Fiscal policy is used to manage government revenues, expenditures, and debt.
It involves using government expenditure and revenue programs to influence national income, production, and employment.
It focuses on the proper use of revenue resources through public expenditure to achieve national development and growth.
Fiscal Policy Document (Budget)
Annual Financial Statement (AFS): Contains estimated receipts and expenditures for the upcoming fiscal year.
Finance Bill: A legislative proposal that includes amendments to existing tax laws and provisions related to fiscal matters, such as exemptions, deductions, and changes in income tax slabs.
Macro-Economic Framework: Assessments of key macroeconomic indicators, including GDP growth, inflation, fiscal deficit, current account deficit, and business cycle.
Macro-Economic Framework (MTFPS)
Presented to Parliament under Section 3 of the Fiscal Responsibility and Budget Management Act, 2003.
Includes an assessment of:
Growth prospects (GDP growth rate).
The domestic economy.
Stability of the external sector.
Fiscal balance of the Central Government (Debt).
External sector balance.
Tools of Fiscal Policy
Tax:
Direct Tax
Indirect Tax
Public Revenue:
Revenue Receipt
Capital Receipt
Public Expenditure:
Revenue Expenditure
Capital Expenditure
Types of Fiscal Policies
Anti-Depression Tax Policy:
Increases disposable income to promote consumption and investment.
Aims to provide more funds for consumption and investment through tax reductions.
Anti-Inflationary Tax Policy:
Designed to reduce excessive purchasing power and consumer demand.
May involve raising expenditure tax and excise duty, but not so much as to discourage new investment.
Curbing Inflationary Pressures:
Utilizes steeply progressive personal income tax and taxes on windfall gains.
Involves restricting exports and liberalizing imports of essential commodities.
Tools of Fiscal Policy (Expenditures)
Public spending is a key fiscal tool due to the government's active role in economic activity (Wagner's Law).
Increased public spending has a multiplier effect on income, output, and employment, similar to increased investment.
Reduction in public spending can decrease economic activity through the reverse operation of the government expenditure multiplier.
Keynes' General Theory: Highlights public works programs as significant anti-depression measures.
Public Works: Durable goods, primarily fixed structures, produced by the government (e.g., roads, rail tracks, schools, parks, buildings, airports, post offices, hospitals, irrigation canals).
Transfer Payments: Payments such as interest on public debt, subsidies, pensions, relief payments, unemployment insurance, and social security benefits. Expenditure on capital assets (public works) is called capital expenditure.
Tools of Fiscal Policy (Public Debt)
Government borrowing from the non-bank public can affect national income differently depending on whether the money comes from consumption, saving, private investment, or hoarding.
If bond selling schemes are attractive, people may curtail consumption.
Borrowing from banking institutions during depression can be effective, as banks have excessive cash reserves and private businesses are unwilling to borrow.
Objectives of Fiscal Policy: Reducing Inequality or Equitable Distribution of Income
Invest in productive channels that benefit low-income groups to raise their productivity and technology.
Reduce regional disparities by providing incentives to backward regions.
Implement a highly progressive redistributive tax policy, imposing heavy taxation on the rich and exempting the poor.
Heavily tax luxurious items consumed by the higher section.
GST and the 15th Finance Commission are used as redistribution tools.
Objectives of Fiscal Policy: Full Employment
Spend sufficiently on social and economic overheads to reduce unemployment and under-employment.
These expenditures help create more employment opportunities and increase economic efficiency.
Encourage domestic industries in rural areas by providing training, cheap finance, equipment, and marketing facilities.
Planned investment expands income, output, and employment and increases effective demand through the multiplier process.
Compensate for deficiencies in private investment through public investment.
MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) is mentioned.
Objectives of Fiscal Policy: Economic Growth
Fiscal policy should aim at achieving an accelerated rate of economic growth, especially in developing economies.
Increase in public expenditure during depression increases aggregate demand and leads to a large increase in income via the multiplier process.
Reduction in taxes raises disposable income, thereby increasing consumption and investment expenditure.
Objectives of Fiscal Policy: Optimum Allocation of Resources
Allocate resources to important sectors by pushing the growth of social infrastructure.
Public expenditure, subsidies, and incentives can favorably influence resource allocation in desired sectors.
Tax exemptions and concessions can attract resources to favored industries.
High taxation may draw away resources from a specific sector.
Protectionist policies can be useful for the growth of socially desired industries in under-developed countries.
Objectives of Fiscal Policy: Price Stability
Attainment of price stability is a short-run objective.
Instability in price levels (inflation or deflation) has undesirable consequences.
A surplus budget during prosperity and a deficit budget during depression are formulated.