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Fiscal Policy

Meaning
The word fiscal is derived from the Greek word fisc
meaning basket.
The word fisc was used to denote the income and
expenditure operations of the government while the
income generating operations relate to taxation and govt.
borrowing, the expenditure operations relates to
govt.spending.
The income of the govt. from various sources is called
public revenue.
It includes income from taxes : both direct and indirect.
Contd.
Direct taxes include personal income tax, corporation
tax,wealth and gift taxes.
Indirect taxes include custom duties, excise duties and
sales tax.
Taxes constitute the bulk of govt. incomes.
Other sources include profits generated by public sector
enterprises, fines, fees, gifts and grants.
Other sources are referred to as non-tax revenue of the
govt.
Similarly,the govt. makes expenditure on various activities
which includes social and community services,economic
services, general services.
Definition
Prof. Ursula Hicks says that fiscal policy is concerned
with the manner in which the different elements of
public finance may collectively be geared to forward the
aim of economic policy.
According to them, Fiscal policy serves two major
economic functions , namely:
(i) It sets national priorities, allocates national output
among private and public consumption and
investment,and
(ii) It provides incentives to increase or decrease output in
the particular sectors of the economy .
Objectives
(1) High level of employment
(2) Sustained Economic Growth
(3) Economic Stability
(4) Social justice and Equity:
(a) Increasing the rate of investment and capita;l formation
(b) Encouraging a socially optimum pattern of investment
(c) Reducing income inequalities
(d) Controlling inflationary pressures in the economy

Instruments of Fiscal policy
Discretionary Fiscal Policy:
(1) Anti-recessionary or Expansionary Fiscal Policy
(a) Compensating Increase in Govt. Expenditure:
K= 1/ 1-MPC
(b) Tax reduction as an instrument of Anti-recessionary Fiscal
Policy
(2) Anti-inflationary or Contractionary Fiscal Policy
Non-discretionary Fiscal Policy (Automatic Stabilizers):
(1) Personal Income Tax and Corporate Income tax
Contd.
(2) Transfer Payments

(3) Corporate dividends


Limitations of Fiscal Policy
(1) Long Time-span between Cyclical Shock and Effective
Response
(2) Difficulty in Raising Taxes and Reducing Expenditures

(3) Large Fiscal Deficits and Lack of Upward Flexibility

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