fiscal policy navin

8/2/2019 Fiscal Policy Navin

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Fiscal Policy-Meaning

• The word fisc means „state treasury‟ and fiscalpolicy refers to policy concerning the use of „state treasury‟ or the govt. finances to achievethe macroeconomic goals.

• “any decision to change the level, compositionor timing of govt. expenditure or to vary theburden ,the structure or frequency of the tax

payment is fiscal policy.” - G.K. Shaw



Objectives of Fiscal Policy

• It has 2 major objectives:

i. GENERAL obj-. aimed at achievingmacroeconomic goals

ii. SPECIFIC obj-. relating to any typical

problems of an economy



Fiscal Policy And

Macroeconomic Goals• Economic Growth: By creating conditions for increase in

savings & investment.

• Employment: By encouraging the use of labour-

absorbing technology

• Stabilization: fight with depressionary trends and

booming (overheating) indications in the economy

• Economic Equality: By reducing the income and wealth

gaps between the rich and poor.

• Price stability: employed to contain inflationary and

deflationary tendencies in the economy.



Instruments of Fiscal Policy

• Budgetary surplus and deficit

• Government expenditure

• Taxation- direct and indirect

• Public debt

• Deficit financing



Budgetary surplus and deficit

• “A budget is a detailed plan of operations for

some specific future period”

• Keeping budget balanced (R=E) or deficit (R<E)or surplus (R>E) as a matter of policy is itself a

fiscal instrument.

• An accumulated deficit over several years (or

centuries) is referred to as the government debt• A deficit is a flow. And a debt is a stock. Debt is

essentially an accumulated flow of deficits



Government Expenditure

It includes :

• Government spending on the purchase of

goods & services.

• Payment of wages and salaries of

government servants

• Public investment

• Transfer payments



Taxation

• Meaning : Non quid pro quo transfer of

private income to public coffers by means

of taxes.

• Classified into

1. Direct taxes- Corporate tax, Div. Distribution

Tax, Personal Income Tax, Fringe Benefit taxes,Banking Cash Transaction Tax

2. Indirect taxes- Central Sales Tax, Customs,

Service Tax, excise duty.



Public debt

• Internal borrowings1. Borrowings from the public by means of treasury bills

and govt. bonds

2. Borrowings from the central bank (monetized deficitfinancing)

• External borrowings

1. foreign investments

2. international organizations like World Bank &IMF

3. market borrowings



BUDGET

• “A budget is a detailed plan of operations

for some specific future period”

• It is an estimate prepared in advance of the

period to which it applies.



COMPONENTS OF BUDGET

• Revenue receipts

• Capital receipts

• Revenue expenditure

• Capital expenditure



BUDGET FINANCIALS

2007-08



Where The Rupee Comes From

service & other taxes

7%

excise

17%

customs

12%

income tax

13%

corporation tax

21%

borrowings

19%

non-debt capital reciepts

1%

non-tax revenue

10%



Where Does The Rupee Goes To

state's share of

taxes & duties

18%

non plan assistance

to states

5%

planned state

assistance

7%

central plan

20%

interest

20%

defence

12%

subsidies

7%

other non plan exp.

11%



Fiscal Responsibility And Budget

Management (FRBM) Bill• Introduced in Lok Sabha in December 2000.

• Objectives include:

1. Long-term macroeconomic stability2. Inter-generational equity in fiscal management.

• It aimed at:1. Reducing revenue deficit

2. Reducing gross fiscal deficit3. Reducing the Public debt

4. No Borrowing from the RBI



Sticking to FRBM Targets

Items Units

2005-

06

2006-

07

2007-

08*

Central Government Finances

Revenue deficit/ GDP % 2.6 2 1.5

Fiscal deficit/ GDP % 4.1 3.7 3.3

Gross Tax/ GDP % 10.3 11.4 12.0

Expenditure/ GDP % 14.2 14.1 14.0**

Debt/ GDP % 65.1 64.4 58.6

*From Budget proposals ** SBI share transfer excluded



Thank You

fiscal policy navin

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