Fiscal Policy

Shyam Sreekumaran Nair

Institute of Management Technology Nagpur
Public Revenue
Revenue receipts Tax Revenue and Non tax revenue
Capital receipts Public sector disinvestment proceeds,
recovery of loans, grants
Taxation
Compulsory levies (payment) on private individuals and
organisations made by government to raise revenue to
finance expenditure on public goods and services, and to
control the volume of private expenditure in the economy
Incidence of taxation: The ultimate distribution of the burden of
tax
Tax base: the quantity or coverage of what is taxed
Principles of good tax policy
Equity and fairness horizontal and vertical equity
Certainty certainty and stability to gauge tax liability
Convenience of payment tax deduction at source better
compliance
Economy of collection administrative and compliance costs
Nature of taxes
Progressive Tax System ability to pay
Regressive Tax system each tax payer, regardless of his or
her income, pays the same amount of tax
Proportional Tax System tax payers are subject to fixed or
flat rates of tax

Laffer Curve
Relationship between tax rate and amount of tax revenue
generated
Thesis that there exists some optimal tax rate, which
maximises government tax revenue
Taxes above the optimal rate discourage production and
hence result in lower revenues

Types of taxes
Direct tax capital gains tax, corporate tax, inheritance tax,
income tax, wealth tax, retirement tax
Indirect tax
*
countervailing duty, custom duty, excise duty,
sales tax, stamp duty, VAT
**


*
A tax collected by an intermediary (such as a supplier) from
the economic agent who bears the formal incidence of the tax
(such as the customer)
**
An indirect tax levied on goods and services as a percentage
of their value added
Non Tax Revenue
Commercial revenue
Administrative revenue fines and penalties, license fee,
forfeitures, escheat, special assessment, gifts and grants
Capital Receipts
Disinvestment of public sector units
Recoveries of loans
Grants

Public Expenditure
Revenue account and capital account
Revenue account affects money balance, but does not
create assets expenditure on goods, services and transfer
payments
Capital account variations in physical and financial assets of
government infrastructure development adds to growth
and have long term implications


Canons of expenditure
Economy resources used more efficiently and judiciouly
Sanction resources should not be used without proper
authorisation
Benefit collective maximisation of social benefits
Surplus meet expenditure from revenue earned

Measurement of Deficit
Fiscal Deficit: [(Revenue expenditure + capital expenditure)
(revenue receipts + capital receipts)]
Revenue Deficit: Revenue expenditure revenue receipts
Primary deficit: Gross fiscal deficit Interest payments
Net fiscal deficit: Gross fiscal deficit (Domestic lending -
Recoveries)
Net primary deficit: Gross primary deficit (Loans and
Advances - Recoveries)
Concepts of deficit estimated
independently
Monetized deficit
Cyclical deficit
Structural deficit