FISCAL POLICY

• 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.”

objectives

i. GENERAL objectives - aimed at achieving macroeconomic goals

ii. SPECIFIC objectives - 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• Deficit financing

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

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 into1. 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.

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

Limitations of Fiscal Policy• Whenever legislative sanctions are required to bring about

changes in tax structure, there may be administrative delays in implementing fiscal policies.

• Effective implementations of fiscal policy involves accurately forecasting the future course of business cycles which is extremely difficult.

• Existence of time lags between the initiation of the fiscal measures and realization of its impact reduces the effectiveness.

• An increase in public investment may be followed by a decline in private investment.

• The fiscal policies may be adequate in dealing with run away inflations and deep depressions.