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Good Morning

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Role of Fiscal Policy in EconomicRecession

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Fiscal Policy: The governments role in the

economy

Fiscal policy involves the governments use of tax

increases or decreases to change consumption (and

therefore GDP), OR the use of increases or decreases

in government spending (and therefore GDP)

THE GOAL OF FISCAL POLICY IS TO PROMOTE

ECONOMIC STABILITY AND KEEP AD AT THE FULL

EMPLOYMENT LEVEL OF GDP.

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Expansionary fiscal Policy

An increase in government spending and/or a

decrease in taxes designed to increase aggregatedemand in the economy. The intent is to increaseGDP an decrease unemployment.

Contractionary Fiscal Policy: Decrease in government spending or increase in

taxes designed to decrease aggregate demand inthe economy. The intent is to control inflation

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Objectives of fiscal policy

To mobilize resources for economic growth,

especially for the public sector.

To promote economic growth in the private

sector by providing incentives to save and invest.

To restrain inflationary forces and recession in the

economy in order to ensure price stability.

To ensure equitable distribution of income andwealth so that fruits of economic growth are

fairly distributed

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6

The world capitalist system has been greatly stressed by

financial and economic crises, which had threatened thefoundation of the system in the recent past

The resultant global economic recession was triggered by

financial crisis originating in the US mortgage sector.

However, financial crises with global dimension are not new in

history.

- A major one occurred 1928-1933 culminating in the Great

Depression.

The Great Depression occurred after a dramatic expansion in

debt and money supply, first in the 1920s, and later in 1929-

1933 due to debt default.

Global Economic Recession

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7

Latest financial crisis similarly originated in rapid riskydebt accumulation and loss of investor confidence in

the US sub-prime mortgage market. Result: liquidity

crisis.

In September 2008, the crisis deepened, as severalstock markets crashed and many banks, mortgage

lenders and insurance companies failed.

Spread of the crisis worldwide is due to the linkages of

the world economy arising from economic globalization.

Contd

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Effects of recession worldwide

Output losses, higher unemployment and

poverty.

reduced capital inflows including aid, andincreased capital flight

exchange rate and balance of payments crisis.

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Effects ofRecession in India

Indian Rupee had depreciated- foreign investors has

withdrawn their money to support their parent

companies.

Exports were affected- lower demand for Indiangoods and services

Liquidity deficit was created.

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Different tools used by Government to

combat Economic Recession Monetary Policy (Major)

CRR

Bank Rate

Open Market Operations

Fiscal Policy

Taxation

Public Expenditure

Public Debt Management

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Role of Fiscal Policy as a Cooping of

Strategy in Economic Recession

Role of Taxation - At the time of tax rate is

lowered in order to increase purchasing power

in the economy.

Public Expenditure- increased during

recession. By this government try to create

employment, boost up business confidence .

Public Debt Management Securities are

purchased by the government during

recession.

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Fiscal Policy During the Recession- USA

In early 2009 the congress passed a fiscalstimulus package

The American Reinvestment and Recovery Act

$787 billion over two years

1/3 tax cuts

1/3 government purchases

1/3 transfer payments

Complete Tax holidays were given to big corporatehouses.

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Criticisms of Stimulus

Too small

Not enough to bring us back to full employment(Krugman)

Not well designed Lack of shovel-ready projects

Focused on infrastructure projects with long termbenefits, not immediate ones.

Too large

Add to national debt in the long run.

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Fiscal Stimulus Packages in India

Amount Proposed Initiatives Date

announced

Increase in planned

expenditure and tax

cuts (INR 200 billion)

plus

amount provided in the

budget for 2008 but

mostly unspent (INR

2800 billion)

(Total INR 3000 billion,

USD 60 billion)

Support to exports, textile sector,

infrastructure, housing

and SMEs

Increase expenditure on public

projects to create

employment and public assets

Petrol and diesel prices cut by Rs 5

and 3 per litre

respectively

Interest rate cuts on loans for

infrastructure and exports

Cut of 4% in excise duties across theboard on all

manufactured goods (except

petroleum products)

7-Dec-08

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Contd.Package to help realtyand infrastructure sector

India Infrastructure FinanceCompany Limited permitted to

raise funds to provide

refinancing to public sector

banks in

the infrastructure sector

External CommercialBorrowings policy liberalized to

increase lending to borrowers in

the infrastructure sector

Countervailing duty and special

countervailing duty reimposed

on cement imports

2-Jan-09

Tax cuts Service tax cut across the board

from 12% to 10%

Excise duty reduced by 2% for

items currently attracting

10%

25-Feb-09

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Conclusion

At the time ofRecession Public Expenditure is

the most important Fiscal Policy measure as it

also takes care of Public debt and Taxation.

To keep the Economy Stable there must be a

judicious mix of both monetary and fiscal

policy.

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