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Understanding Fiscal Policy and Budgeting

Fiscal policy refers to the government's spending and tax policies to influence macroeconomic goals such as economic growth, employment, price stability, and reducing inequality. The main instruments of fiscal policy include the budget (surplus, deficit, or balanced), government expenditure, taxation, public debt, and deficit financing. The objectives of fiscal policy are both general (macroeconomic goals) and specific (addressing typical economic problems). In India, the Fiscal Responsibility and Budget Management (FRBM) Act was passed to promote long-term macroeconomic stability and intergenerational equity in fiscal management through reducing deficits and debt.

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119 views17 pages

Understanding Fiscal Policy and Budgeting

Fiscal policy refers to the government's spending and tax policies to influence macroeconomic goals such as economic growth, employment, price stability, and reducing inequality. The main instruments of fiscal policy include the budget (surplus, deficit, or balanced), government expenditure, taxation, public debt, and deficit financing. The objectives of fiscal policy are both general (macroeconomic goals) and specific (addressing typical economic problems). In India, the Fiscal Responsibility and Budget Management (FRBM) Act was passed to promote long-term macroeconomic stability and intergenerational equity in fiscal management through reducing deficits and debt.

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Roopesh Kumar
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Fiscal Policy and Budget

Presented By: Group 4 (Roll. No 46-60)

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


It has 2 major objectives:
i. GENERAL obj-. aimed at achieving macroeconomic goals ii. SPECIFIC obj-. relating to any typical problems of an economy

Fiscal Policy And Macroeconomic Goals


Economic Growth: By creating conditions for increase in savings & investment. Employment: By encouraging the use of labourabsorbing 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.

Instruments of Fiscal Policy


Budgetary surplus and deficit Government expenditure Taxation- direct and indirect Public debt Deficit financing

Budgetary surplus and deficit


A budget is a detailed plan of operations for some specific future period Keeping budget balanced (R=E) or deficit (R<E) or surplus (R>E) as a matter of policy is itself a fiscal instrument. An accumulated deficit over several years (or centuries) is referred to as the government debt A deficit is a flow. And a debt is a stock. Debt is essentially an accumulated flow of deficits

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

1. 2.

Internal borrowings
Borrowings from the public by means of treasury bills and govt. bonds Borrowings from the central bank (monetized deficit financing)

External borrowings 1. foreign investments 2. international organizations like World Bank & IMF 3. market borrowings

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.

COMPONENTS OF BUDGET
Revenue receipts Capital receipts Revenue expenditure Capital expenditure

BUDGET FINANCIALS 2007-08

Where The Rupee Comes From


non-tax revenue 10% non-debt capital reciepts 1% service & other taxes 7% excise 17%

borrowings 19%

customs 12%

corporation tax 21%

income tax 13%

Where Does The Rupee Goes To


other non plan exp. 11% subsidies 7% non plan assistance to states 5% defence 12% planned state assistance 7% state's share of taxes & duties 18%

interest 20%

central plan 20%

Fiscal Responsibility And Budget Management (FRBM) Bill



1. 2.

Introduced in Lok Sabha in December 2000. Objectives include:


Long-term macroeconomic stability Inter-generational equity in fiscal management.

1. 2. 3. 4.

It aimed at:
Reducing revenue deficit Reducing gross fiscal deficit Reducing the Public debt No Borrowing from the RBI

Sticking to FRBM Targets


Items Units 200506 200607 200708*

Central Government Finances Revenue deficit/ GDP % 2.6 2 1.5

Fiscal deficit/ GDP Gross Tax/ GDP


Expenditure/ GDP Debt/ GDP

% %
% %

4.1 10.3
14.2 65.1

3.7 11.4

3.3 12.0

14.1 14.0** 64.4 58.6

*From Budget proposals ** SBI share transfer excluded

Thank You

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