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Fiscal Policy And Its

Instruments

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Fiscal Policy-Meaning

Fisc - state treasury

Fiscal policypackage of governments economic

measures to influence the direction of nationseconomy by using its financial and regulatorypowers.

The expenditure a government undertakes to provide

goods and services and the way in which thegovernment finances these expenditures.

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Objectives of Fiscal Policy

It has 2 major objectives:

i. GENERAL - aimed at achievingmacroeconomic goals

ii. SPECIFIC - relating to any particular

problem of the economy

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Fiscal Policy And

Macroeconomic Goals

Economic Growth - by creating conditions for increase in

savings & investment.

Employment

Reduce sectoral and regional imbalances.

Economic Equality

Price stability

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Functioning of fiscal policy

Aim is to increase

Aggregate

Demand

Govt. buys moregoods and

services

Decrease tax on1.Households

2. Corporate world

Increase transferpayments

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Instruments of Fiscal Policy

Powerful tool for creating demand stimulus.

Budgetary surplus and deficit

Government expenditure

Taxation- direct and indirect

Public debt

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Budgetary surplus and deficit

A budget is a detailed plan of operations for

a specific future period

Keeping budget balanced (R=E) or deficit

(RE) as a matter of policy

is itself a fiscal instrument.

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Government Expenditure

It includes :

Government spending on current purchase of

goods & servicesgovt. consumption.

Payment of wages and salaries of government

servants

Investmentintended for future benefits.Transfer paymentsno purchases but just

transfer of money.

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Public debt

Internal borrowings

1. Borrowings from the public by means of treasury bills and

govt. bonds

2. Borrowings from the central bank (monetization of debt)

External borrowings

1.

Foreign investments2. From international organizations World Bank & IMF

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Taxation

Non quid pro quo transfer of private income topublic coffers for the purpose of generatingrevenues for public expenditure.

Classified into

1. Direct taxes- Corporate tax, Personal Income Tax,Fringe Benefit tax, Banking Cash Transaction Tax

2. Indirect taxes- Central Sales Tax, Service Tax,Excise duty.

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What is taxation?

Means by which government raises revenue

under the authority of the law, to promote welfare

and protection for its citizens.

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What is tax ?

Characteristics of Tax

Forced contribution

Non quid pro quo

Levied for public purposesdomestic, external

Levied on person or property

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Why to tax ?

Three R

Revenue

Redistribution

Reorientation of pattern and level of demand

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How to tax ?

Should it be progressive?

Should it be regressive?

Should it be proportional?

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How to tax ?

Basic Principles of a Sound Tax System

Fiscal adequacy - revenue should be capable ofexpanding or contracting in response to changes in publicexpenditureluxury items

Equality - taxes levied must be based upon the payingability of the bearer.

Administrative feasibility - tax should be clear to

taxpayers, enforcement should be easy and convenient.

Compatible with economic goalseg. sectoral boost,R&D.

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Direct tax levied on income, wealth and profit.

Indirect tax on expenditure (spending on goods and services), such

as excise duties, VAT.

Why indirect taxes not recommended?

Many are regressive in naturedo not follow equity principle.

Raising indirect taxes leads to cost push inflation.

Less revenue when consumer demand is low.

Where to tax ?

Direct Vs Indirect taxation