Fiscal Policy
The word Fisc means state treasury and fiscal policy concerning the use of
state treasury or the government finances to achieve certain macroeconomic
goals.
Def
A policy under which government uses its expenditure and revenue
programs to produce desirable effects and avoid undesirable effects on the
national income, production and employment.
Fiscal policy is the government programme of making discretionary changes
in the pattern and level of its expenditure, taxation and borrowings in order
to achieve certain economic goals such as economic growth, employment,
income equality, and stabilization of the economy on a growth path.
A narrow concept of fiscal policy is budgetary policy. While budgetary policy
refers to current revenue and expenditure of the financial year, fiscal policy
refers to budgetary operations including both current and capital receipts
and expenditure. The two sides of the government budget are receipts and
expenditure. The total receipts of the government are constituted of tax and
non-tax revenue and borrowings .The government expenditure refers to the
total expenditure made by the government in the fiscal year. The total
government expenditure consists of payments for goods and services, wages
and salaries, interest and loan repayments, subsidies, pensions and grants -
in aid, and so on. From economic analysis point of view, receipt items give
the measure of the flow of money rom the private sector to the government
sector. The government expenditure, on the other hand, represents the flow
of money from the government to the economy as a whole. The government
receipts are inflows and expenditures are outflows.
31.1.2 The Scope of Fiscal Policy
The scope of fiscal policy comprises the fiscal instruments Fiscal
instruments include taxation (direct and indirect), government expenditure,
transfer payments (grants and subsidies) and public investment.
1. Taxation:
Tax is a payment by the people to the government against which there is no
direct return to the tax payers.
Taxes are classified as Direct tax and Indirect tax
Taxation is a influential instrument of fiscal policy in the hands of public
authorities which prominently effect the changes in disposable Income,
consumption and investment. Clearly, there will be more funds with the
people for consumption and investment purposes at the time of tax
reduction.
This will ultimately result in the increase in spending activities i e it will tend
to increase effective demand and reduce the deflationary gap. In this regard.
sometimes, it is suggested to reduce the rates of commodity taxes like
excise duties, Sales tax and import duty. As a result of these tax
Concessions, consumption is promoted.
Direct taxes include taxes on petsonal income , coporate inomes, wealth and
property. Personal income tax and corporate income tax are the two most
important direct taxes imposed by the central government. Indirect taxes
includes taxes on production and sale of goods and services. Indirect taxes a
also called commodity taxes.
2. Public Borrowings.
Public Debt is comprehensive fiscal weapon to fight against inflation
and deflation.
It means debt taken by the government from people or from
government of other countries.
Public borrowings include both internal and external borrowings. The
governments make borrowings, generally, with a view to financing their
budget deficits. Internal borrowings are of wo types. 1. Borrowing from the
public by means of government bonds and treasury bills, and (2) borrowing
from the central bank. The two types of borrowings have different effects of
the economy. Borrowings from the public to finance budget deficit is, simply
a transfer of purchasing power from the public to the government, whereas
borrowings from the central bank for financing budget deficits, i.e.,
monetized deficit financing. is straightaway an injection into the economy.
External borrowings include borrowings from (a) foreign governments, ()
international organizations like World Bank and IMF, and (c) market
borrowings. It has the same effect on the economy as deficit financing.
3. Public Expenditure
The active contribution of the government in economic activity has
conveyed public spending as an important tool among the fiscal tools.
The suitable variation in public expenditure can have more direct effect
upon the level of economic activity than even taxes. The enlarged
public spending will have a multiple effect upon income, output and
employment exactly in the same way as increased investment has its
influence on them. Similarly. a reduction in public spending., can
decrease the level of economic activity .
The government expenditure include expenditures on public works as
roads, rail tracks, schools, parks, buildings, airports. post offices,
hospitals, irrigation canals etc. Transfer payments are the payments
like interest on public debt, subsidy, pension, relief payment,
unemployment, insurance and social security benefits etc. The
expenditure on capital assets (public works) is called capital
expenditure.
Public works are supported as an anti-depression device on the
following grounds:
(i) They absorb previously unemployed workers.
(ii) They rise the purchasing power of the community and thus
encourage the demand for consumption goods.
(ii) They help to generate economically and socially useful capital
assets as roads, canals, power plants, buildings, irrigation, training
centers and public parks etc.
(iv) They provide a strong incentive for the growth of industries which
are generally hit by the state of depression.
(v) They help to maintain the moral and self-respect of the work force
and make use of the skill of unemployed people.
Main objectives of Fiscal Policy
1. Economic development:
one major objective of fiscal policy is to promote economic
development of the country. The government step up saving and
investment through its taxation policy, public borrowing and public
spending. The contribution of public expenditure to growth depends
on its size as well as the ratio of productive expenditure to total
expenditure. Hence in developing countries the expenditure on non-
productive activities should be minimized.to encourage production
of specific item subsidies may be provided.
2. Reduction of disparities of income: the government can
transfer the purchasing power of the people through its fiscal policy.
Through public expenditure, the purchasing power is diverted to the
people. Whereas taxation and borrowing can be used to shift the
purchasing power from the public to the government. These
transfers can be regulated to minimize the inequalities of income
and wealth. Following measures can be taken to reduce the
disparities of income and wealth: progressive taxes may be imposed
to reduce the spending power of the richer sections of the society,
while poor people should be exempt from tax. Luxury and harmful
goods should be heavily taxed.
3. Expansion of employment: expansion of job opportunities is
one of the important objectives of fiscal policy. In the thirties, the
promotion and maintenance of full employment was given utmost
attention under the influence if Keynes. Fiscal policy can help in
creating an atmosphere where people get employment
opportunities.
4 Price stability: in a period of deflation budgets must be so
prepared that expenditure rise and create incomes for those people
having high marginal propensity to consume. Similarly, in period of
inflation, expenditure must be cut and spending capacity to people
curbed. The excess purchasing power can also be withdrawn through
direct taxes and public borrowings.
5.Mobilization of resources.
The government may resort to voluntary and compulsory savings
to collect. sufficient resources for investment. Resources are mobilized for
financing developmental programmes through public debt and taxation. The
diverse preferences of individuals and financial institutions should be
considered when the government intends to mobilize resources by issuing
bonds.
