect taxes YearDirect taxesIndirect taxes

Public expenditure  Public expenditure refers to the expenses of public authorities like the Central,state and Local governments 9

Classification of public expenditure 1) Capital and revenue expenditure 2) Productive and unproductive expenditure 3) Transfer and non-transfer expenditure 10

Causes of public expenditure 1) Defence 2) Population 3) National income 4) Subsidies 5) Public debt 6) Administrative machinery 7) Democracy 11

Causes of public expenditure Interest Payments3,19,759 Defence1,13,829 Subsidies1,90,015 12

Public debt  Public debt implies the borrowings by the government from banks, business organizations and individuals.  Public debt is one of the instruments to cover deficits in the budget. 13

Components of internal debt 1) Market borrowings 2) Treasury bills 3) Bonds 4) Ways and Means advances 5) Securities against small savings 6) Small savings 7) Provident funds 8) Reserve funds and deposits 9) External debt 14

Budget  A budget is a description of the spending and financing plans of an individual, a company or a government.  The government budget shows the planned expenditure programme of the government and the expected revenues from taxes and other sources during the given year. 15

Components of the budget Budget Revenue budget Capital budget 16

Revenue budget Revenue Receipts Tax revenue Non tax revenue Revenue expenditure Development exp Non development exp 17

Capital expenditure Capital budget Capital receipts Capital expenditure 18

Concepts of deficit 1) Revenue deficit: Revenue expenditure is more than revenue receipts 2) Fiscal deficit: It is defined as excess of total expenditure (TE),including net lending(Loan-recovery), over revenue receipts(RR) plus external grants(EG) plus non-debt capital receipts(NCDR) GFD=(TE+NL)-(RR+EG+NDCR) 3)PRIMARY DEFICIT: It is equal to fiscal deficit minus interest payments 19

Deficit Revenue deficit Fiscal deficit

Components of Union budget 1. The actuals for the year preceding the current year 2. The budget estimates and the revised estimates for the current year. 3. The budget estimates for the coming year. 21

Actuals for preceding year Budget estimates for current year Revised estimate for current year Budget estimate for coming year 1. Revenue receipts a) Tax revenue b) b) Non-tax revenue 2. Revenue expenditure a) interest payment b) Major subsidies c) Defense expenditure 3)Revenue deficit/surplus 22

4) Capital receipts a) Recovery of loan b) Borrowing and other liabilities 5) Capital expenditure 6)Total expenditure [2+5] 7) Fiscal deficit [6-1-4(a)- 4(b) 8) Primary deficit [7-2(a)] 23