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Fiscal Policy-Meaning
The word fiscal means state treasury and
fiscal policy refers to policy concerning the use of state treasury or the govt. finances to achieve the macroeconomic goals.
- G.K. Shaw
Government Expenditure
It includes : Government spending on the purchase of goods & services. Payment of wages and salaries of government servants. Public investment. Transfer payments.
Taxation
Meaning : Non quid pro quo transfer of private income to public coffers by means of taxes. Classified into 1. Direct taxes- Corporate tax, Div. Distribution Tax, Personal Income Tax, Fringe Benefit taxes, Banking Cash Transaction Tax 2. Indirect taxes- Central Sales Tax, Customs, Service Tax, excise duty.
Public debt
Internal borrowings Borrowings from the public by means of treasury bills and govt. bonds Borrowings from the central bank (monetized deficit financing) Public debt Internal borrowings External borrowings Foreign investments, international organizations like World Bank & IMF market borrowing.
Government Budgets
Deficit budget: government spends more than it receives in tax revenue (must borrow money to cover shortfall) Surplus budget: government collects more in taxes than it spends. Balanced budget: government spends amount equal to collected tax revenue. Debt: total amount owed by the government.
More Limitations
Crowding out of private investment : Increases interest rates. Reduces amount of funding for private investment. Deficits redistribute income from all taxpayers to bondholders : Interest payments on debt made from tax revenue. Deficits impose net burden on future generations : Foreign-owned debt removes capital from economy.