Fiscal Policy

Fiscal Policy-definition
 “Fiscal policy is the means by which a government
adjusts its levels of spending in order to monitor and
influence a nation’s economy”.
 “Fiscal policy is that part of government policy which
is concerned with razing revenue through taxation
and other means and deciding on the level and
pattern of expenditure”.
 “In other wards the term fiscal policy refers to the
expenditure a government undertakes to provide
goods and services and to the way in which the
government finances these expenditures”.
 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.

 “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.”
Objectives of Fiscal Policy
 To achieve desirable price level:
To Achieve desirable consumption level:
To Achieve desirable employment level:
To achieve desirable income distribution:
Increase in capital formation:
 Degree of inflation:
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
Deficit financing
 The Golden Rule
Fiscal policy framework
The Government's fiscal policy framework is
based on the five key principles set out in the
Code for fiscal stability - transparency,
stability, responsibility, fairness and efficiency.
the golden rule:
over the economic cycle, the Government will
borrow only to invest and not to fund current
spending;
the sustainable investment rule:
 Fiscal Policy In Action
The rise in AD leads to an increase in real national income, ceteris paribus,
unemployment would fall to 3% but at a cost of higher inflation
If government ‘reduces taxes’ (remember the AD therefore
subtleties) and or increases spending, it will have shifts to the
various effects: right to AD1
Assume an
initial
equilibrium
position with
a level of
National AD=C+I+G+(X-
Income M)
giving an Apart from G, C
unemployme and I are also
nt rate of 5% likely to be
(U = 5%) affected directly
or indirectly by
the policy change.
 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
Where The Rupee Comes
From
non-tax revenue service & other taxes
10% 7%
non-debt capital reciepts
1% excise
17%

borrowings
19%

customs
12%

corporation tax
income tax
21%
13%
Where Does The Rupee
Goes To
state's share of
other non plan exp.
taxes & duties
11%
18%
subsidies
7%
non plan assistance
to states
5%
defence
12% planned state
assistance
7%

interest central plan

20% 20%
 Government Income

Tax Revenue
Sale of Government Services –
e.g. prescriptions, passports, etc.
Borrowing (PSNCR)
Public Sector Income

700
Government Income ($
billion)
Government Income ($
billion)
Government Income – Inland Revenue
2008-09
 Methods of funding
This expenditure can be funded in a number of different
ways:
 Taxation
 Seignorage, the benefit from printing money
 Borrowing money from the population, resulting in a fiscal deficit
 Consumption of fiscal reserves.
 Sale of assets (e.g., land).

Funding the deficit

Consuming the surplus
 Economic effects of
fiscal policy
Governments use fiscal policy to influence the level
of aggregate demand in the economy, in an effort
to achieve economic objectives of price stability,
full employment, and economic growth.
The government can implement these deficit-
spending policies to stimulate trade due to its size
and prestige.
In the classical view, fiscal policy also decreases
net exports, which has a mitigating effect on
national output and income. When government
borrowing increases interest rates it attracts
foreign capital from foreign investors.