fiacal policy an introduction

8/7/2019 fiacal policy an introduction

1/31

Fiscal Policy

An Introduction


2/31

Government in the Economy

Nothing arouses as much controversy as

the role of government in the economy.

Government can affect the macro economy

through two policy channels: fiscal policyandmonetary policy.

Fiscal policyis the manipulation of

government spending and taxation.

Monetary policyrefers to the behavior of

the Central Bank regarding the nations

money supply.


3/31

Government in the Economy

Tax rates are controlled by the government,

but tax revenue depends on changes in

household income and the size of corporate

profits, which the government cannot control.

Discretionary fiscal policyrefers to

changes in taxes or spending that are

the result of deliberate changes in

government policy.


4/31

Net Taxes (T), and Disposable

Income (Yd)

Net taxes are taxes paid by firms and

households to the government minus

transfer payments made to households

by the government.

Disposable, orafter-tax, income (Yd)

equals total income minus taxes

yd.

= Y-T


5/31

Macroeconomic Policies


6/31

Monetary Policy

Attempts to influence the level of

economic activity (the amount of buying

and selling in the economy) throughchanges to the amount of money in

circulation and the price of money short-

term interest rates.

Interest rates the key area ofMonetary

Policy


7/31

SupplySide Policy Intention is to shift the aggregate supply

curve to the right, increasing the long

term productive capacity of theeconomy

Tend to be long-term policies


8/31

SupplySide Policies Policies aim to influence productivity and

efficiency of the economy

Key feature open up markets and de-

regulate to improve efficiency in the working

of markets and the allocation

of resources


9/31

Fiscal Policy Influencing the level of economic activity

though manipulation of government

income and expenditure

Associated with Keynesian Demand

Management Policies


10/31

Fiscal Policy Influence Aggregate Demand

Tax regime influencesconsumption (C) and investment

(I)

Government Spending (G) Influences key economic objectives


11/31

Fiscal Policy Also used to influence non-economic

objectives and provide framework for

supply side policy

e.g. education and health, poverty

reduction, welfare reform, investment,

regional policies, promotion of

enterprise, etc.


12/31

Fiscal policy framework

The Government's fiscal policy framework is

based on the five key principles set out in the

Code for fiscal stability - Transparency,Stability, Responsibility, Fairness and

Efficiency.

The Government's fiscal policy objectives are:


13/31

The Government's fiscal policy objectives are:

over the medium term, to ensure soundpublic finances and that spending andtaxation impact fairly and

over the short term, to supportmonetary policy and, in particular, toallow the automatic stabilizers to help

smooth the path of the economy.


14/31

Fiscal Policy Objectives in a nutshell

Stability

Distributive Justice Economic Growth


15/31

Fiscal Policy

Discretionary Fiscal Policy: Discretionary FiscalPolicy. Fiscal policy is changes in the taxing and

spending of the federal government for purposes of

expanding or contracting the level of aggregatedemand.

Non discretionary Fiscal Policy:A second type

of fiscal policy is built into the structure of federal taxesand spending. This is referred to as "non discretionary

fiscal policy" or more commonly as "automatic

stabilizers".


16/31

Fiscal Policy

. Expansionary fiscal policy is defined as anincrease in government expenditures and/or a decrease

in taxes that causes the government's budget deficit to

increase or its budget surplus to decreaseContractionary fiscal policy is defined as a

decrease in government expenditures and/or an

increase in taxes that causes the government's

budget deficit to decrease or its budget surplus

to increase.


17/31

Benefits of Fiscal Policy

Regional Focus:

Some parts may be more affected than

others by the business cycle

Discretionary fiscal policy can focus onparticular regions where, for example,

unemployment rates are the highest or

inflation is at its worstAutomatic stabilizers have the greatest

effect in regions that need them the

most


18/31

Drawbacks of Fiscal Policy

Delays: Recognition Lag the amount of time it takes policy-makers to realize

that a policy is needed

Decision Lag the amount of time needed to formulate and implement

an appropriate policy

Impact Lag the amount of time between a policys implementation

and its having an effect on the economy

Political Visibility:

Voters are likely to respond more favourably to increases in government

purchases and cuts in taxes

Public Debt:

Public Debt - the total amount owed by the federal government as aresult of its past borrowing

Public Debt Charges are the amounts paid out each year by the

federal government to cover the interest charges on its public debt


19/31

The Union Budget

In order to pursue various economic andnon economic activities a government

has to peruse certain policies which

have their financial counterparts in theform of revenue borrowing and

expenditure


20/31

The Union Budget is:

Not just an annual statement of

receipts and expenditures.

It is an instrument for fulfilling the

obligations of the state

And is a political statement of the

priorities set by government in resource

allocation.


21/31

The Budget has to be

Precise

Objective oriented

Impartial People oriented

Correct data


22/31

Types of Budget

Multiple and unified budget

Lame duck budget

Executive and legislative budget

Revenue and capital budget


23/31

Public Revenue and Public Expenditure

Central Government, State Government andLocal Self Governments have various

sources of income and expenditure

Government spends money to run publicinstitutions and for social welfare. For this

purpose Governments mobilize income from

various sources.

Public finance is the study of the income

and the expenditure of Central Government,

State Governments and Local Self

Governments.


24/31

Government Income Tax Revenue

Sale of Government Services e.g.prescriptions, passports, etc.

Borrowing


25/31

Government Expenditure Social Security

Law and Order

Emergency Services

Health

Education

Defence Foreign Aid

Environment

Agriculture

Industry

Transport

Regions

Culture, Media andSport


26/31

Balanced Budget

A balanced budget is when there is

neither a budget deficit or a budget

surplus when revenues equalexpenditure ("the accounts balance")

particularly by a government.


27/31

PublicDebt

When the income of Government is insufficient

to meet its expenses, Government borrows

money from within the country and abroad.

This borrowing creates public debt.

When the government borrows from from with

in the country, internal debtemerges. When

Government borrows from foreignGovernment and international institutions,

there is external debt


28/31

Productive and non productive

debt

If borrowed money is used for productive

of Government purposes like railways, dam

etc, it is called productive debt.

If the borrowed amount is utilized for

unproductive purposes, it is known as

unproductive debt. (eg: war, payment ofMaintenance of democratic process. interest

etc).


29/31

FiscalDeficit Concept

The fiscal deficit is the difference between the

government's total expenditure and its total receipts

(excluding borrowing).The elements of the fiscal deficit are

(a) the revenue deficit, which is the difference

between the governments current (or revenue)

expenditure and total current receipts (that is,

excluding borrowing) and

(b) capital expenditure.


30/31

Revenue Deficit: The Concept

The Difference between revenue or

current expenditure and current receipts

is known as revenue deficit


31/31

Deficit Financing

The fiscal deficit can be financed by

borrowing from the Reserve Bank of

India (which is also called deficitfinancing or money creation) and

market borrowing (from the money

market, that is mainly from banks).

fiacal policy an introduction

Documents