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Contents
1. Introduction

2. Definition

3. Purpose of Fiscal Policy

4. Objectives of Fiscal Policy

5. Tools / Instruments of Fiscal Policy

6. Types of Fiscal Policy

7. Techniques of Fiscal Policy

8. Advantages & Disadvantages

9. Conclusion

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Fiscal Policy of Pakistan

Introduction
J.M Keynes in his book, General Theory of Employment Interest and Money disagreed with view of classical economists. He was of the opinion that govt. of a country must intervene in economic matters to stabilize pieces and achieve full employment. He is late in 1940 stressed that govt use its expenditures and taxes for changing the size of national income and tempo of aggregate economic activity in the country.
The use of deliberate changes in govt. expenditure and taxes to achieve certain national economic goals is called FISCAL POLICY.

Definition
What is a Fiscal Policy?
According to Lipsey

1. Governments revenue rasing and its spending activities are called Fiscal Policy.
2. Fiscal policy is the use of government expenditure and revenue collection to Influence the economy.

The purpose of Fiscal Policy

1. Reduce the rate of inflation, 2. Stimulate economic growth in a period of a recession. Basically, fiscal policy aims to stabilize economic growth, avoiding the boom and bust economic cycle.

Objectives of fiscal policy

There are some objectives of fiscal policy.

1. Economic Growth
The basic objective of a fiscal policy is to promote economic growth in the economy. In all countries, whether develop or under developed, the state gives

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top priority to economic development i.e. raising if national income, per capita income and standard of living.

2. Fair Distribution of Income

In a free enterprise economy, economic development is always accompanied by inequalities in the distribution of wealth. A small group of palpation becomes richer and richer and majority of the population becomes poorer and poorer.

3. Full Employment
The achievement of full employment is another objective of fiscal policy. Employment level can be increased by giving incentives to investors and govt, through fiscal policy can induce by lowering down the tax rate or by increasing slabs. Income tax holiday and reduction in other taxes may bring larger investment.

4. To Correct the Disequilibrium in the Balance of Payment

Disequilibrium in the balance of payments arises when the imports payments of a country exceed its exports. To correct this disequilibrium the govt may adopt certain fiscal measures.

5. Suitable Consumption Level

It is also necessary that through fiscal policy a suitable and desirable level of consumption should prevail in the country

TOOLS / PRINCIPLES WEAPONS / INSTRUMENTS OF FISCAL POLICY

The government uses various fiscal weapons to achieve full employment in an economy without inflation or deflation. They are as follow:

1. Taxes
Our present taxation system automatically operates the cyclical fluctuation in the economy. When there is a rise in prices, rise in profits and the need is to contact the inflationary pressure the progressive tax system comes to rescue and contracts the surplus purchasing power from the economy and vice versa.

2. Unemployment Allowance
In advanced countries of the world, people receive unemployment allowance and other welfare payments when they are out of jobs. As soon as they get employment, these payments are stopped

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3. Public Expenditure
An increase in public expenditure during the disposable adds to the aggregate demand for goods or services and leads to a increase in income and during inflation reduction in public expenditures reduces aggregate demand, national income, employment and prices. Thus inflationary and deflationary pressures can be controlled in this way.

4. Public Revenue
A reduction in taxes affects in raising the disposable income of the people which in turn increases consumption and investment expenditures of the people, on the other hand an increase in taxes tends to reduce disposable income and as a result there is reduction in consumption and investment expenditure.

5. Public Debit
To control inflationary and deflationary pressures government change its fiscal policy. During depression government by public lending increases the income, consumption and investment while during inflationary pressures government borrows from the financial institutes to decrease the disposable income, consumption and investment expenditures.

Techniques of Fiscal Policy

1. Taxation Policy
Taxation policy is relating to new amendments in direct tax and indirect tax. Govt. of Pakistan passes finance bill every year. In this policy govt. determines the rate of taxes. Govt. can increase or decrease these tax rates and amend previous rules of taxation .Govt.'s earning's main source is taxation. But more tax on public will adverse effect on the development of economy.

If Govt. will increase taxes, more burdens will be on the public and it will reduce production
and purchasing power of public.

If Govt. will decrease taxes, then public's purchasing power will increase and it will increase
the inflation.

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Govt. analyzes both the situation and will make his taxation policy more progressive. 2. Govt. Expenditure Policy
There are large number of public expenditure like opening of govt schools, colleges and universities, making of bridges, roads and new railway tracks. In all above projects govt has paid large amount for purchasing and paying wages and salaries all these expenditure are paid after making govt. expenditure policy. Govt. can increase or decrease the amount of public expenditure by changing govt. budget. So, govt. expenditure is technique of fiscal policy by using this, govt. use his fund first on very necessary sector and other will be done after this.

3. Deficit Financing Policy

If Govt.'s expenditures are more than his revenue, then govt. should have to collect this amount. This amount is deficit and it can be fulfilled by issuing new currency by central bank of country. But, it will reduce the purchasing power of currency. More new currency will increase inflation and after inflation value of currency will decrease. So, deficit financing is very serious issue in the front of govt. Govt. should use it, if there is no other source of govt. earning.

4. Public Debt Policy

If Govt. thinks that deficit financing is not sufficient for fulfilling the public expenditure or if govt. does not use deficit financing, then govt. can take loan from World Bank, or take loan from public by issuing govt. securities and bonds. But it will also increase the cost of debt in the form of interest which govt. has to pay on the amount of loan. So, govt. has to make solid budget for this and after this amount is fixed which is taken as debt. This policy can also use as the technique of fiscal policy for increase the treasure of govt.

Types of Fiscal Policy

There are two types of fiscal policy. 1. Expansionary: An increase in government purchases of goods and services, a decrease in net taxes, or some combination of two for the purpose of increasing aggregate demand and expanding real output. 2. Contractionary: A decrease in government purchases of goods and services, an increase in net taxes, or some combination of the two for the purpose of decreasing aggregate demand and thus controlling inflation.

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Methods of Raising Funds

Governments expenditure can be funded in a number of different ways: 1.Taxation of the population Types of Taxes There are father types of taxes. 1.1 1.2 1.3 1.4 Income Tax Corporate Tax Transfer Taxes-estate Tax & Gift Tax Property Tax

1.5 Capital Value Tax

2. Borrowing money from the population, resulting in a fiscal deficit. 3. External resources: Foreign grant and loans. 4. Privatization proceeds.

Advantages
1. Transaction costs will be eliminated.
For instance, Uk firms currently spend about 1.5 billion a year buying and selling foreign currencies to do business in the EU. With the EMU this is eliminated, so increasing profitability of EU firms.

2. Price transparency.
Eu firms and households often find it difficult to accurately compare the prices of goods, services and resources across the EU because of the distorting effects of exchange rate differences. This discourages trade. According to economic theory, prices should act as a mechanism to allocate resources in an optimal way, so as to improve economic efficiency. There is a far greater chance of this happening across an area where E.M.U exists. Advice to young people: We can buy things without wrecking our brains trying to calculate what price it is in our currency.

3. Uncertainty caused by Exchange rate fluctuations eliminated.

Many firms become wary when investing in other countries because of the uncertainty caused by the fluctuating currencies in the EU. Investment would rise in the EMU area as the currency is universal within the area, therefore the anxiety that was previously apparent is there no more.

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4. Single currency in single market makes sense.

Trade and everything else should operate more effectively and efficiently with the Euro. Single currency in a single market seems to be the way forward.

6. Prevent war.
The EMU is, and will be a political project. It's founding is a step towards European integration, to prevent war in the union. It's a well known fact that countries who trade effectively together don't wage war on each other and if EMU means more happy trade, then this means, peace throughout Europe and beyond (we hope).

Disadvantages
1. The instability of the system.
Throughout most of the 1980s the UK refused to join the ERM (Exchange rate mechanism). It argued that it would be impossible to maintain exchange rate stability within the ERM, especially in the early 1980s when the pound was a petro-currency and when the UK inflation rate was consistently above that of Germany. When the UK joined the ERM in 1990 there had been three years of relative currency stability in Europe and it looked as though the system had become relatively robust. The events of Sept. 1992, when the UK and Italy were forced to leave the system, showed that the system was much less robust than had been thought.

2. Over estimation of Trade benefits.

Some economists argue that the trade and cost advantages of EMU have been grossly over estimated. There is little to be gained from moving from the present system which has some stability built into it, to the rigidities which EMU would bring.

3. Loss of Sovereignty.
On the political side, it is argued that an independent central bank is undemocratic. Governments must be able to control the actions of the central banks because Governments have been democratically elected by the people, whereas an independent central bank would be controlled by a non elected body. Moreover, there would be a considerable loss of sovereignty. Power would be transferred from London to Brussels. This would be highly undesirabel because national governments would lose the ability to control policy. It would be one more step down the road towards a Europe where Brussels was akin to Westminster and Westminster akin to a local authority.

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Conclusion
1. Pakistan fiscal position worsened because of unexpected events occurred on domestic and external scene. 2. High proportion of revenues being spent on defense and interest payments. 3. Lower industrial productivity leads to lower tax collection because of high interest rates. 4. Pakistan needs to increase tax base by imposing tax on agriculture and capital gain to increase revenue.

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