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.

• “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)

or surplus (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. bonds2. Borrowings from the central bank (monetized deficit

financing) • External borrowings 1. foreign investments2. international organizations like World Bank &

IMF3. 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 2007-08

Where The Rupee Comes Fromservice & other taxes

7%

excise17%

customs12%

income tax13%

corporation tax21%

borrowings19%

non-debt capital reciepts1%

non-tax revenue10%

Where Does The Rupee Goes Tostate's share of taxes & duties

18%

non plan assistance to states

5%

planned state assistance

7%

central plan20%

interest20%

defence12%

subsidies7%

other non plan exp.11%

Tax policy function

• 1. Revenue function

• 2. regulatory function

Fiscal Responsibility And Budget Management (FRBM) Bill

• Introduced in Lok Sabha in December 2000.• 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

Items Units2005-

062006-

072007-

08*

Central Government Finances 

Revenue deficit/ GDP % 2.6 2 1.5

Fiscal deficit/ GDP % 4.1 3.7 3.3

Gross Tax/ GDP % 10.3 11.4 12.0

Expenditure/ GDP % 14.2 14.1 14.0**

Debt/ GDP % 65.1 64.4 58.6

*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