Escolar Documentos
Profissional Documentos
Cultura Documentos
Concepts of fiscal deficits & deficit financing, Complementarities in fiscal & monetary policies, Fiscal policy in India, Trend in fiscal management in India
Submitted by Revant Nandgaonkar (087) Sameer Chaulkar (065) Siddhesh Tigdi (118) Vajreshwar Thoutti (117) Jayesh Bendale (064) Kiran Phaphale (092)
Division B
Acknowledgement
This project could not have been written without the help of Prof.Dr. Bansilal Srivastav, who not only served as my supervisor but also encouraged and challenged me throughout this project,our fellow friends and the other students of our class also guided us through this process, never accepting less than our best efforts. We thank them all.
INTRODUCTION
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 Federal taxation and spending policies designed to level out the business cycle and achieve full employment, price stability, and sustained growth in the economy. Fiscal policy basically follows the economic theory of the 20th-century English economist John Maynard Keynes that insufficient demand causes unemployment and excessive demand leads to inflation. It aims to stimulate demand and output in periods of business decline by increasing government purchases and cutting taxes, thereby releasing more disposable income into the spending stream, and to correct overexpansion by reversing the process. Working to balance these deliberate fiscal measures are the so-called built-in stabilizers, such as the progressive income tax and unemployment benefits, which automatically respond counter cyclically. Fiscal policy is administered independently of Monetary Policy by which the Federal Reserve Board attempts to regulate economic activity by controlling the money supply. The goals of fiscal and monetary policy are the same, but Keynesians and Monetarists disagree as to which of the two approaches works best. At the basis of their differences are questions dealing with the velocity (turnover) of money and the effect of changes in the money supply on the equilibrium rate of interest (the rate at which money demand equals money supply. Measures employed by governments to stabilize the economy, specifically by adjusting the levels and allocations of taxes and government expenditures. When the economy is sluggish, the government may cut taxes, leaving taxpayers with extra cash to spend and thereby increasing levels of consumption. An increase in publicworks spending may likewise pump cash into the economy, having an expansionary effect. Conversely, a decrease in government spending or an increase in taxes tends to cause the economy to contract. Fiscal policy is often used in tandem with monetary policy. Until the 1930s, fiscal policy aimed at maintaining a balanced
3
budget; since then it has been used "counter cyclically," as recommended by John Maynard Keynes, to offset the cycle of expansion and contraction in the economy. Fiscal policy is more effective at stimulating a flagging economy than at cooling an inflationary one, partly because spending cuts and tax increases are unpopular and partly because of the work of economic stabilizers. Fiscal policy is manifested in a government's policies on taxation and expenditures. To obtain funds for their operation, government units generally collect some form of taxes. The expenditure of these funds not only provides goods and services for constituents, but has a direct impact on the economy. For example, if expenditures are larger than the funds received by the government, the resulting deficit tends to stimulate the economy, as goods and services are produced for government purchase. In contrast, if a government runs a surplus by not spending all the funds it collects, economic growth will generally be curtailed, as the surplus funds are removed from circulation in the economy
employment. Income distribution should be equal to the most possible degree. Fiscal policy can achieve equality in distribution of income.
5. Increase in capital formation: In under-developed countries deficiency of capital is the main reason for under-development. Large amounts are required for industry and economic development. Fiscal policy can divert resources and increase capital. 6. Degree of inflation: In under-developed countries, a degree of inflation is required for economic development. After a limit, inflationary be used to get rid of this situation
Price stability: employed to contain inflationary and deflationary tendencies in the economy.
Reduce the rate of inflation. Stimulate economic growth in a period of a recession. Basically, fiscal policy aims to stabilize economic growth, avoiding the boom and bust economic cycle.
Government expenditure
It includes : Government spending on the purchase of goods & services. Payment of wages and salaries of government servants Public investment
Transfer payments
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
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
10
Government Income Tax Revenue Sale of Government Services e.g. prescriptions, passports, etc. Borrowing (PSNCR)
41 40 39 38 37
300
36
200 100 0
35 34 33
19 90 19 91 91 19 92 92 19 93 93 19 94 94 19 95 95 19 96 96 19 97 97 19 98 98 19 99 99 20 00 00 20 01 01 20 02 02 20 -03 03 20 043 04 20 053 05 20 063 06 20 073 07 20 083 08 -0 93
Public sector total receipts1 billion Public sector total receipts1 % GDP
Year
Fiscal policy is the economic term that defines the set of principles and decision of government in setting the level of public expenditure and how the expenditure is funded. In economics, fiscal policy is the use of government spending and revenue collection to influence the economy Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money. The two main instruments of fiscal policy are government spending and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:
11
%GDP
bn
Aggregate demand and the level of economic activity; The pattern of resource allocation; The distribution of income.
Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three possible stances of fiscal policy are neutral, expansionary, and contractionary:
A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue). Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.
An expansionary stance of fiscal policy involves a net increase in government spending (G > T) through rises in government spending, a fall in taxation revenue, or a combination of the two. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had, or a deficit if the government previously had a balanced budget. Expansionary fiscal policy is usually associated with a budget deficit.
A contractionary fiscal policy (G < T) occurs when net government spending is reduced either through higher taxation revenue, reduced government spending, or a combination of the two. This would lead to a lower budget deficit or a larger surplus than the government previously had, or a surplus if the government previously had a balanced budget. Contractionary fiscal policy is usually associated with a surplus.
12
Methods of funding
Governments spend money on a wide variety of things, from the military and police to services like education and healthcare, as well as transfer payments such as benefits. This expenditure can be funded in a number of different ways:
Taxation Seignorage, the benefit from printing money Borrowing money from the population, resulting in a fiscal deficit Consumption of fiscal reserves. Sale of assets (e.g., land).
13
toward full employment. The government can implement these deficit-spending policies to stimulate trade due to its size and prestige. In theory, these deficits would be paid for by an expanded economy during the boom that would follow; this was the reasoning behind the New Deal. Governments can use budget surplus to do two things: to slow the pace of strong economic growth and to stabilize prices when inflation is too high. Keynesian theory posits that removing funds from the economy will reduce levels of aggregate demand and contract the economy, thus stabilizing prices. Some classical and neoclassical economists argue that fiscal policy can have no stimulus effect; this is known as the Treasury View, which Keynesian economics rejects. The Treasury View refers to the theoretical positions of classical economists in the British Treasury, who opposed Keynes' call in the 1930s for fiscal stimulus. The same general argument has been repeated by neoclassical economists up to the present. From their point of view, when government runs a budget deficit, funds will need to come from public borrowing (the issue of government bonds), overseas borrowing, or the printing of new money. When governments fund a deficit with the release of government bonds, interest rates can increase across the market. This is because government borrowing creates higher demand for credit in the financial markets, causing a lower aggregate demand (AD), contrary to the objective of a budget deficit. This concept is called crowding out; it is a "sister" of monetary policy. In the classical view, fiscal policy also decreases net exports, which has a mitigating effect on national output and income. When government borrowing increases interest rates it attracts foreign capital from foreign investors. This is because, all other things being equal, the bonds issued from a country executing expansionary fiscal policy now offer a higher rate of return. In other words, companies wanting to finance projects must compete with their government for capital so they offer higher rates of return. To purchase bonds originating from a certain country, foreign investors must obtain that country's currency. Therefore, when foreign capital flows into the country undergoing fiscal expansion, demand for that country's currency increases. The increased demand causes that country's currency to appreciate. Once the currency appreciates, goods originating from that country now cost more to foreigners than they did before.
14