FISCAL POLICY

Submitted by:Huma Khan

Wajiha KhanSehrish Shaukat

Ziyad Bin MehtabJawad Mughal

What is Fiscal Policy?

• It is the use of government expenditure and revenue collection to influence the economy.

• Fiscal policy refers to the overall effect of the budget outcome on economic activity. – 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.

Objectives of Fiscal Policy

• Economic Growth• Promotion of Employment.• Economic Stability• Economic Justice or Equity• Price Stability

Fiscal Policy And Macroeconomic Goals

Goal DescriptionEconomic Growth By creating conditions for increase in

savings & investment.

Employment By encouraging the use of labor-absorbing technology.

StabilizationFight 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.

How Fiscal Policy Works

• Fiscal policy is based on the theories of British economist John Maynard Keynes. Also known as Keynesian economics, this theory basically states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending.– This influence, in turn, curbs inflation (generally

considered to be healthy when at a level between 2-3%), increases employment and maintains a healthy value of money.

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– Indirect

• Public Debt

Impact of Instruments

• Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:– Aggregate demand and the level of

economic activity; – The pattern of resource allocation; – The distribution of income.

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

Non quid pro quo transfer of private income to public coffers by means of taxes.

• Classified into:– Direct Taxes- Corporate Tax, Div. Distribution

Tax, Personal Income Tax, Fringe Benefit Taxes, Banking Cash Transaction Tax

– Indirect Taxes- Central Sales Tax, Customs, Service Tax, Exercise Duty

Public Debt

• Internal Borrowings 1.Borrowings from the public by means of treasury

bills and govt. bonds2.Borrowings from the central bank (Monetized

Deficit Financing) • External Borrowings

1.Foreign investments2. International organizations like World Bank & IMF3.Market borrowings

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

state's share of taxes & duties

18%

non plan assistance to states

5%

planned state assistance

7%

central plan20%

interest20%

defence12%

subsidies7%

other non plan exp.11%

Where Does The Rupee Go To

state's share of taxes & duties

18%

non plan assistance to states

5%

planned state assistance

7%

central plan20%

interest20%

defence12%

subsidies7%

other non plan exp.11%