Fiscal Policy and Budget

Presented By :-
Ajay Banka
Amey Vikram
Binny Kumar
 Fiscal Policy-Meaning
• The word fisc means ‘state treasury’ and fiscal
policy refers to policy concerning the use of
‘state treasury’ or the govt. finances to achieve
the macroeconomic goals.
• “Any decision to change the level, composition
or timing of govt. expenditure or to vary the
burden ,the structure or frequency of the tax
payment is fiscal policy.”
- G.K. Shaw
 Objectives of Fiscal Policy
• Economic Growth.
• Promotion of Employment.
• Economic Stability
• Economic Justice or Equity.
 Fiscal Policy And
Macroeconomic Goals
• Economic Growth: By creating conditions for increase in
savings & investment.
• Employment: By encouraging the use of labour-absorbing
technology
• Stabilization: fight with depressionary trends and booming
(overheating) indications in the economy
• Economic Equality: By reducing the income and wealth gaps
between the rich and poor.
• Price stability: employed to contain inflationary and
deflationary tendencies in the economy.
 Use of Fiscal Policy

• Adjustment of income tax allowances rather than rates

of income tax
• Extending or amending range of goods covered by
VAT
• Changing the rules under which tax has to be paid –
married persons allowances, inheritance taxes, stamp
duties, etc.
• Abolishment of certain tax allowances – MIRAS
(Mortgage Income Relief At Source)
• Accusations of ‘stealth taxes’ – much of it is a
‘tinkering’ with the tax system to achieve certain aims
– mostly non-economic (governments these days, for
example, rarely ‘increase taxes’ to dampen down the
economy)
Economic effects of fiscal policy
• Governments use fiscal policy to influence
the level of aggregate demand in the
economy, in an effort to achieve economic
objectives of price stability, full
employment, and economic growth.
 Instruments of Fiscal Policy
• Government expenditure
• Taxation- direct and indirect
• Public debt
 Government Expenditure
 It includes :
• Government spending on the purchase of
goods & services.
• Payment of wages and salaries of
government servants
• Public investment
• Transfer payments
 Taxation
• Meaning : Non quid pro quo transfer of private
income to public coffers by means of taxes.
• Classified into
1. Direct taxes- Corporate tax, Div. Distribution Tax,
Personal Income Tax, Fringe Benefit taxes, Banking
Cash Transaction Tax
2. Indirect taxes- Central Sales Tax, Customs, Service
Tax, excise duty.
 Public debt
• Internal borrowings
1. Borrowings from the public by means of treasury bills
and govt. bonds
2. Borrowings from the central bank (monetized deficit
financing)
• External borrowings
1. Foreign investments
2. International organizations like World Bank &
IMF
3. Market borrowings
 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 Code requires the Government to state both its objectives and the rules
through which fiscal policy will be operated. The Government's fiscal policy
objectives are:
Cont….
• over the medium term, to ensure sound
public finances and that spending and
taxation impact fairly within and between
generations.
• over the short term, to support monetary
policy and, in particular, to allow the
automatic stabilisers to help smooth the
path of the economy.
 Fiscal Policy In Inflation
• Control Over Public Expenditure.
• Increase In Taxes.
• Increase In public Borrowing.
• Delay In The Payment of old Debts
 Fiscal Policy In Deflation
• Increase In Public Expenditure.
• Decrease In Taxes.
• Increase In Social Welfare Expenditure.
• Prices Support Policy.
 BUDGET
• “A budget is a detailed plan of operations
for some specific future period”
• It is an estimate prepared in advance of the
period to which it applies.
Where The Rupee Comes From
non-tax revenue service & other taxes
10% 7%

non-debt capital reciepts

1% excise
17%

borrowings
19%

customs
12%

corporation tax
income tax
21%
13%
Where Does The Rupee Goes To
other non plan exp. state's share of
11% taxes & duties
18%
subsidies
7%
non plan assistance
to states
5%
defence
12% planned state
assistance
7%

interest central plan

20% 20%
Thank you