Fiscal Policy Dr. Kavita Srivastava Deptt. Of Management ITS, Ghaziabad
Meaning & Definition Fisc means State Treasury. Fiscal Policy refers to the policy concerning the use of state treasury or the government finances to achieve the macroeconomic goals. Fiscal Policy is a policy under which the government uses its expenditure and revenue programmes to produce desirable effects on the national income, production and employment. In order to attain these objectives, the government of India has been formulating its fiscal policy incorporating the revenue, expenditure and public debt component in a comprehensive manner. 12/7/2009 Dr. Kavita Srivastava 2
Objectives of the Fiscal Policy: To mobilise adequate resources for financing various programmes and projects adopted for the economic development. To raise the rate of savings and investment. To attain economic stability To remove poverty and unemployment To reduce regional disparities To reduce the inequality of income and wealth. To maintain growth rate in the economy 12/7/2009 Dr. Kavita Srivastava 3
Also called budgetary policy where revenue and expenditure of government are dealt with. 12/7/2009 Dr. Kavita Srivastava 4
Scope of Fiscal Policy Includes the number of fiscal instruments and target variables. Fiscal instruments are the variables that government can change at its own discretion. It includes budgetary policy, government expenditure policy, taxation, public debt & deficit financing. Target variables are macro variables like disposable income, aggregate consumption, savings & investment, imports & exports and the general prices. 12/7/2009 Dr. Kavita Srivastava 5
Fiscal instruments Budgetary Policy: Balance Budget Surplus Budget Deficit Budget 12/7/2009 Dr. Kavita Srivastava 6
Public Expenditure Government Expenditure is on the following: Public spending on purchase of goods and services Payment for wages and salaries of government servants Public investments Transfer payments Government expenditure is an injection to the economy, it adds to the aggregate demand 12/7/2009 Dr. Kavita Srivastava 7
Development of infrastructure Development of public enterprises Support to the private sector Social Welfare and employment programmes 12/7/2009 Dr. Kavita Srivastava 8
Taxation Tax is a non Quid pro quo payment tby the people to the government Direct & indirect taxes Direct tax includes taxes on personal income, corporation tax, wealth & property. In 2002-03, personal income tax contributed 17.0 percent and corporation tax 21.3 percent of the gross tax revenue 12/7/2009 Dr. Kavita Srivastava 9
Indirect Taxes Indirect ttaxes includes taxes on production and sale of the goods and services. Also called commodity taxes Excise duty and custom In 2002-03, central excise duty yielded 38.1 percent and customs 20.7 percent of the gross tax revenue. 12/7/2009 Dr. Kavita Srivastava 10
Public Debt Internal Debt : (i) Borrowing from the public by means of government bonds and treasury bills (ii) Borrowing from the central bank, i.e., deficit financing External Borrowings: ( i ) Borrowing from foreign government,(ii) International organizations, (iii) Market Borrowings 12/7/2009 Dr. Kavita Srivastava 11
Deficit Financing Is a situation where expenditure of the government acceedes its revenue in the current and capital account. 12/7/2009 Dr. Kavita Srivastava 12
Kinds of fiscal policy Compensatory fiscal policy Surplus budgeting During the period of inflation, expenditure is lower than the revenue, high rate of tax is imposed this reduces the purchasing power of individuals as their disposable income decreases as a result the aggregate demand decreases. A cut in government expenditure also reduces the aggregate demand. 12/7/2009 Dr. Kavita Srivastava 13
Deficit Budgeting During the period of deflation, expenditure is more than the revenue, low rate of tax is imposed this increases the purchasing power of individuals as their disposable income increases as a result the aggregate demand increases. An increase in government expenditure also increases the aggregate demand. 12/7/2009 Dr. Kavita Srivastava 14
Discretionary fiscal policy Government makes deliberate changes in: The level and pattern of taxation Size and pattern of its expenditure The size and composition of public debt 12/7/2009 Dr. Kavita Srivastava 15
Changes in Taxation Includes changes in direct and indirect taxes as Increasing or decreasing the tax rates Imposition of new taxes or abolition of old taxes Imposition of taxes on new tax bases 12/7/2009 Dr. Kavita Srivastava 16
Changes in Government Includes: Expenditure Change in the size of government expenditure Composition of government expenditure The method of financing government expenditure Transfer payments Methods of deficit financing 12/7/2009 Dr. Kavita Srivastava 17
Fiscal Policy & Macroeconomic Goals Fiscal Policy for economic growth: Given the manpower, technology & the natural resources, the growth rate of a country depends on the rate of savings and investment. 12/7/2009 Dr. Kavita Srivastava 18
In order to promote savings, the rate of income tax is enhanced than the tax incentives are provided for savings corporate sector is provided with number of incentives and concessions for promoting private investments t Incentives and concessions include tax holiday, investment subsidies, exemption from the import duties and so on. 12/7/2009 Dr. Kavita Srivastava 19
These methods often prove inadequate for raising savings due to: Low level of per capita income and high rate of MPC A small fraction of population with taxable income Inadequate growth of population p and social overhead capital Lack of effective aggregate demand 12/7/2009 Dr. Kavita Srivastava 20
Government is required to play the role of a prime mover. Progressive taxation policy Widespread taxation of all kinds of consumer goods Taxation of luxury goods Imposition of exorbitantly high duty on import of consumer goods 12/7/2009 Dr. Kavita Srivastava 21
Public Borrowings &Economic Growth Internal borrowings include market borrowing and deficit financing External borrowings is from the international organizations to finance growth projects. 12/7/2009 Dr. Kavita Srivastava 22
Fiscal Policy & Employment Heavy taxation on capital intensive goods Sbidi Subsidization i of flb labour intensive i goods. Heavy duty on imports of capital intensive technology Concession on imports of finputs for labour intensive i products Government allocation of funds for labour intensive i public works like construction of roods, dams, canals and bridges. Promotion of schemes like JRY etc. 12/7/2009 Dr. Kavita Srivastava 23
THANK YOU 12/7/2009 Dr. Kavita Srivastava 24