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    Fiscal Policy

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    Aditya
    Fiscal policy uses government spending, taxation, and borrowing tools to influence the economy. It aims to achieve full employment, price stability, and economic development. The main fiscal policy tools are taxation, government expenditure, public debt, and deficit financing. Fiscal policy can be used for stabilization by increasing spending and deficits during recessions and reducing them during booms. It faces limitations in developing countries like inadequate data and non-monetized sectors.

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    Fiscal Policy

    Uploaded by

    Aditya
    409 views21 pages
    Fiscal policy uses government spending, taxation, and borrowing tools to influence the economy. It aims to achieve full employment, price stability, and economic development. The main fiscal policy tools are taxation, government expenditure, public debt, and deficit financing. Fiscal policy can be used for stabilization by increasing spending and deficits during recessions and reducing them during booms. It faces limitations in developing countries like inadequate data and non-monetized sectors.

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    Fiscal policy uses government spending, taxation, and borrowing tools to influence the economy. It aims to achieve full employment, price stability, and economic development. The main fiscal policy tools are taxation, government expenditure, public debt, and deficit financing. Fiscal policy can be used for stabilization by increasing spending and deficits during recessions and reducing them during booms. It faces limitations in developing countries like inadequate data and non-monetized sectors.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    409 views21 pages

    Fiscal Policy

    Uploaded by

    Aditya
    Fiscal policy uses government spending, taxation, and borrowing tools to influence the economy. It aims to achieve full employment, price stability, and economic development. The main fiscal policy tools are taxation, government expenditure, public debt, and deficit financing. Fiscal policy can be used for stabilization by increasing spending and deficits during recessions and reducing them during booms. It faces limitations in developing countries like inadequate data and non-monetized sectors.

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    Download as ppt, pdf, or txt
    of 21

    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

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