Fiscal Policy

Fiscal policy

India's fiscal deficit has grown almost four-fold in the last five years. Government finances are in disarray largely because of a mounting subsidy and interest payment burden. Fiscal policy refers to the overall effect of the budget outcome on economic activity. The idea of using fiscal policy to combat recessions was introduced by John Maynard Keynes in the 1930s

Two main instruments of fiscal policy

* Revenue Budget

* Expenditure Budget

Three possible stances of fiscal policy are:

* A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue).

* An expansionary stance of fiscal policy involves a net increase in government spending (G > T).

* A contractionary stance of fiscal policy (G < T)

OBJECTIVE OF FISCAL POLICY

1. To achieve desirable price level

2. To Achieve desirable consumption level

3. To Achieve desirable employment level

4. To achieve desirable income distribution

5. Increase in capital formation

6. Degree of inflation

METHODS OF FUNDING

Governments spend money on a wide variety of things, from the military to services like education and healthcare, as well as transfer payments.

This expenditure can be funded in a number of different ways:

* Taxation

* Seignorage, the benefit from printing money

* Consumption of fiscal reserves.

* Sale of assets (e.g., land).

REVENUE RECEIPT

Revenue receipts are those which neither decrease the asset nor increase the liability of the government

Classification of revenue receipts:

TAX REVENUE

Fiscal Deficit

when a Government total expenditure exceed the revenue that it generated (excluding money from borrowing)

| Budget estimated | Actual |

2009-10 | 6.8 | 6.4 |

2010-11 | 5.5 | 4.7 |

2011-12 | 4.6 | 3.9 |