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1. FISCAL POLICY

2. INTRODUCTION
• Fiscal policy
– Refers to the government’s efforts to use its spending,
taxes, transfer payments to smooth out the business
cycle and maintain full employment without inflation to
promote full employment, price stability and economic
growth.
– Use of the government budget to achieve the
macroeconomic objectives.
• Government policies may be able to help
the economy achieve full employment and
therefore reduce insufficiency.

6. Roles of Fiscal Policy
• To help stabilize short run fluctuations in the
economy.
• Helps counter impact of crisis that mitigates the
impact of global slowdown on the domestic
economy.
• Promoting economic development.

7. Objectives of Fiscal Policy
• Economic development & growth - by creating
conditions for increase in savings and investment also
mobilize resources for economic growth, especially
for the public sector.
• Employment - by encouraging the use of labor-
absorbing technology.
• Stabilization - fight with depressionary trends and
booming (overheating) indications in the economy.
• Reduction of disparities of income - By reducing the
income and wealth gaps between the rich and poor.
• Price stability - employed to contain inflationary and
deflationary tendencies in the economy.

8. Limitations of Fiscal Policy
• Formulation of an appropriate fiscal policy requires
reliable forecasting of the target variables.
• The overall effect of changes in the policy instruments,
like, changes in government spending and taxation is
determined by the rate of dynamic multiplier.
• A decision and execution lag in case of discretionary
fiscal policy makes both working and efficiency of fiscal
policy shrouded with uncertainty.

9. Limitations of Fiscal Policy
• Effectiveness of fiscal policy in
underdeveloped countries is severely limited
by:
i. Low levels of income
ii. Small proportion of population in taxable income groups
iii. Existence of large non - monetized sector
iv. All pervasive corruption and inefficiency in
administration especially in tax collection machinery.

10. Types of Fiscal Policy
1. Expansionary Fiscal Policy
– An increase in government expenditures for
goods and services
– A decrease in taxes
– Some combination of the two
• Contractionary Fiscal Policy
– A decrease in government expenditures for
goods and services
– An increase in net taxes

11. • The goal is to reduce unemployment by increasing
aggregate demand and expanding real output.
Therefore the tools would be an increase in
government spending and/or a decrease in taxes.
• This would shift the AD curve to the right
increasing real GDP and decreasing

12. • The goal is to reduce inflation by decreasing aggregate demand.
Therefore the tools would be an decrease in government spending
and/or an increase in taxes.
• This would shift the AD curve to the left decreasing inflation, but it
may also cause some unemployment.
• Apply during economic boom to curb possible inflationary pressure.
Hence, the government may run a budget surplus in that situation.

13. Fiscal Policy Vs. Monetary Policy
Fiscal Policy Monetary Policy
• Fiscal Policy is managed by • Monetary Policy is maintained by
Central Bank.
Govt.
• Deals with money supply control of,
• Deal government policy (iv)The supply of money,
that attempts to influence (v) Availability of money,
the direction of the (vi) Cost of money or rate of interest,
in order to attain a set of objectives
economy fiscal allowances.
oriented towards the growth and stability
of the economy.

14. 1Q 2011 Fiscal Policy Update

15. 2Q 2011 Fiscal Policy Update

16. 3Q 2011 Fiscal Policy Update