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Fiscal Policy

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Fiscal Policy

Fiscal Policy

shape Introduction

Fiscal Policy is the process of policy decision making in relation to the financial structure of the government receipts and payments. It includes the action strategies on tax policy, revenue and expenditure, loans and borrowing, deficit financing etc. Primarily it is the budgetary policy of the Govt. and is reflected through the annual budget formulation. Fiscal Policy is one of the strongest influence of the economy. Fiscal Policy is based on the principle that: increasing or decreasing revenue (taxes) and expenditures (spending) levels influences inflation, employment and the flow of money through the economic system.

shape Objectives

Fiscal policy objectives are dependent on the economic situations and circumstances of a country. Fiscal Policy shapes the country’s economic direction by adjusting revenue and spending levels. The primary objectives of Fiscal Policy are as follows:

  • Mobilization of resources for meeting the financial requirements for economic growth.

  • Improve savings & investment rate to enhance the capital formation.

  • To initiate steps to remove poverty and unemployment and improve the standard of living of the people.

  • To reduce regional disparities.

  • Equitable distribution of wealth and income.

  • Optimum allocation of economic resources so as to increase the efficiency of productive resources.

  • To maintain price stability. During inflation, fiscal policy aims at controlling excessive aggregate spending, and during depression fiscal policy aims at making up the deficiency in effective demand for raising the economy from the depths of depression.

  • Achievement and maintenance of full employment

shape Instruments

The primary tools of Fiscal Policy are: Expenditure, Taxes, Public Debt and a Country’s Budget. Public expenditures include normal government expenditures, capital expenditures on public works, relief expenditures, subsidies of various types, transfer payments and social security benefits.

Public Revenues:

  • The income of the Government through all sources is called public income or public revenue.

  • Public revenue refers to income of a Government from all sources raised, in order to meet public expenditure.

  • Public revenue consists of taxes, revenue from administrative activities like fines, fees, income from public enterprises, gifts and grants. Public Receipts includes public revenue plus the receipts from public borrowings, the receipts from sale of public assets & printing & issuing new currency notes.

  • It includes other sources of public income along with public revenue.

  • Public Revenue can be classified as Tax Revenue and Non –Tax Revenue.

    Public Expenditure:
    Public Expenditure refers to Government Expenditure. It is incurred by Central and State Governments. The Public Expenditure is incurred on various activities for the welfare of the people and also for the economic development.

    Capital and Revenue Expenditure:

    Capital Expenditure of the Government refers to that expenditure which results in creation of fixed assets.They are in the form of investment. They add to the net productive assets of the economy. Capital Expenditure is also known as development expenditure as it increases the productive capacity of the economy. It is investment expenditure and a non-recurring type of expenditure.
    Revenue Expenditures are current or consumption expenditures incurred on civil administration, defense forces, public health and, education, maintenance of Government machinery etc. This type of “expenditure is of recurrent type which is incurred year after year.

    Plan and Non – Plan Expenditure:
    The plan expenditure is incurred on development activities outlined in ongoing five year plan. Plan expenditure is incurred on Transport, rural development, communication, agriculture, energy, social services, etc. The non – plan expenditure is incurred on those activities, which are not included in five-year plan.

    Public Debt:
    Public debt refers to Government debt. It refers to Government borrowings from individuals, financial institutions, organizations and foreign countries. If revenue collected through taxes and other sources is not adequate to cover expenditure, the Government may resort to borrowings. Thus public debt is one of the instruments to cover deficits in budget.

    Instruments of Fiscal Policy

    • Reduction of Govt. Expenditure

    • Increase in Taxation

    • Imposition of new Taxes

    • Wage Control

    • Rationing

    • Public Debt

    • Increase in savings

    • Maintaining Surplus Budget

    Other Measures of Fiscal Policy:

    • Increase in Imports of Raw materials

    • Decrease in Exports

    • Increase in Productivity

    • Provision of Subsidies

    • Use of Latest Technology

    • Rational Industrial Policy