WHAT IS FISCAL POLICY?

 Fiscal policy is the policy

related to revenue,
expenditure $ debt of the
government for achieving a
set of definite objectives.
 DEFINITION
 “fiscal policy is defined as the
discretionary action by the
government to change (i) the level of
government expenditure on goods $
services and transfer payments and
(ii) the yield of taxation at any given
level of output.”
-D.C. ROWAN
OBJECTIVES OF FISCAL POLICY
1. Full employment
2. Price stability
3. Reduction in economic
inequality
4. Economic development
METHODS OR TOOLS OF FISCAL
POLICY
THERE ARE FOUR MAIN INSTRUMENTS OF
FISCAL POLICY SUCH AS:
(1)TAXATION POLICY: Govt. collects large
funds from public by way of taxes, these
taxes are broadly classify as direct taxes $
indirect taxes .As a result of taxes, real
income of people is diminished $ so also
their aggregate demand. Also change in
taxation has an inverse effect on national
income, fall in taxation increases national
income $ rise in taxation decreases national
income.
(2)GOVERNMENT EXPENDITURE PLOICY:
Aggregate demand is influenced by govt.
expenditure. On increase in public (govt.)
expenditure there is increase in aggregate
demand and vice versa. Public expenditure
can be of two types (i) expenditure
incurred to buy goods $ services. it has
direct effect on aggregate demand. (ii)
public expenditure can also be incurred
without buying goods $ services e.g.
expenditure Made on pensions, medical
facilities, education by govt., it has indirect
effect on aggregate demand.
(3) PUBLIC DEBT POLICY: Aggregate
demand is also influenced by public
debt policy.public debt is of two kinds
(i) internal debt (ii) external debt.
effect of public debt on aggregate
demand depends on many factors.if
due to public debt;demand of private
sector doesn’t fall then by spending
the amount collected through public
debt,govt. can increase aggregate
demand.
(4)DEFICIT FINANCING: It refers to
financing to financing of the deficit of
government’s budget. when govt.
meets its budgetary deficit by
borrowing from the central bank, it is
called deficit financing. As a result of
deficit financing, income of the people
goes up and alongwith it aggregate
demand also goes up.
FISCAL POLICY AND
STABILISATION
 Economic stability refers to minimum
possible changes in the internal price-
level and foreign exchange rate.
FISCAL POLICY can help in achieving
economic stabilisation in the following
ways:
1.Fiscal policy and inflation.
2.Fiscal policy and deflation.
3.Exchange stability and fiscal policy.
1.FISCAL POLICY AND
INFLATION
 Keynes emphasised the following
fiscal measures to check inflation:
(i) Decrease in public expenditure.
(ii) Increase in public debts.
(iii) Delay in the payment of old debts.
(iv) Increase in taxes.
(v) Over-valuation of money.
(vi) Surplus budget policy.
2.FISCAL POLICY AND
DEFLATION
 Following measures are suggested to
check deflation:
(i) Increase in government expenditure.
(ii) Decrease in taxes.
(iii) Increase in social welfare expenditure.
(iv) Pump priming.
(v) Price support policy.
(vi) Deficit financing.
3. EXCHANGE STABILITY AND
FISCAL POLICY
 Exchange stability means that fluctuations
in the foreign exchange rate should be
minimised.
 To achieve exchange stability It is
necessary that BOP should be in
equilibrium.
 To stabilize the exchange rate, it is
necessary that adverse BOP be corrected
by promoting exports and restricting
imports.
LIMITATIONS OF FISCAL
POLICY IN UNDERDEVELOPED
COUNTRIES
 SOME OF THE MAIN LIMITATIONS
ARE:
(1)Lack of elasticity
(2)Non-monetized sector
(3)Inadequate statistics
(4)Illiteracy
(5)Limited scope
METHODS OF FISCAL POLICY IN
UNDERDEVELOPED COUNTRIES
(1)TAXATION POLICY: govt. should pursue
such a taxation policy as may (i) promote
capital formation. (ii) curb consumption
expenditure to boost saving. (iii) mobilize
economic surplus (it means difference
between the current production $ current
consumption).
SPECIAL MEASURES BE TAKEN TO CHECK
TAX EVASION, AS IT LEADS TO THE
GENERATION OF BLACK MONEY AND
INFLATION.
(2)PUBLIC EXPENDITURE
POLICY
Economic development requires large
availability of capital which can’t be
expected from private sector alone, it is
necessary to increase public sector
expenditure for this purpose.
Public expenditure can be made in following
ways: (i) development of public
enterprises. (ii) encouragement to private
sector. (iii) provision of infrastructure i.e.
development of railways, roads, bridges
etc.
(3)PUBLIC DEBT POLICY
Public debt can be:
(i) INTERNAL DEBT
(ii) EXTERNAL DEBT
It is of great significance to economic
development in more than one way. (a) it
encourages propensity to save. (b) it helps in
capital formation for economic development.
(c) it helps to control inflation. (d) it can be
repaid out of the increased national income.
(4) DEFICIT FINANCING
It refers to financing of the deficit of
government’s budget. when govt.
meets its budgetary deficit by
borrowing from the central bank, it
is called deficit financing. Central
bank gives this loan by printing
new currency notes.
(5) FISCAL DEFICIT
Fiscal deficit is estimated, accounting for both
the capital as well as revenue receipts and
expenditures of the govt.
FD=BE-BR other than borrowings
HERE,
FD= fiscal deficit
BE= budget or total expenditure
BR= budget or total receipts
FISCAL DEFICIT IS INFACT EQUAL TO THE
TOAL BORROWINGS AND OTHER LIABILITIES
OF THE GOVT.
LIMITATIONS OR EVALUATION
OF FISCAL POLICY
 Lack of accurate forecasting
 Delay of decisions
 Conflicting trends in public $ private sectors
 Limitations of fiscal policy relating to full
employment
 Conflict between social $ other economic
objectives
 Increase in public debt
 Problems of deficit financing