presentaion on fiscal policy

1. Fiscal policy
by: deepsi khandelwal

2. Meaning of fiscal
policy
 The fiscal policy is concerned with the raising
of government revenue and incurring of
government expenditure. To generate revenue
and to incur expenditure,
 To generate revenue and to
incur expenditure, the government frames a
policy called budgetary policy or fiscal policy.
So, the fiscal policy is concerned with
government expenditure and government
revenue.

3.  Fiscal policy has to decide on the size and pattern
of flow of expenditure from the government to
the economy and from the economy back to the
government.
in broad term fiscal policy refers to
"that segment of national economic policy which is
primarily concerned with the receipts and
expenditure of central government.

4. Main Objectives of
Fiscal Policy In India
 Development by effective
Mobilisation of Resources
 Efficient allocation of Financial
Resources
 Reduction in inequalities of Income
and Wealth
 Price Stability and Control of
Inflation
 Employment Generation

5.  Balanced Regional Development
 Reducing the Deficit in the
Balance of Payment
 Increasing National Income
 Foreign Exchange Earnings

6. Development by
effective Mobilization
of Resources
 The principal objective of fiscal policy is
to ensure rapid economic growth and
development. This objective of economic
growth and development can be achieved
by Mobilisation of Financial Resources
 The central and the
state governments in India have used
fiscal policy to mobilise resources.

7.  The financial resources can be mobilised by:
 Taxation : Through effective fiscal policies,
the government aims to mobilise resources by
way of direct taxes as well as indirect taxes
because most important source of resource
mobilisation in India is taxation.

8.  Public Savings : The resources can be mobilised
through public savings by reducing government
expenditure and increasing surpluses of public
sector enterprises.
 Private Savings : Through effective fiscal
measures such as tax benefits, the government can
raise resources from private sector and
households.

9. Efficient allocation
of Financial
Resources
 The central and state governments have tried
to make efficient allocation of financial
resources. These resources are allocated for
Development Activities which includes
expenditure on railways, infrastructure, etc
 While Non-development
Activities includes expenditure on defence,
interest payments, subsidies, etc.

10.  But generally the fiscal policy should
ensure that the resources are
allocated for generation of goods and
services which are socially desirable.
 therefore, India's
fiscal policy is designed in such a
manner so as to encourage production
of desirable goods and discourage
those goods which are socially
undesirable.

11. Reduction in inequalities of
Income and Wealth
 Fiscal policy aims at achieving equity or
social justice by reducing income
inequalities among different sections of
the society. The direct taxes such as
income tax are charged more on the rich
people as compared to lower income
groups.
 Indirect taxes are also more in
the case of semi-luxury and luxury items,
which are mostly consumed by the upper
middle class and the upper class.

12. Price Stability and
Control of Inflation
 One of the main objective of fiscal policy is
to control inflation and stabilize price.
Therefore, the government always aims to
control the inflation by Reducing fiscal
deficits, introducing tax savings schemes,
Productive use of financial resources, etc.

13. Increase capital
 The objective of fiscal policy in India is
also to increase the rate of capital
formation so as to accelerate the rate of
economic growth.
 In order to increase the
rate of capital formation, the fiscal
policy must be efficiently designed to
encourage savings and discourage and
reduce spending.

14. Increasing National Income
 The fiscal policy aims to increase the
national income of a country. This is
because fiscal policy facilitates the
capital formation. This results in
economic growth, which in turn
increases the GDP, per capita income
and national income of the country.

15. Foreign Exchange
Earnings
 Fiscal policy attempts to encourage more
exports by way of Fiscal Measures like,
exemption of income tax on export earnings,
exemption of sales tax and octroi, etc.
 Foreign exchange provides fiscal
benefits to import substitute industries.

16. Types of fiscal
policy
 Discretionary Fiscal Policy
 Expansionary Fiscal Policy
 Contractionary Fiscal Policy

17. Expansionary Fiscal Policy
 Expansionary fiscal policy uses increased
government spending, reduced taxes or a
combination of the two. The chief objective of a
fiscal expansion is to increase aggregate
demand for goods and services across the
economy, as well as to reduce unemployment.

18. Contractionary Fiscal Policy
 When government policy-makers cut spending or
increase taxes, they engage in contractionary
fiscal policy. Governments may enact
contractionary measures to slow an economic
expansion and prevent inflation..
 In addition, governments may
enact contractionary policy for ideological reasons.
These include reducing the overall size and scope
of government activity or lowering budget deficits,
in which the government spends more money than
it collects.

19. Discretionary fiscal
policy
 Discretionary fiscal policy is the
portion of the Federal government's
actions that can be changed year to
year by Congress and the President.
It is usually executed through each
year's budget or through changes in
the tax code.

20. Fiscal policy in
India
 FiscalcanbeexplainedasFinan
cial,soapolicyinrelationtoFina
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olicyisformedbytheReserveb
ankofIndiaandthefiscalpolicy
isformedbytheCentral
 Government.

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moftheFiscalPolicyistoseethe
threechildrenarefinei.e.Publi
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ublicRevenuetoachievecertai
nobjectiveslikegrowth,stabili
ty,unequaldistribution of
 Income.

22. Measures of fiscal
policy
 Fiscal policy is the policy under
which the government of a
country uses fiscal measures (or
instruments) to correct excess
demand and deficient demand
and to achieve other desirable
objectives. There are mainly
three types of fiscal measures,
viz.

23.  A) Taxes
 B) Public
expenditure
 public
borrowing

24. Taxes
 Excess of aggregate demand over aggregates supply
is caused due to the excess amount of money income
is the hands of the people in relation to the available
output in the country.
 In order to correct such situation
personal disposable incase should be reduced.
Therefore, government should increase the rate of
personal income tax, and corporate income tax so that
people will have less money in their hands and
aggregates demand will fall.


25. Public expenditure
 Public expenditure is an important component
of aggregate demand. Therefore, excess
demand can be corrected by reducing
government expenditure. Reduction in
government expenditure also leads to a decline
in the volume of national income due to the
backward operation of investment multiplier.
Reduction in national income leads to a decline
in aggregate demand and fall in the price level.

26.  On the other hand, government
should increase expenditure on
public works programmes such as
the construction of roads,
expansion of railways, setting up
of power projects, construction
of irrigation projects, schools
and colleges, hospitals and parks
and so on. Besides, government
should also enhance expenditure
on social security measures, like
old age pensions, unemployment
allowances, sickness benefits
etc.

27. Public borrowing
 Like tax and public expenditure, public
borrowing is also an important anti –
inflationary instrument. Government of a
country should resort to borrowing from the
non-bank public to keep less money in their
hands for correcting the state of excess
demand and inflationary situation.
 On the other hand, to
correct deficient demand, government should
reduce borrowing from the general public so
that purchasing power in the hands of the
people is not reduced

28.  Besides the above fiscal measures,
government should resort to deficit
financing to correct deficient demand.
Deficit financing is a technique of
financing a deficit budget by (i) printing
notes, & (ii) borrowing from the central
bank or drawing down the cash balances on
part of the government from the central
bank., deficit financing makes an addition
to the total money supply of the country
and can correct deficient demand.


29. Criticisms of Fiscal
Policy
 Disincentives of Tax Cuts.
 Side Effects on Public Spending.
 Poor Information
 Time Lags.
 Budget Deficit
 Other Components of AD

30. Disincentives of Tax
Cuts
 Increasing Taxes to reduce AD
may cause disincentives to work,
if this occurs there will be a fall
in productivity and AS could fall.
However higher taxes do not
necessarily reduce incentives to
work if the income effect
dominates.

31. Side Effects on Public
Spending.
 Reduced govt. spending to
Increase AD could adversely
effect public services such as
public transport and education
causing market failure and
social inefficiency.

32. Poor Information
 Fiscal policy will suffer if the
govt. has poor information. E.g.
If the govt. believes there is
going to be a recession, they will
increase AD, however if this
forecast was wrong and the
economy grew too fast, the govt.
action would cause inflation.

33. Time lags
If the govt. plans to increase
spending this can take along
time to filter into the
economy and it may be too
late. Spending plans are only
set once a year. There is also
a delay in implementing any
changes to spending
patterns.

34. Budget Deficit
 Expansionary fiscal policy
(cutting taxes and increasing
G) will cause an increase in the
budget deficit which has many
adverse effects. Higher
budget deficit will require
higher taxes in the future and
may cause crowding out

35. Other Components of AD
 If the government uses fiscal policy
its effectiveness will also depend
upon the other components of AD,.
 for example if
consumer confidence is very low,
reducing taxes may not lead to an
increase in consumer spending.

36. What is the difference
between fiscal and monetary
policy?
 Monetary policy is  Fiscal policy are
the process by policies that
which the monetary
influnce the tax
authority of a
country controls the rates and
supply of money, government
often targeting a expenditure in
rate of interest for the country
the purpose of
promoting economic
growth and stability

37. Fiscal Policy and Development
in Madhya Pradesh
 The greatest damage of the influence of
neo-liberal macroeconomic advice from
the Asian Development Bank is its
emphasis on 'self-sufficient' state
governments exercising 'fiscal discipline'.
Obviously wasteful expenditure is a bad
thing. State governments must reduce the
slack in resource mobilisation and
expenditure.

38.  This however is not the fundamental
problem for Madhya Pradesh today.
The problem is that MP has too little
public investment and a low growth of
state income, etc. There is little merit
in the argument in favour of a smaller
or zero fiscal deficit, if the spending
is aimed towards increasing state
income and employment.

39. Who control fiscal
policy
 In India the president and congress
together control the fiscal policy.

40. Effect of fiscal policy
 Unemployment
 Expansion
 Contraction
 Inflation Issues

41. Unemployment
 Unemployment is often stable in the
long term, with a certain amount of the
population unable to work simply
because of the constraints of a free
market economy. Governments often
choose to develop fiscal policies that
attempt to decrease this stable rate of
unemployment.

42. Expansion
 Governments also work to encourage
economic growth as a whole, funding
expansion through subsidies, tax cuts
and new contracts with domestic and
international partners. In many cases,
this can actually encourage inflation if a
government only works to help increase
demand and buying power within its
economy. Demand goes up, prices rise
and then wages rise.

43. Contraction
 Governments worried about inflation can
attempt to decrease inflation rates through
contraction, using fiscal policy to reign in
natural inflation. The government usually
switches interest rates, raising them to
discourage too much rampant spending, or
raises a certain sector of taxes by a small
amount to accomplish the same effect.
Product continues, but spending becomes
safer and more concentrated, and inflation
tends to decrease as a result.

44. Inflation Issues
 Economists often discuss how much effect any
fiscal policy can have on inflation. Government
policies may seem to control inflation, especially
in the short term, but long term changes are
much more difficult to ascertain.
 In an increasingly global economy
and a free market economy, the changes a
government can make may be minimal or
ineffective. Consumers tend to decide inflation
themselves, and government actions may
sometimes have the opposite effects intended.