2. What is Fiscal Policy?
• Fiscal policy involves the Government changing the levels of
Taxation and Govt Spending in order to influence Aggregate Demand
(AD) and therefore the level of economic activity.
• AD is the total level of planned expenditure in an economy
• C- is consumption ,
• I- is Investment,
• G- is Government spending,
• X- is total exports, and
• M- is total imports
AD = C+ I + G + X – M
3. Reasons for Fiscal deficit
Increase in
Subsidies
Unproductive
Payment of
expenditure by
Interest
the government
Defense
Huge Borrowings
Expenditure
Poor
Weak Revenue
Performance of
Mobilization
Public Sector 3
Tax Evasion
4. Objectives Of Fiscal Policies
Increase in
capital
Achieve formation
desirable
employment
level
Achieve
desirable
Achieve income
desirable distribution
price Achieve
level desirable
consumption
level
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6. Expansionary Policy / Loose
Involves increasing AD
Govt will increase spending (G) & Cut
Taxes
Lower taxes will increase consumers
spending because they have more
disposable income(C)
This will worsen the govt budget deficit
Risk of High Inflation due to huge
demand & increase in money supply
7. Contractionary Policy / Tight
Involves decreasing AD
Govt will cut spending (G) & Increase
Taxes
High taxes will decrease consumers
spending because they have less
disposable income(C)
This will help in improving the govt
budget deficit
Not Easy to achieve this
9. Tools Of Fiscal Policies
Public
Expenditure
Income Of
The
Government
Government
Borrowings
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10. Fiscal Responsibility And
Budget Management (FRBM)
• Long-term macroeconomic stability
FRBM
• Reducing revenue deficit
FRBM
• Reducing the Public debt
FRBM
• No Borrowing from the RBI
FRBM
11. Criticisms of Fiscal Policy
Disincentives of Tax
Cuts.
Poor
Crowding
Informati
out
on
Time lags
12. Implications of Fiscal policy
• It will lead to capital infrastructure like higher education,
growth and output.
• It help and facilitate trade and promote economic activity in
the private sector.
• It will build up the framework for strong economic growth and
working towards full employment.
• It will improve and promote in economic development.
14. Cont..
• An increased deficit by the national government shifts the
IS curve to the right.
• This raises the equilibrium interest rate (from i1 to i2) and
national income (from Y1 to Y2), as shown in the graph.
• The equilibrium level of national income in the IS-LM
diagram is referred to as aggregate demand.
• The graph indicates one of the major criticisms of deficit
spending as a way to stimulate the economy: rising
interest rates lead to discouragement – of private fixed
investment, which in turn may hurt long-term growth of
the supply side 14
16. Government’s Income
• Direct and Indirect Tax
• Progressive Tax and Regressive Tax
• Non Tax Revenue
• Administrative receipts
• Net contribution of
• Public sector undertaking
• Railways
• Posts and Telegraphs
• Currency and mint
• Other
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17. Public Debt
• The government can turn to the capital markets to borrow
the necessary money.
• Borrowings could be from the Reserve Bank of India
(RBI), from the public by floating bonds, financial
institutions, banks and even foreign institutions.
• Borrowing from capital market is done primarily by
issuing securities, either Treasury Bills or Treasury Bonds
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18. Public Expenditure
• Public expenditure is incurred in the form of purchases of goods and
services, transfer payments and lending.
• Divided under two heads i.e. Plan Expenditure and Non Plan
expenditure.
• The plan expenditure is developmental in nature. Plan expenditure refers
to the expenditure incurred by the Central Government on
Programs/Projects, which are recommended by the Planning
Commission.
• According to the ministry of finance non-Plan expenditure is a generic
term, which is used to cover all expenditure of Government not included
in the Plan expenditure. It includes both developmental and non-
developmental expenditure. Part of the expenditure is obligatory in
nature e.g. interest payments, pensionary charges and statutory transfers
to States. A part of the expenditure is an essential obligation of a State,
e.g. Defense and internal security. Expenditure on maintaining the assets
created in previous Plans is also treated as Non-plan expenditure. 18
