Fiscal Policy

Fiscal Policy

What Is Fiscal Policy

It

is concerned with raising the revenue. Most important instrument of government intervention in the country. Taxation, Expenditure and Borrowing by the government. It operates through budget.

Objectives of Fiscal Policy ■

■ ■ ■

In a developing countries it play’s a very important role in accelerating economic development. Several peculiar characteristics, which necessitate the adoption. vast and diverse resources human and material, which are lying underutilized. Weak infrastructure.

To overcome these handicaps…

   

To mobilize resources. To promote economic growth in the private sector. To ensure price stability by restraining inflationary forces. To ensure equitable distribution of income and wealth

Role Of Fiscal Policy ■

Instrument to measure the Deficit.

■

The consumers would not like to be told directly to curtail their consumptions.

■

Help stabilize short-run fluctuations in the economy.

FISCAL POLICY

Discretionary policy

To cure Recession

Non-Discretionary Policy

To Control Inflation

Increase in Govt Expenditure

Reduction of taxes

Personal Income taxes

Raising Taxes to Control Inflation

Transfer Payments

Disposing of Budget Surplus

Corporate Income taxes Corporate Dividend policy

Discretionary Policy  Deliberate

change in Government Exp. And Taxes.  Aims at managing aggregate demand.  Divided

into 2: Fiscal Policy to Cure Recession.  Fiscal policy to Control Inflation.

Fiscal Policy To Cure Recession

Increase In Government expenditure: ■By starting public works,such as building roads, dams, telecommunication links, irrigation of new areas. ■The effect if both DIRECT & INDIRECT. ■Direct effect is increase in incomes of those who sell and supply labour and RM. ■Indirect is those who earn more income and spend as per their MPC.

How large should be the increase in expenditure so that equilibrium is established at full level of output?? 45o

E X P E N D I T U R E

C+I2+G2

E2 H

C+I1+G1 Deflationary Gap E1 Potential output

450 Y1

NATIONAL INCOME

YF

Y= G 1 1-MPC

Non-Discretionary ■

Automatic stabilizer.

■

No deliberate change is made by the Government.

■

Automatically cures the recession and controls the Inflation.

Cont… ■

Personal Income: ✦ Progressive

Rate ✦ More income = more rate of Tax

■

Transfer Payments: ✦ Unemployed

Compensation / Welfare benefits. ✦ Recession increases = Unemployment increases.

Cont… ■

Corporate Income Taxes: ✦ Corporate/

companies pays the Income tax as per the percentage of profit earned. ✦ More Profit = more income tax

■

Corporate Dividend Policy: ✦ Profit

depends on economic fluctuation ✦ Follow a fairly stable dividend policy.

EFFECTIVENESS OF FISCAL POLICY Keynesians theory

2. 3.

Large expansionary effect of national income = Government increases its expenditure, without raising its taxes When Government reduces taxes without changing expenditure

INSTRUMENTS ■ ■ ■ ■ ■

Budget Taxation Public Expenditure Government Borrowing Deficit Financing

Budget FRBMA ■ notified on July 2nd & came into force on July 5th 2004. ■ Reduction of fiscal deficit & elimination of revenue deficit by March 09

Budget Provisions of FRBMA ■ ■

■ ■

Revenue deficit should be down by 0.5% Fiscal deficit should be reduced by 0.3% every year and brought down to 3% by 07-08 The total liabilities of the Union Govt. should not rise by more than 9%p.a The Union Government shall not give guarantee to loans raised by PSUs and State governments for more than 0.5% of GDP in the aggregate;

TAXATION ■ ■ ■

A non quid pro quo payment by the people to the government Types - personal and corporate tax, VAT & royalties Sound tax system, with moderate rates and a broad base, is an integral part of the prudent fiscal policy. The expansion in the tax base is sought to be achieved through expansion in the scope of taxes, specifically service tax, removal of exemptions and improvement in tax administration

TAXATION - REFORMS ■ ■ ■ ■ ■ ■

Domestic Co. 40% – 30% Foreign Co. 55%– 40% Special tax benefits to power sector, SEZ & shipping Ind. Dematerialization of TDS cert. Widening of service tax base Introduction of state – level VAT for achieving a self-enforcing & harmonized commodity taxation regime

PUBLIC EXPENDITURE ■ ■ ■

■

Plan expenditure – govt. plans to incur on a scheme to be implemented in a given year. Non-plan expenditure is generally an outcome of plan expenditure Return generated should be greater than the cost of capital, but cannot always work on profit motive Expected to release a summary of their monthly receipts and exp to public.

Government Borrowing ■

■ ■ ■

Borrowing is the quickest Mode of raising funds. To finance schemes of economic devt. Market loans – Govt. sells securities & treasury bills to public Small savings – RDB, Postal accounts To meet the uncovered gap between total expenditure and total non-debt receipts

DEFICIT FINANCING DEFICIT = Government expenditure Government receipts from the public. ■ ■

Expenditure < Income = Surplus Expenditure > Income = Deficit

Cont… ■

Deficit financing means the creation of new currency.

■

Monetization of government debt.

NEED FOR DEFICIT FINANCING

■

The developing countries keen to promote rapid economic growth;

Cont… ■

The resources required for development far exceeds the amount which can be raised by normal means of resource mobilization, viz., taxation, borrowing, surpluses from public enterprises, etc.

■

The uncovered gap is made up by deficit financing.

TRENDS IN FISCAL DEFICITS

Year

Gross Fiscal

Fiscal

Revenue

Revenue

Primary

Primary

Deficit

Deficit as

Deficit

Deficit as

Deficit

Deficit as

(Rs.crs)

% of GDP

(Rs.crs)

% of GDP

(Rs.crs)

% of GDP

1996-97

56242

4.1

32654

2.4

-3236

-0.2

1997-98

73204

4.8

46449

3.1

7567

0.5

1998-99

89560

5.1

66976

3.8

11678

0.7

1999-00

104717

5.3

67596

3.5

14468

0.7

2000-01

118816

5.6

85234

4.0

19502

0.9

2001-02

140955

6.2

100162

4.4

33495

1.5

2002-03

145072

5.9

107880

4.4

27268

1.1

2003-04

123272

4.5

98262

3.6

-816

0.0

2004-05

125202

4.0

78338

2.5

-1732

-0.1

2005-06 (RE)

146175

4.1

91821

2.6

16143

0.5

2006-07 (BE)

148686

3.8

84727

2.1

8863

0.2

2006-07

108201

-

84483

-

20258

-

(Provisional upto November)

RE= Revised Estimates BE= Budget Estimates Source: Ministry of Finance and Controller General of Accounts..

DEBT POSITION OF THE CENTRE (INTERNAL DEBT)

Amount Outstanding at the end of March (Rs.crores)

DEBT

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

(RE)

(BE)

Internal debt (Total)

803698

913061

1020689

1141706

1275971

1355943

1522031

I) Market Loans

428793

516517

619105

707965

758995

867368

984645

II) Others

374905

396544

401584

433741

516976

488575

537386

38.1

40.0

41.7

41.4

40.7

39.9

38.9

As % of GDP

RE= Revised Estimates BE= Budget Estimates Source: Ministry of Finance and RBI

Comparison from 1997 - 2007