Fiscal policy involves the government making discretionary changes to taxation, expenditures, and borrowings to achieve macroeconomic goals. It is an essential tool for overcoming recessions and inflation as well as promoting economic growth. Fiscal policy instruments include changes to budget deficits or surpluses, the level and composition of government expenditures, taxation levels and types, public debt, and deficit financing. The government uses these tools to target variables like disposable income, consumption, savings and investment to influence the overall economy.

1. Fiscal Policy
The most important instrument of government intervention in
the economy is fiscal or budgetary policy.
fiscal policy is essential in the matter of
 Overcoming Recession or Inflation
 Promoting and Accelerating Economic Growth.
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2. ‘Fisc’ means State Treasury
FFiissccaall ppoolliiccyy
FFiissccaall ppoolliiccyy iiss tthhee ggoovveerrnnmmeenntt pprrooggrraammmmee ooff mmaakkiinngg ddiissccrreettiioonnaarryy
cchhaannggeess iinn
 TThhee ppaatttteerrnn aanndd lleevveell ooff iittss eexxppeennddiittuurree,,
 TTaaxxaattiioonn
 BBoorrrroowwiinnggss
TToo AAcchhiieevvee Intended Economic Growth, Employment, Income Equality
and Stabilization of the Economy on a Growing Path.
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3.  Fiscal policy is also called Budgetary Policy
 TThhee eesssseennccee ooff ffiissccaall ppoolliiccyy lliieess iinn tthhee bbuuddggeettaarryy ooppeerraattiioonnss ooff tthhee
GGoovvtt..
 TTwwoo ssiiddeess ooff tthhee GGoovvtt bbuuddggeett aarree –– RReecceeiipptt aanndd EExxppeennddiittuurree
 Receipts - inflow ( flow of money from private sector to Govt.sector)
 Tax revenue
 Non tax revenue
 Borrowings including Deficit Payment
Expenditures Payments/outflow – flow of money from Govt to Private
Sector
 Payment for goods and services
 Interest and loan payments
 Subsidies
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 Pensions grand in –aid and so on.

4.  Govt using its statutory power to change the
magnitude and composition of inflows and outflows
 magnitude and composition can be altered by
– Making changes in taxation
– Govt spending
– Borrowing
Fiscal Instruments
 Fiscal Instruments are the variables that government
changes it. Fiscal policy is implemented through
instruments.
Target Variables
 Variables that are intended to be changed to
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achieve the intended results

5. Fiscal Policy Instruments
 Budgetary surplus and deficit
 Govt expenditure
 Taxation – direct and indirect
 Public debt
 Deficit financing
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6. Budgetary Balance Policy
 Balanced budget – expenses = revenue
 Deficit budget – Govt.spending> expected revenue
 Surplus budget - Govt.spending> expected
revenue
Balanced, Deficit, Surplus budgets affect the economy
in different ways and in different directions.
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7. Govt. Expenditures
 Govt. expenditures means the sum of public spending on purchase of
goods and services, public investment, transfer payments
 Size and composition of GE is a matter of Govt. direction
 GE is an injection into the economy
 It adds to the AD (C + I)
Effect GE depends on
 Way of Govt. financing
 Multiplier effect of the GE.
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8. Taxation
 Direct –
• taxes on personal income
• Corporate income
• Wealth and property
 Indirect tax –
• on production
• Sale of the goods and services
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9. Public Borrowings
 Borrowings include both internal and external
 To finance their budget deficit
Internal Borrowing
- Borrowing from public by means of bonds & treasury ( transfer of
purchasing power from the public to the Govt)
- From central bank (straightaway an injection into the economy)
External Borrowing
- Borrowing from foreign Govt
- International organization i.e. IMF and WB
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- Market borrowing

10. Target Variables
 Disposable income
 Aggregate Consumption expenditure
 Savings and investment
 Imports and exports
 Level and structure of prices
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11. Fiscal Policy and Macroeconomic Goals
 Fiscal policy for economic growth
 Fiscal policy for Employment
 Fiscal policy for Stabilization
 Fiscal policy for economic equality
 Fiscal policy for external balances
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12. Fiscal Policy and Economic Growth
 Given the Manpower
 Technology
 Natural Resources
The growth rate of a country depends on the
 Rate of Savings
 Investment.
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13. Therefore fiscal policy in this regard is
 To create conditions for increase in private savings
and investment
 To enhance investment in the public sector.
To promote savings
 reducing rate income tax
 giving tax incentives for savings
 giving incentives to promote private savings
 giving concessions to promote private investment
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14. Incentives/concessions may be one of the following
 Tax holiday
 High depreciation allowance
 Rebate for capacity expansion
 Investment subsidies
 Exception of import duties on capital imports
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15. These measures often prove to be inadequate to
promote savings and investment due to,
 Low level of per capita income and high rate of
MPC
 A small fraction of population with taxable income
 Inadequate growth infrastructure and social
overhead Capital
Because of these reasons savings and investment may
inadequate.
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16. The Government is required, under these conditions to
play the role of a prime mover
This requires
 Expansion of the public sector and
 Enhancement of the public sector investment.
To accomplish these things huge amount of resources
is need.
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17. Tax is a suitable means of source of income.
 progressive taxation of personal and cooperate
income
 taxation of all kinds of consumer goods
 taxation of luxury goods at a prohibitive rate
 imposition of extraordinary high duty on imports of
consumer goods.
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18. Fiscal policy for Employment
According to Keynesian theory of employment
 All fiscal measures that accelerate the pace of
economic growth promote employment but
 This proposition does not hold under all conditions.
 Developed countries try to maintain full
employment
 Developing countries try to create more
employment opportunities.
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19. FFiissccaall mmeeaassuurreess sshhoouulldd aacccceelleerraattee
 Economic growth
 Promote employment
Some conditions not increase economic growth
 Capital intensive or labour saving technology does
not increase employment
In this situation Govt. intervene through fiscal policy
as follows
 Govt should discourage use of labour – saving
Technology
 Encourage 1122//1144//1144 the use of labour absorbing technology
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20. In this case Govt may take following fiscal measures
 heavy taxation on capital – intensive good
 giving subsidization for labour intensive goods
 heavy duty on imports of capital intensive
technology
 Concessions in customs for the import of input for
labour intensive products
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21. Fiscal Policy for stabilization
Fiscal policy for stabilization can take any of the two forms of
fiscal policy
 automatic stabilization policy
 discretionary policy
 Automatic stabilization policy means adopting a fiscal
system with built – in flexibility of tax revenue and
government spending.
 Built – in flexibility means automatic adjustment in the
government expenditure and tax revenue in response to rise
and fall 1122//1144//1144 in GNP.
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22. Automatic Stabilization Policy
If GNP increases tax revenue also increases
 because household income increases
 no need to government expenditure
If GNP decreases tax revenue also decreases
 Because household income decreases
 So Govt. will increase its expenditures
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23. Discretionary Fiscal Policy
It means ad hoc changes – happening when necessary
and not planned in advance
So, here Govt. make changes in the
 level and pattern of taxation
 size and pattern of govt. expenditures
 size and composition of public debt
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24. Fiscal policy for Economic Equity
 Economic Disparity beyond a level is socially,
economically and politically undesirable.
 Both taxation and expenditure measures are
used to reduce income and wealth gap between
the rich and poor……
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25. Fiscal Policy – Tax Measures
 Taxation on personal income
 corporate income at progressive rate
 Imposition of wealth and property tax
 Taxation of high price and luxury goods at
higher rate
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26. Fiscal Policy – Govt. Expenditures
 Spending on projects which increase the earning
capacity of the lower income people
Ex: Free Education , Medical Facilities
 Reallocating capital expenditures to enhance
employment opportunities for unemployed and
under employed people.
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27. Fiscal Policy – Govt. Expenditures
 Financial aid for unemployed people for their self –
employment
 Giving unemployed relief and unemployment
insurance.
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28. Tax and expenditure measures make two – way attack on
economic disparity.
Tax measures limit the growth of incomes in th high – income
groups and transfer a part of rich people’s income to the
Govt. treasury
Which enhances government resources to help poor
Expenditures increase incomes in low-income groups
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29. Fiscal policy for External Balances
 External imbalances arise - when external
payment obligations exceed the foreign exchange
earnings.
 This gap arises mainly due to decreasing trade
balance or current account deficits
 Current account deficit increase mainly due to he
widening gap between imports and exports
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30. Tax policy can be used as an effective tool of
resorting the external balance.
 Imposition of heavy import duty – especially
on the import of consumer goods
 Subsidization of exports
 These measures work efficiently only when
both imports and exports are price – elastic
 In the absence of a high – price elasticity,
these measures may not work
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31. Kinds of Fiscal Policy
Variety of fiscal policies have been suggested by the
economists and used by the policy makers in different
countries under different circumstances to achieve
specific macroeconomic goals.
 Automatic Stabilization Fiscal policy
 Compensatory Fiscal Policy
 Discretionary Fiscal Policy
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32. Automatic Stabilization Fiscal policy
Automatic stabilization policy means adopting a fiscal
system with built – in flexibility of tax revenue and
government spending.
Built – in flexibility means automatic adjustment in
the government expenditure and tax revenue in
response to rise and fall in GNP.
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33.  Tax revenue increases and government
expenditure decreases automatically, with an
increase in GNP
 Tax revenue decreases and government
expenditure increases automatically, with an
decrease in GNP
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34. Compensatory Fiscal Policy
 Compensatory Fiscal Policy is deliberate
budgetary action taken by the government to
compensate for the deficiency in aggregate
demand and excess of aggregate demand.
 During the period of depression – the Govt is
required to boost up the aggregate demand
 The government compensatory fiscal actions may
be – reduction in tax and increase in
Govt.expenditure.
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35. This kind of fiscal action (Deficit budgeting)
increases AD
 AD leads first to the rise in price level
 It adds to the producer’s profit without any
increase in costs.
 This creates an optimistic environment
 So opportunity and incentives to invest increases
 This push up the level of employment and output
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36.  During the period of high rate of inflation
surplus budgeting policy is adopted.
 Inflation is caused by excessive demand
 So Govt. lowers the expenditure level
 Increase the tax level
 Higher taxes reduces the disposable income as
result aggregate demand decreases
 Further, cut in the Govt. expenditure reduces the
AD
 Therefore, two side attack on the AD helps
reducing the demand pressure and thereby, the
inflation.
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37. Discretionary Fiscal Policy
 Ad hoc changes in the Govt. expenditure and
taxation System
 In Discretionary Fiscal Policy, the Govt. makes
deliberate changes in
Level and pattern of taxation
Size and pattern of its expenditure
Size and composition of public debt.
 The discretionary changes in these fiscal instruments
are made with the view to achieving certain specific
objectives.
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38. During recession/depression period Fiscal Policy helps to
increase demand
 Govt increase its expenditures
 Spending more on public works to increase employment
 Increase subsidies to producers of consumer goods
 Lowering tax to stimulate consumption and investment
During period of inflation Fiscal Policy helps to
Reduce demand
 Govt reduce its own expenditures
 Reducing private investment by imposing tax –
consumption or investment.
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