Fiscal policy

1. Impact of Fiscal
Policy on
Economy
Group 3
1. Ashish Kumawat
2. Amit Kumar
3. Vikas Mishra
4. Prateek Darjee
5. Deepak Memane

2. Introduction
• Fiscal Policy is a part of macroeconomics,
and this is also known as budgetary policy
• It is that policy which guides the
government in deciding :
o How much money it should spend?
o Where to spend?
o From where will it get that money?
• One major function of the government is to
stabilize the economy
This Photo by Unknown author is licensed under CC BY.

3. Definition
• The word fisc means 'state treasury' and fiscal policy refers to
policy concerning the use of 'state treasury' or the
government finances to achieve the macroeconomic goals.
• Fiscal policy governed by government's finance ministry. It
refers to the use of government spending and tax policies to
influence economic conditions
• It is sister strategy to monetary policy through which a central
bank influences a nation's money supply

4. Objectives of Fiscal Policy
1. Higher Economic Growth
2. Price Stability
3. Reduction in Inequality

5. Components of Fiscal Policy
1. Government Receipt – Taxation, University fees, PSU company sales, disinvestment
etc.
2. Government Expenditure – Public services, social programs, infrastructure, defense,
education etc.
3. Public Debt – External (International) creditors, Internal (Domestic individuals,
institutions, and organizations) creditors.
Receipts and Expenditures of the Indian government are credited and debited from 3
Funds -
i. Consolidated Fund of India
ii. Contingency fund of India
iii. Public Account of India

6. Instruments of Fiscal Policy
A Budget is a detailed plan of operations for some specific future period
Budget
Government Revenue collection through direct and indirect taxes
Taxation
Spending made by the government of country on collective needs and wants
such as pension, education, infrastructure etc.
Public
Expenditure
Any money owned by a government agency by internal or external borrowings
Public Debt

7. Types of Fiscal Policy
1. Expansionary Fiscal Policy – Employed when the economy is experiencing a
slowdown or recession.
2. Contractionary Fiscal Policy – Used to combat inflation and prevent
overheating economy.

8. Expansionary
Fiscal Policy
• It is defined as the policy that
works towards promoting the
consumption in the economy.
It works for expansion of the
economy.
• Government increases the
spending and lowers tax rates
for boosting economic growth
• This increases the
aggregate demand;
consumption & It increases
in purchasing power
e.g. - During the 2008 financial crisis, many
governments implemented stimulus
packages to revive their economies

9. Contractionary
Fiscal Policy
• It is defined as the policy that
works towards contracting the
economy
• Government reduces the
spending and increases tax rates
at the same time
• Result of such a move is that
there is very less money
available in the market which
leads to reduction in purchasing
power and consumption declines.
e.g. - Central banks and governments work
together to implement contractionary
measures during period of high inflation

10. Case Studies
China – Fiscal Stimulus (2008-2009) -
• Response to global financial crisis
• Expansionary Fiscal policy
• Massive fiscal stimulus package
• Increased government spending on -
• Infrastructure projects
• Housing
• Rural development
• Aimed at stimulating economic growth
and job creation

11. Case Studies
India – Goods and Services Tax (GST) implementation (2017)
• Reforms in tax structure
• Neutral in terms of Expansionary or Contractionary
• Replaced multiple state and central taxes with unified GST
• Goals -
• Simplify taxation
• Improve efficiency
• Promote economic Growth

12. Fiscal Deficits and Surpluses
Fiscal Deficit = Total expenditure – Total receipt
• Fiscal deficit occurs when government spending
exceeds revenue from taxation. This can lead to
an increase in public debt.
• Budget Surpluses occurs when government
revenue exceeds spending. While surpluses can
reduce debt, they might also lead to reduce
economic activity due to decreased
government spending

13. Fiscal Deficit Statistics of India

14. Fiscal Policy of India – 2023-24
• Extended capital investment – 33% increase, a jump
of 10 lakh crore rupees
• Fiscal deficit for the fiscal year 2023-24 is targeted
at 5.9% of GDP compared to the present fiscal
deficit rate of 6.4%
• Tax deductions as per the new tax regime – To
provide effective solution for controlling inflation
and any kind of economic recession. Those with
lower incomes will have more purchasing power
and improved quality of life.
This Photo by Unknown author is licensed under CC BY-NC-ND.

15. Challenges of Fiscal Policy
• Time Lags – Delayed effects due to implementation and economic
response time
• Political influence – Short term political goals may override long
term economic considerations
• Coordination challenges – Complexities in aligning policies across
different levels of government
• Budget Constraints – Deficit spending can lead to high public debt
and limit future flexibility
• Inflation – Expansionary policy might contribute to demand-pull
inflation
• Crowding Out – Government borrowing can increase interest rates,
impacting private investment
• Global factors – External conditions can influence policy
effectiveness
• Size of Economy – Large Economy require significant policies for
meaningful impact

16. Conclusion
Fiscal Policy is a powerful tool that governments
use to shape economic conditions.
By strategically adjusting government spending
and taxation, policymakers can influence
economic growth, employment, inflation, and
overall stability.
However, finding the right balance and timing is
essential to ensure positive outcomes.

17. THANK YOU
Economics is the efficient allocation of limited resources to
satisfy unlimited wants – Thomas Sowell