Fiscal policy refers to a government's spending and tax policies to influence macroeconomic conditions. The document discusses different aspects of fiscal policy including: - Countercyclical fiscal policy aims to stabilize the economy by increasing government spending and reducing taxes during recessions, and reducing spending and raising taxes during expansions. - Discretionary fiscal policy is used purposefully by governments to achieve macroeconomic goals like reducing inflation or boosting growth. Tools include changing spending, taxes, and borrowing. - Non-discretionary or automatic fiscal policy relies on built-in stabilizers like income taxes that automatically influence demand over the business cycle. - Large fiscal deficits can adversely impact growth by reducing funds for

1. Fiscal Policy

2. Meaning Of Fiscal Policy
“It refers to a policy concerning the use of state treasury or the
government finances to achieve the macro-economic goals”
or
“Government policy of changing its taxation and public expenditure
programmes intended to achieve its objective”.
or
“Government uses its expenditure and revenue program to produce
desirable effects on National Income , production and employment”.

3. Counter Cyclical Fiscal Policy
Fiscal or Budgetary Policy:
Are the Revenue and Public Expenditure Policy

It is based on the relationship between them

It generates additional purchasing power during depression

Contracts purchasing power during expansion

4. Importance of Fiscal Policy

Government activities are enlarged.

Tax- Revenue and Expenditure accounts for large proportion of
GNP.

Government effects the Economic activities through gap between
government receipts and borrowings.

It indicates the level of overall borrowings by the government.

It is the indicator of fiscal health of the economy.

5. Objectives of Fiscal Policy

To mobilise resources for Economic Growth

To promote growth in Private Sector

Equitable distribution of Income and wealth

Restrain inflationary forces in the Economy

6. Tools of Fiscal Policy
Tools of
Fiscal Policy
Public Revenue
Revenue
Receipt
Tax
Direct Tax
Capital
Receipt
Non- Tax
Indirect Tax
Public
Expenditure
Revenue
Expenditure
Capital
Expenditure

7. Public Expenditure (Payments)

Revenue Expenditure



Interest Payments
Major Subsidies
Defense

Capital Expenditure






Expense on administration
Repayment of Loans
Extension of fresh loans to
the state govt by the central
Loans to public enterprise
Expense on Irrigation
project
Sectoral development

8. Public Revenue (Receipts)

Revenue Receipts

Tax

Capital Receipts



Non- Tax Receipts





Fines and Penalties
Fees
Profits of PSU
Govt Interest
Grants and Gifts

Recovery of Govt loans
Disinvestment of PSU
Market Borrowings –
Internal and International
sources

9. Public Revenue (Receipts)

Direct Tax




Income Tax
Corporate Tax
Wealth Tax
Gift Tax

Indirect Tax




Sales Tax
Excise Tax
Custom
Service Tax

10. Effect of Public Expenditure on the
Economy
Public Expenditure




An increase in PE raises the level of GNP.
PE increases the purchase of goods and services
 Increases household incomes
 Increases Govt Indirect tax revenues
Increase the flow of funds in the economy
Increases private Income and thereby the Private Expenditure

11. Effect of Public Revenue on the
Economy
Public Revenue





Total amount received.
Taxation is a measure of transferring funds from private
purses to the public coffers.
Withdrawal of funds from the private use.
Has a deflationary impact on GNP
Reduces Disposable income and reduces private expenditure

12. Concept of Deficit
Deficit:
Total government expenditure is more than government receipts.
Budgetary Deficit: Total Expenditure – Total Revenue
Revenue Deficit: Revenue Expenditure – Revenue Receipts
Fiscal Deficit: Total Expenditure – Total Revenue (Excluding Govt Borrowing)
Primary Deficit: Fiscal Deficit – Interest Payments

13. What is Fiscal Deficit?

Fiscal deficit:
Is the difference between what the government spends and what it
earns.
It is expressed as a percentage of GDP.

India's fiscal deficit was brought down to 3.17% (Rs 1,43,653 crore)
of the gross domestic product in 2007-08 from 3.8% in 2006-07.

The government has promised to cut the deficit further to 2.5% of GDP
(Rs 1,33,287 crore) by the end of 2008-09,

14. Q1 Receipts & Expenditure of the central Govt
S.No
Item
1996-97
1997-98
1998-99
1
Revenue Receipts
1,26,279
1,33,886
1,49,510
a)
Tax Revenue
93,701
95,672
1,04,652
b)
Non- Tax Revenue
32,578
38,214
44,858
2
Revenue Expenditure
1,58,933
1,80,336
2,17,419
a)
Interest Payments
59,478
65,637
77,882
b)
Major Subsidies
14,041
18,248
21,269
c)
Defence Expense
20,977
26,174
29,861
3
Revenue Deficit (1-2)
32,564
46,450
67,909
4
Capital Receipt
50,872
82,435
1,06,824
A
Recovery of Loan
7,540
8,310
10,633
B
Other Receipt ( PSU disinvestment)
455
912
5,874
c
Borrowing and Other Liabilities
42,877
73,205
90,922
5
Capital Expenditure
31,403
35,985
38,920
6
Total Receipts ( 1+ 4)
7
Total Expenditure
8
Fiscal Deficit ( 1 + 4a + 4b – 7)
9
Budget Deficit ( 6 -7)
13,185
Nil
Nil
10
Primary Deficit ( 8- 2a)

15. Q2 Receipts & Expenditure of the central Govt
S.No
Item
2004-05
2005-06
1
Revenue Receipts
a)
Tax Revenue
2,24,857
2,73,466
b)
Non- Tax Revenue
80,330
77,734
2
Revenue Expenditure
3,84,745
4,46,512
a)
Interest Payments
1,26,540
1,33,945
b)
Major Subsidies
44,633
46,358
c)
Defence Expense
43,967
48,625
3
Revenue Deficit (1-2)
4
Capital Receipt
1,93,261
163,144
A
Recovery of Loan
60,862
12,000
B
Other Receipt ( PSU disinvestment)
4,424
0
5
Capital Expenditure
1,13,703
67,832
6
Total Receipts ( 1+ 4)
7
Total Expenditure
8
Fiscal Deficit
10
Primary Deficit ( 8- 2a)
Calculate – Revenue Receipt, Revenue Deficit, Fiscal Deficit?

16. Kinds of Fiscal Policy
Fiscal Policy
Discretionary
Fiscal Policy
Anti- Recessionary
Fiscal Policy
Non- Discretionary /
Automatic
Fiscal Policy
Anti – Inflationary
Fiscal Policy

17. Discretionary Fiscal Policy
1. Anti –Recessionary Fiscal Policy
Aggregate Demand Decreases
Private Investment Fall
Deflationary Gap

18. Anti- Recessionary
Fiscal Policy
Increase In Govt
Expenditure
Reduction In Taxes

19. a) Increase In Govt Expenditure
How does Govt increase Expenditure?
1. Public Works
Building roads, dams, ports, telecommunication links, irrigation
works, electrification of new areas etc…
2. Govt buys various types of goods and materials
3. Employ Labour

20. What is going to be the effect?
a) Direct Effect
 Increase in Income of suppliers and sellers
 Increase in demand for capital good
b) Indirect Effect
 Consumption Increases
 Increase in demand for consumer goods
 Expansion in output
 Generates Employment and Income
How large should be the increase in expenditure?
“Magnitude of GNP gap caused by the deflationary gap.”

21. How to finance
Govt Expenditure or Budget Deficit ?
a) Borrowing
1) Market Loans and Borrowings
2) Small Savings
Govt Borrowing is anti - inflationary
 Borrow from the public
 Govt competes with the businessman ( private investment)
 Govt demand will raise the demand for loans
 Raise the rate of interest
 Will reduce pvt investment
b) Creation of New Money- Deficit Financing
 Will not reduce pvt investment
 Full expansionary rise in govt expenditure can be realised
“Monetisation of Budget deficit”

22. b) Reduction in Taxes
What is going to be the effect?





Increase in the Disposable Income
Increase in Consumption
Employment will increase
National Income and output
Lead to increase in “Budget Deficit”
Need to be financed by Borrowing or Creation of Money.

23. Deficit Financing and Inflation

Countries (Developing) need to promote Economic Growth.
Resources required for development exceeds the amount which can
be raised by normal ways: taxation, borrowing, surpluses etc.
Economic development can be achieved by Investment.
For Investment Govts needs to resort to Deficit Financing.

Does Deficit Financing leads to Inflation?



“NOT NECESSARY”
 If the supply of output (Consumer goods) is also increasing with demand
 But in short run it might turn inflationary in developing economies as there
is dearth of capital and long term Investment projects does not add to
supply of consumer goods.

24. Policy Option
What is better Govt Expenditure or Taxes for stabilization?




Depends on the Role of Public Sector.
If Public sector can overcome the failure of free market system.
However Public sector are inefficient and involves waste of
scarce resources then Taxation are better options.
Also depends upon the magnitude of effect of Expenditure and
Tax Multiplier.

25. 2. Anti –Inflationary Fiscal Policy
Aggregate Demand Increases
Private Investment Rises
Inflationary Gap

26. Anti-Inflationary
Fiscal Policy
Reducing Govt
Expenditure
Increase In Taxes

27. a) Reducing Govt Expenditure
How does Govt reduce Expenditure?



Reducing expenditure on non-development or unproductive
heads like Defense, Subsidies, transfer payments
Decrease in income
Reduces excess demand

28. b) Increasing Taxes
What’s going to happen?




Increase in Taxes (income, wealth, corporate)
Reduces the disposable income
Consumption reduces
Aggregate demand reduces
Leads to increase in “Budget Surplus”

29. Disposing Of Budget Surplus
1) Retiring Public Debt
 Pay back the outstanding debt
 Would weaken its anti-inflationary effect
 Add money supply to the public
 Public will spend money
 Increase consumption demand
 Expansion of money supply would lower rate of interest
2) Impounding of Public Debt
 Surplus to be kept idle

30. Non- Discretionary Fiscal Policy


Taxes and Expenditure vary automatically with changes in
National Income.
With built in stabilizers recession and inflation will be shorter
and less intense.
1) Personal Income Taxes



Direct relationship in between tax revenue and level of income
Higher National Income, citizen have to pay higher taxes, which reduces
the disposable income and the consumption demand.
Fall in national income in recession, lower taxes but aggregate demand
does not fall.
2) Corporate Income Taxes



Companies pay percentage of profits as tax.
Revenue rises during inflation which reduces aggregate demand.
Revenue falls in recession which tend to offset the decline in demand.

31. Non- Discretionary Fiscal Policy
3) Transfer Payments ( Unemployment & Welfare benefits, subsidies,)



It’s a fiscal instrument which redistributes income in favor of poor.
In recession Transfer Payments increases, Govt Expenditure
increases and increases aggregate demand
In prosperity phase, transfer payments decreases, reduces demand
and inflation.
4) Corporate Dividend Policy



Corporate follow a stable dividend policy
Permits individual to spend more during recession
Less during prosperity phase
Success of this largely depend upon tax compliance, honest declaration
of income, a stable dividend policy and transparent economic system.

32. Implication of Large Fiscal Deficit
Borrow from within and outside the country Leads to increase in
public debt and its burden
1)
2)
Financing through Deficit financing Leads to creation of Money and
may lead to rise in prises or Inflation
3)
Adversely effects Economic Growth

Due to large revenue deficit a smaller amount are left for productive
investment in Infrastructure and social capital (education and health)

More borrowing by Government leaves less resources for Private
sector Investment.

33. What should Govt do?

In India, to reduce Fiscal Deficit the Govt has been curtailing Capital
Expenditure.

But it effects the Economic Growth

The Govt needs to cut Revenue Expenditure and raise Revenue
receipts ( mobilising Taxation)

34. FRBM – Fiscal Responsibility and
Budget Management
Fiscal Deficit 2008-09 : 6.4%
Revenue Deficit 08-09: 4.5%