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11/02/12 1 FISCAL POLICY( FP )FP refers to the policy of the Govt w r tTaxation - various kinds of taxes such asDirect & IndirectPublic Expenditure - Various Methods andprocedures of Public ExpenditurePublic Debt- Various methods of Borrowing
Meaning: Fiscal policy is a recent development in the contextof economic regulation and management. It is similar likemonetary policy. Fiscal policy had its birth almost after WorldWide Depression in 1930.It was popularized by thepublication of “General Theory” of J.M.Keynes in 1936.Fiscalpolicy has today become a major instrument employed byGovts to achieve economic growth.Definitions:1.According to Arthur Smith," Fiscal policy refers to a policyunder which government uses its expenditure and revenueprogrammes to produce desirable effects on national income,production and employment” 11/02/12 2
2.According to A.G.Buehler, “By fiscal policy it means the use of public finance expenditure, taxes, borrowing and financial administration”In simple fiscal policy refers to the policy of the govt as regards taxation, public borrowing and public expenditure with specific objectives in view.Objectives of Fiscal policy:1.Economic growth2.Full employment3.Optimum allocation of economic resources4.Increasing rate of investment 11/02/12 3
5.Reducing inequality of income and wealth6.Controlling inflationThe above objectives are attained through the purposeful manipulation of public expenditure, public debt and taxes.Instruments of Fiscal Policy:The govt of a country, both at the centre and in the states, is directly responsible for implementing fiscal policies of the nation.Govt revenue, expenditure and borrowings are the three instruments of fiscal policy. These three instruments are operating through the govt budget. 11/02/12 4
1.Public Revenue –Taxation ( source of revenue) a) Direct taxes b) Indirect taxesDeveloped countries prefer direct taxesDeveloping countries prefer more on indirect taxes2.Public Expenditure – ( spending) a) Development expenditure b) Non-development expenditure Public expenditure has been increasing at a faster rate 11/02/12 5
3.Public borrowing – ( loans ) a) Internal debt b) External debt c) Deficit financingTypes of Fiscal Policy:There are two types of fiscal policy1.Automatic stabilizers fiscal policy – Built in the system automatically without deliberate action of the govt.There are two automatic stabilizers viz, i) changes in tax revenues ii) unemployment compensation and welfare payments 11/02/12 6
2.Discretionary fiscal policy – It implies deliberate changes undertaken by the govt of a country in the tax rates and planned expenditures in an effort to stabilize the economy.Problems of Fiscal policy:1.Fiscal policy takes time to work - delay2.Problems in tax policyi) Loopholes in tax lawsii) Large non-monetized sectoriii) Exemption of agricultural incomeiv) Inefficient and corrupt administration3.Burden of public debt – internal and external4.Deficit financing 11/02/12 7
Taxation A Tax is a compulsory contribution. Canons of Taxations: Smith’s Canons Canon of Equity. Canon of Certainty. Canon of Convenience Canon of Economy Modern Canons Canon of Simplicity Canon of Productivity Canon of Elasticity Canon of Diversity11/02/12 8
Direct and Indirect Taxes Impact - Shifting- Incidence Direct Taxes Merits Demerits I Just and Equitible i Arbitrary ii Progressive ii Unpopular iii Elastic iii Inconvenient iv Productive iv Evasion v Economical v Uneconomical vi Effective vi Narrow base vii Certain vii Tax on Honesty vii Educative Value11/02/12 9
Indirect Taxes Merits Demerits i Convenient i Unjust ii No Evasion ii Inequitable iii Broad Tax Base iii Inflationary iv Social Value iv Uncertain v Economical v Savings Affected vi Effective vi Not Economical vii No Pinch vii No Link between viii Progressive Tax-Payers & Govt viii Tax by Cruelaty11/02/12 10