Fiscal policy definition, objectives, tools, instruments.how fiscal policy effect on economy in different situations like recession and depression in the economy.

1. FISCAL POLICY
Present by: Sumiyyah
Abdul Aziz
BS(Economics)
The University of Haripur
Topic :1

2. DEFINITION:
al policy is the govt’s budgetary policy and it controls the govts expenditure and recipts.
OR
It operates through changes in govt expenditures, taxation and public borrowing.
Government Expenditure/Spendings
Definition: Government Spendings/Expenditures can be broadly divided into
three main categories. i.e. i Govt consumption expenditure(Expenditure) ii
Transfer payments
(Borrow product to another country in Dollar) iii Interest payments(Loan to
another country on interest).

3. Government Expenditures:
It provides subsidies, free education, healthcare to the poor people hence govt expenditures is used
as a powerful fiscal investment / tool to bring about an equitable distribution of income and wealth.
Government Expenditures:
It refers to the distribution and use of the funds the govt finance as raised so as to meet the needs
of economic constructions and Various causes. It includes the following main items.
I. Expenditure for capital construction.
II. Innovations funds for enterprises.
III. Geological prospecting expenses.
IV. Expenditures for Science and Technological promotions.
V. Expenditure for supporting rural production.
VI. Operating expenses for the department of farming.
VII. Expenditure for supporting domestic industries.
Domestic Industries:
1. Specific import quote.
2. Subsides.

4. FISCAL POLICY
Present by: Sumiyyah
Abdul Aziz
BS(Economics)
The University of Haripur
Topic :2

5. Government Revenue
Refers to the revenue of the govt finance by operating in the distribution of the social products,
which is the financial resources for ensuring the govt to function. The contents of the governme
revenue have been changed several times. It include the following main items.
I) Various tax revenue /by taxation
Various tax revenues includes value added tax, business tax, consumption tax, land value added
taxes on city maintenance and construction, resources tax on the use of urban land ,
enterprise income tax, tariff, stamp tax on security transaction and so on.
ii) Special revenue
Special revenue including revenues from the fee on sewage treatment, fee on urban
resources, fee for the consumption of minerals resources and extra charges for education etc.

6. iii) Other revenue
It including revenues from interest, revenue from the payments of capital construction projects
and donation or grants.
iv) Subsidies
For the losses of state-owned enterprises this is an item of negative revenue,
consisting of subsidies to industrial, commercial and grain purchasing and supply enterprises.

7. FISCAL POLICY
Present by: Sumiyyah
Abdul Aziz
BS(Economics)
The University of Haripur
Topic :3

8. Objectives of Fiscal policy
1. To allocate economic resources optimally.
2. To maintain price stability.
3. To reduce economic inequalities through equitable distribution of income and wealth.
4. To provide Full Employment.
5. To Foster Economic Growth.

9. 1. To allocate economic resources optimally
Economic resources such as men, money, materials and so on. Should be
used effectively and allocated optimally as they are the function of fiscal
policy. Govt should also avoid wasting resources. And ensure maximum
productivity from economic resources.
2. To Maintain price stability
• The govt should also avoid wastage of resources and ensure maximum
productivity from scarce economic resources.
• Economic activity decreases with falling prices. while steeply rise prices
or beneficial to traders and speculators.
• By fighting inflationary and deflationary trends in the country, fiscal
policy should aim to ensure price stability.

10. 3. To reduce economic inequalities through equitable distribution of income and wealth
The fiscal policy are a welfare state should aim to reduce economic inequality between the rich
and poor.
to the maximum possible degree. It should ensure a fair distribution of income and wealth
among different
sections/classes of society.
4.To provide Full Employment
Providing and maintaining Full employment is the main objective of all economic policies.
Including fiscal policy.
The economy can growth in proportion to the population growth if the economy keeps growing
at the same
Pace. To ensure that the increase in income also increases the private employment
opportunities, fiscal policy
should be constructed in such a way as to ensure that the increase in income and exceeds the
increase
in population.

11. 5. To Foster Economic Growth
The least developed countries are tapped in endless cycle of poverty due to a lack of
capital the basic
Goals of fiscal policy and a least developed country as to accelerate economic
productivity and capital formation.

12. FISCAL POLICY
Present by: Sumiyyah
Abdul Aziz
BS(Economics)
The University of Haripur
Topic :4

13. Instruments of Fiscal policy
a. Public expenditure
b. Taxation
c. Canons of taxation
d. Tax system
e. Public borrowing

14. 1. Public Expenditure
In developing countries govt expenditure is vital to meet the development
requirement of heavy investments as well as due to the lack of private initiative/
Investment.
Due to there rest and low returns private entrepreneur are reluctant to invest and
in socially desirable and productive channels in these countries.
Hence, it is responsibility of the govt to make these investment and create the
basic infrastructure For economic development.

15. 2. Taxation
Taxation and public borrowing system influence the efficiency of
fiscal policy. For developing countries, historical taxation has been
the most effective instrument of fiscal policy. Borrowing from the
public well result in higher interest rate which may adversely
influence private investment . Taxation is the only means of
decreasing private consumptions and transferring resources to the
govt for economic developing/development under such conditions.
3.Cannons of taxation
Developmental canons of taxation. According to the Adam smith
there are four basic canons of taxation.
1 Equity
2 Certainty
3 Convenience
4 Economies

16. In order to make these canons more relevant to the conditions and problems
of developing countries. They have been revised.
4. Tax system
It is essential that taxation increases to meet the govts developments expenditures.
Heavier tax collection and exceedingly the difficult tax additionally taxation
increases or depending can the country’s taxation capacity and the kind of taxes it
can impose/rewind. improving the tax system therefore, essential and order to
increase the tax revenue of the country.
5.Public borrowing
Other important sources of financing economic growth or public borrowings. It is an
anti-inflationary source of mobilizing resources. If the public lends that part of their
income that would otherwise be spend. Public borrowing is a better tool than
taxation.

17. FISCAL POLICY
Present by: Sumiyyah
Abdul Aziz
BS(Economics)
The University of Haripur
Topic :5

18. Importance’s of fiscal policy
 Resources mobilization
 Accelerating the rate of growth
 Encouraging socially optimal investment
 Boosting capital formation
 Creating more jobs opportunities
 Enhancing economic stability
 Checking inflationary tendencies
 reducing inequalities

19. 1. Resource Mobilization is the core/main objective of fiscal policy in all under
developed
countries. due to low savings rates, the national income and per-capita income
are very low.so such govts push the rate of investments and capital through to
forced saving which in terms accelerates the pace/speed of economic
development in such countries. Inflation can 'be controlled by increasing. Private
investment reducing unnecessary consumption and investing and unproductive
channels.
2. Accelerating the rate of growth increasing the rate of public and private
investment is one way
that fiscal policy accelerates economic growth. The use of various tools of fiscal
policy such as taxation, public borrowing and financing deficits should be done
in a balanced manners. So as not to adversely effect consumption, production
and wealth distribution.

20. 3. Encouraging socially optimal investment the fiscal policy of under
develop countries encourages investments an those productive
channels which are socially and economically desirable. Accordingly
optimal investments are those investments which promote
economic development and avoid wasteful and unproductive
investments.
4.Bossting capital formation a fiscal policy play’s a key/crucial role
in under developed countries by directing investments to strategic
industries and services of public utility. On one hand, and by
encouraging private sector investment and introducing modern
production technology on the other hands. The fiscal policy should
be designed to raise/increase social marginal productivity in social
desirable
projects. and to divert resources to those productive channels where
the social marginal productivity is highest.

21. FISCAL POLICY
Present by: Sumiyyah
Abdul Aziz
BS(Economics)
The University of Haripur
Topic :6

22. 5. Creating more jobs opportunities as we known that population growth is very increased
in developing
Countries. Hence, fiscal policy intended to increase employment opportunities by making
high levels of expenditures. And to underemployment specially in rural areas. Efforts should
be made to introduce community development Programs that involve more labor and less
capital per person.
6.Enchancing economic stability the fiscal policy of a developing country also plays an
important role ensuring
reasonable internal and external economic stability. Developing countries are generally
susceptible to the effects of international cyclical fluctuations. Their main exports are
primary products, while they imports manufacture
goods.it is however important to review fiscal policy from along prospective in order to
minimize the effects of
international cyclical fluctuations. In order to achieve balance growth and to reduce the
effect of cyclical fluctuations, deficit budgeting and inflations these are the most suitable
measures of/ for achieving balance growth.

23. 7.Checking inflationary tendencies developing countries are
influenced by inflationary tendencies due to their heavy
investments and their development activities. As a result real
resources are always in short supply compare to their demand.
Demand rises as purchasing power increases, but supply remains
inelastic due to structure rigidities, market imperfections and
other issues which leads to inflationary pressures.
8.Reducing inequalities fiscal policy plays an important role and
reducing inequality in developing countries due to large income
and wealth disparities. Fiscal measures to reduce the gap
between poverty and prosperity include progressive taxation,
heavy taxes, on the rich and exemptions tax concessions for
goods or mass consumption, govt assessment programs, inputs
for small business and agriculture reform and provision of
essential products.at low prices to the poor.

24. FISCAL POLICY
Present by: sumiyyah
Abdul Aziz
BS(Economics)
The University of Haripur
Topic : 7

25. Crowding out and Crowding In effect
Crowding out Effect
Definition: crowding out effect occur when an increase in interest rate
reduces private investment spending in a manner that dampens the initial
increase in total investment spending.
When govt increases its spending to boost economic growth, it adopts an
expansionary fiscal policy stance this interest rates. High interest rate
affect private investment decisions.
As interest rate increases, the cost of investing fund increases and make
debt financing less accessible.
In the end, this causes less investment to be made and crowd out the
effect of the initial increase in investment spending.

26. Crowding In Effect
Definition
When private expenditure does not decrease with in increase in govt
expenditure, there is no crowding expenditure of crowding out effect.
High public investment leads to an increase in private investment which
is the most likely cause of crowding in effect. Govt investment through
the crowding in effect.
Two types of Crowding out Effect
The Crowding out effect of govt spending on private investment can be
seen directly and/ or indirectly.
Direct /Indirect Crowding out
It occurs when physical resources available to the private sector are
reduced, where is indirect Crowding out occurs when interest rates and
prices increases.

27. FISCAL POLICY
Present by: Sumiyyah
Abdul Aziz
BS(Economics)
The University of Haripur
Topic : 8

28. Discretionary Fiscal Policy
Definition
It refers to the deliberate manipulation of taxes and govt spending by
federal govt to alter real domestic output and employment, control
inflation and stimulate economic growth.
‘’Discretionary ‘’ refers to the changes are at the option of federal
govt.
Simplifying Assumptions
 Assume initial govt purchase don’t influence (depressor stimulate)
private spending.
 Assume fiscal policy effect only demand out not supply side of the
economy.

29. Fiscal policy Choices
 Expansionary Fiscal Policy used to combat a recession
OR
Increase in interest rate also increase in money supply to control
the recession
 Contractionary Fiscal Policy used to combat demand pull
inflation due to excess spending.
OR
Loans are expenses to control the money supply in inflationary
situation

30. Expansionary Fiscal policy and tools
To illustrate how the govt can use fiscal policy to effect the economy,
consider an economy that experiencing recession the govt might issue tax
stimulus rebates to increase Aggregate demand and few economic growth.
The logic behind this approach is that when people pay lower taxes they
have more money to spend or invest which increase Aggregate demand.
Increase in demand leads firms to hire more labor decrease unemployment
and cause competition for labor in turn this serves to raise wages and
provide consumer more money to spend/invest. It is virtuous cycle or
positive feedback loop.
Alternatively, the govt may seek economic expansion by increasing
spending, building more infrastructure could increase employment pushing
up demand and growth.
Expansionary fiscal policy is usually characterizes by deficit spending.

31. FISCAL POLICY
Present by: Sumiyyah
Abdul Aziz
BS(Economics)
The University of Haripur
Topic : 9

32. Contractionary Fiscal Policy
Definition
In the phase of mounting inflation and other expansionary
symptom’s, a govt can pursue contractionary policy perhaps even
to the extent of inducing a brief recession in order to restore a
balance to the economic cycle in the economy.
when demand pull inflation occurs, a shift of Aggregate demand
to the right in the vertical range of Aggregate supply then,
contractionary policy is the remedy.
Tools of Contractionary Fiscal Policy
a. A decrease in govt spending shifts Aggregate demand back to
the left, once the multiplier process is complete.
Here, price levels returns to the pre-inflationary level but Gross
Domestic Product remains it full employment level.

33. b. An increase in taxes will reduce income, and then consumption at
first by the Marginal Propensity to Consume times the decrease in
income, and then the multiplier process leads Aggregate demand to
shifts leftwards still further.
c. A combined govt spending decrease and tax increase could have
the same effect with the right combination.
d. If the budget was initially balanced, a contractionary fiscal policy
creates a budget surplus.

34. FISCAL POLICY
Present by: Sumiyyah
Abdul Aziz
BS(Economics)
The University of Haripur
Topic : 10

35. Govt Budget Constraint
Generally the Govt finances its expenditure through the revenue received
from taxes.
when govt expenditure exceeds its revenue receive from taxes, it can
finance its expenditure by borrowing money from the market or by
printing new money.
The Govt has the power to increase taxes to raise revenue but increase in
the rates of taxes adversely/negatively effects the incentives toward more
save and invest increase in taxes also promotes tax to increasing revenue
from taxes to finance the increased expenditure of the govt.
When Govt finds its difficult to raise adequate resources to finance its
increase expenditure full through normal tax, it faces a constraint which is
called Govt budget. Constraint that results in budget deficit also called
fiscal deficit.

36. In simple terms, govt budget constraint refers to the limit placed
on the govt expenditure to which it can raise resources through
taxation, borrowing from market and using printing money.
The general from of govt budget constraint it G=T+ B+ M
G Govt expenditure (including subsidies and interest
payments on past debt.
T Tax revenue (Direct and Indirect taxes).
B New borrowing from market(by sell of bonds or
securities) internal and external.
M New printing money issued to finance govt expenditure
( it is also called high powered money/money financing).
The Govt has to make a choice between magnitude of T, B and
M to finance its budget deficit.

37. Equation of the Govt budget constraint can also be written as:
G - T = B+ M
G-T = Budget deficit or fiscal deficit equal to New market
borrowing by govt+ new printing money.
The Govt budget deficit can be financed either by printing new
money or by selling bonds to the public which includes Banks,
mutual funds, Insurance companies and other financial
institutions.
The govt borrows from the market by selling bonds and securities
which adds to the govt debt. The govt has to pay interest annually
on its debt and also have to pay back the principle amount
borrowed at the maturity of the bonds or securities.
Borrowing by the govt also leads to the raise interest rates which
crowds out private investment.

38. If the govt finances its budget deficit by printing new money it can
lead to inflation therefore due to budget constraint. The govt has to
make choice between borrowing from the market and using printed
money to finance its budget deficit financing by new printed money
is also called money financing.

39. FISCAL POLICY
Present by: Sumiyyah
Abdul Aziz
BS(Economics)
The University of Haripur
Topic : 11

40. Economic Theory
Definition
Ricardian equivalence is an economic theory that says the
financing govt spending out of current taxes or future
taxes(and current deficit) well have an equivalent effects on
the overall economy.
This means that attempts to stimulate an economy by
increasing debt financed govt spending will not be affective
because investors and consumers understand that the debt
will eventually have to be paid for in the form of future
taxes.
The theory argues that people will save based on their
expectations of increased future taxes to be levied
(imposed) in order to payoff the debt, and that this will
offset the increased in Aggregate demand from the
increased Govt spending. This also implies that Keynesian
fiscal policy will generally be an effective at booting
economic output and growth.

41. FISCAL POLICY
Present by: Sumiyyah
Abdul Aziz
BS(Economics)
The University of Haripur
Topic : 12

42. Decentralization
Definition
Decentralization is the process by which the activities of an
organization, particularly those regarding planning and decision-
making are distributed or delegated away from a central, authorities
location or group(people).
OR
The term decentralization embraces a variety of concepts which must
be carefully analyzed or any particular country. Before determining if
projects or programs should support re-organization of financial,
administrative or service delivery systems.
OR
Decentralization is the transfer of authority and responsibility for
public functions from the central Government to Local Governments.

43. Types of Decentralization
It include Political, Administrative, Fiscal, and market decentralization.
Different types of Decentralization should be distinguished because they have different
characteristics,
policy implications and condition for success.
Fiscal Decentralization
Fiscal Decentralization is essentially the transfer of expenditure responsibilities and
revenue assignments
to lower levels of govt. A small national govt being closer to the people as more capable
compare to
central govt to meet citizen’s preferences and demands and public goods and services. The
Higher fiscal expenditure decentralization means that local governments have greater
autonomy in fiscal expenditure.
Research generally supports that fiscal decentralization has being linked to a variety of
outcomes,
among those are
 Economic Growth
 Government Size

44. Advantages of Fiscal Decentralization
There are many other advantages of Fiscal Decentralization. Overall,
revenue mobilization can be improved because decentralization can
broaden the tax net most Govt services are finance with Value Added
Tax and Income Tax.
Features of Fiscal Decentralization
 Delegation of authority to lower management.
 Faster response time.
 Quick decision- making.
 Development of individual departments.
 Employee engagement and development.

45. FISCAL POLICY
Present by: Sumiyyah
Abdul Aziz
BS(Economics)
The University of Haripur
Topic : 13

46. Short-run economic fluctuation
 The economic activity fluctuates from year to year.
 A recession is a period of declining real income and rising
unemployment.
 A depression is severe recession fluctuations in the economy
often called the business cycle.
Recession
Depression in the economy.
Basic Models
a. Two Variables: are used to develop a model to analyzed the
short- run fluctuations.
1 The economics is output of goods and services measures by real
Gross Domestic Product.
2 The overall price level measure by Consumer Price Index are the
GDP deflator.

47. b. The Aggregate Demand and Aggregate Supply
Economist used to the model of Aggregate Demand and Aggregate
Supply to explain short-run fluctuations an economic activity around
its long-run trends.
Aggregate Demand and Aggregate Supply Curve
 The AD curve shows the quantity of goods and services that
households, firms, and the govt want to buy at each price level.
 Aggregate Supply curve shows the quantity of goods and services.
That firms choose to produce and sell it each price level.
Graph
Price
Supply
Demand
Equilibrium Price
Equilibrium Quantity/output
QD

48. AD Curve
The four components of GDP(Y) contribute to the AD for goods
and services.
Y=C+I+G+Nx
Graph Price level
P1
P2
DC
Y1 Y2
Qd/Q output

49. A decrease in the price level and increases the quantity of goods and services
demand.
Aggregate Demand Shift Curve Graph
Shift raises the from
 Consumption
 Investment
 Government
 Net Export
 When the price is fix Ad curve shift upward and downward through other
factors(income, taste, habits etc.)
 When the price of commodity goods and services decreases the AD curve shift
the upward.
 If the price increases the commodity of goods and services the AD curve shift
the downward.

50. P1
P2
Natural rate of output
Quantity of output
Price level
 A decrease in price level (p1-p2) change in prices
does not effect quantity of goods and services
supplied in the long- run.
Graph

51. P2
P1
Q1 Q2
Graph
 The long-run AS curve is vertical at the natural rate of output.
 This level of production is also referred to as potential output or full employment output.
 Any change in the economy that alters the natural rate of output shifts the long-run AS curve
 The shifts maybe categorized according to the various factors in the classical model that effe

52. P3
P2
P1
Y1
Y2 Y3
 Shift rising from
 Labor
 Capital
 Natural resources
 Technological knowledge

53. 201
0
2000
1990
 In the long-run technological shifts. The long-run AS curve. Short-run flucations in
output and prices level should be viewed as deviations from the long-run
conditions trends.
 In the short-run, an increase in the overall level of prices an economy trends to
rates the quantity of goods and services supplied.
 A decrease in trends level of prices to reduce the quantity of goods and services
supplied.

54.  A decrease in the prices, reduce the quantity of goods
and services supplied in the short-run.

55. AS(short-run)
AD(short-run)
P*

56. THANKYOU FOR YOUR
ATTENTION