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Fiscal policy its objectives
Definition of Fiscal Policy. Fiscal policy
involves the Government revenue and
Government Spending in order to
influence Aggregate Demand (AD) and
therefore the level of economic activity.
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Objectives
Growth and employment by increasing
aggregate demand
Redistribution of income and wealth
Allocation of resources in desired
directions
Stabilization of the economy External Balance
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Fiscal Stance:
This refers to whether the govt is increasing AD ordecreasing AD
Expansionary (or loose) Fiscal Policy. This involves increasing AD,
Therefore the govt will increase spending (G)and cut taxes. Lower taxes will increase consumers
spending because they have more disposable income(C)
This will worsen the govt budget deficit Contractionary (or tight) Fiscal Policy
This involves decreasing AD
Therefore the govt will cut govt spending (G)
And or increase taxes. Higher taxes will reduceconsumer spending (C) This will lead to animprovement in the government budget deficit
Fine Tuning : This involves maintaining a steady rate ofeconomic growth through using fiscal policy. Howeverthis has proved quite difficult to achieve precisely.
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Instruments of fiscal policy
Taxes
Public Expenditure
Public debt or borrowings Deficit financing
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TYPES OF TAXES When it is said Indian Government, it can
be classified into Central Government andthen into state government.
Taxes imposed on citizens of India can be
broadly classified into two categories:1. Direct Taxes and
2. Indirect Taxes
Progressive Regressive
Proportional
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Taxes can be distinguished by the effect they have on the
distribution of income and wealth.
A proportional tax is one that imposes the same relativeburden on all taxpayersi.e., where tax liability and
income grow in equal proportion.
A progressive tax is characterized by a more than
proportional rise in the tax liability relative to the increasein income, and
A regressive tax is characterized by a less than
proportional rise in the relative burden. Thus, progressive
taxes are seen as reducing inequalities in income
distribution, whereas regressive taxes can have the effect
of increasing these inequalities.
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Public Expenditure
Government Expenditure = (revenue +capital
exp.) and Transfer payments
Revenue Expenditure: is recurring spending or,
in other words, spending on items that are
consumed and only last a limited period of time.They are items that are used up in the process
of providing a good or service. In the case of the
government, revenue expenditure would include
wages and salaries and expenditure onconsumables - stationery, drugs for health
service and so on.
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Capital Expenditure: by contrast, capital
expenditure is spending on assets. It isthe purchase of items that will last and will
be used time and time again in the
provision of a good or service. In the case
of the government, examples would be the
building of a new hospital, the purchase of
new computer equipment or networks,
building new roads and so on.
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The breakdown between these two types of
spending is very important. Capital expenditure
has a lasting impact on the economy and helpsprovide a more efficient, productive economy. A
new hospital, for example, will be much more
efficient and allow more patients to be treated for
many years into the future. revenue expenditure,
however, doesn't have such a lasting impact.
Once the money is spent, it is gone and the
effect on the economy is simply a short-termone.
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Public Debt Over the years, the public debt of the India's Central
and that of State government has increasedconsiderably during the planning period. The
Government borrows funds by way of public debt to
meet the various development and non-development
expenses.
Internal Debt: The various internal sources from which the government borrows include
individuals, banks, business firms, and others. The various instruments of
internal debt include market loans, bonds, treasury bills, ways and meansadvances, etc.
Internal debt is repayable only in domestic currency. It imply a redistribution
of income and wealth within the country & therefore it has no direct money
burden.
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External Debt
External loans are raised from foreign countries
or international institutions. These loans arerepayable in foreign currencies. External loans
help to take up various developmental
programmes in developing and underdeveloped
countries. These loans are usually voluntary.
An external loan involves, initially a transfer of
resources from foreign countries to the domestic
country but when interest and principal amountare being repaid a transfer of resources takes
place in the reverse direction
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Flexibility of Fiscal policy
Discretionary Fiscal Policy
Non Discretionary Fiscal
Policy: Automatic
stabilizers or built in
stabilizers
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Automatic Fiscal Stabilizers
If the economy is growing, people will
automatically pay more taxes ( VAT and Income
tax) and the Government will spend less on
unemployment benefits. The increased T andlower G will act as a check on AD.
In a recession the opposite will occur with tax
revenue falling but increased government
spending on benefits, this will help increase AD
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Discretionary Fiscal Stabilizers
This is a deliberate attempt by the govt to affect AD andstabilize the economy, e.g. in a boom the govt will increasetaxes to reduce inflation
Injections (J): This is an increase of expenditure into thecircular flow, it includes govt spending(G), Exports (X) andInvestment (I)
Withdrawals (W): This is leakages from the circular flowThis is household income that is not spent on the circularflow. It includes: Net savings (S) + Net Taxes (T) + NetImports (M).
Fiscal Policy was particularly used in the 50s and 60s tostabilize economic cycles. These policies were broadlyreferred to as 'Keynesian' In the 1970s and 80sgovernments tended to prefer monetary policy forinfluencing the economy.
There are many factors which make successful
implementation of fiscal Policy difficult .
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Budget and various concepts of
budget deficits
The budget of the government of India, for any year ,
gives a complete picture of the estimated receipts and
expenditure of the govt on the on the basis of the figures
of the two previous year . Every budget , for instance
gives three sets of figures . For example, the budgetestimates for the year 2008-09 contains :
Actual or account for the year 2006-07.
Budget and revised figures for the year 207-08.
Budget estimates for 2008-09
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Receipts and Expenditure of central government1.REVENU RECEIPTS (a+b) (net)
a. Tax Revenue
b.Non Tax Revenue2.Revenue Expenditure of which
a. Interest payments
b. Major subsidies
c. Defense expenditure
3. Revenue Deficits (2-1)4. Capital Receipts of which
a. Recovery of loans
b. Other Receipts ( mainly PUS disinvestment )
c. Borrowing and other liabilities
5. Capital Expenditure
6. Total Expenditure ( 2+5= 6(a)+6(b) of whicha.Plan Expenditure
b. Non plan Expenditure
7.Fiscal Deficit( (6-1-4 (a)-4(b)
8.Primary deficit( 7-2(a)
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Budget DeficitsBasic Definitions -
Revenue Deficit= Revenue Receipts Revenue
Expenditure
Budget Deficits = Total Receipts( Revenue
Receipts + Capital Receipts ) Totalexpenditure
Fiscal Deficit = Revenue Receipts + (Capital
Receipts Borrowing and other liabilities )
Total Expenditure
Primary Deficit= Fiscal Deficit Interest
Payments
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Burden of deficits and Debt and monetized public debt
Implications of high fiscal deficits
Money Supply growth rate
Inflation
Crowding out of private investment
Crowding out of essential publicexpenditure
The following data are extracted from the quarterly report Jan The
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The following data are extracted from the quarterly report, Jan The
following estimates are extracted from the Union Budget for the
year 1998-99.CalculateRs. in crore
Tax revenue 1,16857
Non-tax revenue 45,137
Recoveries of loans 9,908
Other capital receipts 5,000
Borrowings/other liabilities 91,025
Non plan expenditure
On revenue account
(of which interest payment is Rs.75,000
crore)
1,66301
On capital account 29,624
Plan expenditure
On revenue account 43,761
On capital account 28,241
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You are required to compute
Revenue Receipts
Capital Receipts
Revenue Expenditure
Capital Expenditure
Revenue Deficit
Fiscal Deficit
Primary Deficit
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