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implications of fiscal policy and central budgets on an economy
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Too often in recent history liberal government have been wrecked on rocks of loose fiscal policy.
- Franklin D Roosevelt
FISCAL POLICY AND BUDGET AT A GLANCE
Presented by Group 6
Contents • Public Finance as Over the Years• Public Finance, Keynes and Beyond• Issues Related to Aggregate
Demand• Instruments of Fiscal Policy
– Instruments of Policy in Inflation– Crowding Out Effect (Recession)– Instruments of Fiscal Policy to Cure
Recession– The Essence of Taxation– Government Expenditure– Measures of Deficit– India’s Fiscal Deficit
• Budget at a Glance• Dream Budget
Public Finance As Over the Years
• A balanced budget• Public debt considered a
burden• Everything true of an
individual or family is also true of government
• Equal tax collection• Policy of laissez-faire
Adam Smith
Alfred Marshall
David Ricardo
Thomas Malthus J B Say
Irving Fisher
Public Finance, Keynes and Beyond
• The Great Depression• Government
Intervention• Focus on Aggregate
Demand
• Emerging importance of the Fiscal Policy
Issues Related to Aggregate Demand
Y
OXY1 Y2
ΔY
E
G
HR
C + I
C + I + G
Z
45⁰
Multiplier = 1 1- MPC
Slope is equal to MPC
National Income
C, I,
G
INSTRUMENTS OF FISCAL POLICY
- Government Expenditure- Taxation
Instruments of Fiscal Policy in Inflation
Y
OXYF Y2
ΔY
E
Inflationary Gap
H
C + I + G1#
C + I + G2
Z
45⁰
#ΔY = ΔG* 1 [1– MPC*(1-t)]
Expe
nditu
re (C
, I, G
)
National Income
J
C + I + G1
Y1
ΔG
Crowding Out Effect (Recession)
E3
E2
E1
I
Y2Y1 YF
45
C+I1+G2
C+I2+G2
C+I1+G1
45
C +
I + G
Y
O XNational Income
Inte
rest
I2 I1
r1
r2
O
Y
X
I
I
I
Investment
Instruments of Fiscal Policy to Cure Recession
Y
O XY1 YF
ΔY
E1
ΔG
HR
C + I1 + G1
C + I1 + G2
45⁰
45⁰
Expe
nditu
re
GNP Gap
Deflationary Gap
ΔY = ΔG* 1 1 - MPC
National Income
Y
O XMs1 Ms
2
E1 E2
Md1
Md2
r
Rate
of i
nter
est
Quantity of money
The Essence of TaxationT/ Y
YIncomeO
% o
f inc
ome
paid
in ta
xes
Progressive
Proportional
Regressive
The Laffer CurveTax Rate
Tax RevenuesR2R1
50%
60%
Maximum Tax Revenues
Government Expenditure
Measures of Deficit
• Revenue Deficit = Expenditure – Receipts
• Fiscal Deficit = (Total Expenditure) - (Revenue Receipts + Non-debt Capital Receipts)
• Primary Deficit = Fiscal Deficit – Interest Payments
India’s Fiscal Deficit
BUDGET AT A GLANCE
- Revenue Receipts- Capital Receipts- Total Receipts- Non-Plan Expenditure- Plan Expenditure- Total Expenditure- Revenue Deficit- Fiscal Deficit- Primary Deficit
Dream Budget
• Broadening of Tax Base• Reform in Subsidies • Resettlement of Slum Dwellers• Employment for All• Food for All• Education for All• Health and Social Security• Justice for All