Fiscal Policy

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Fiscal policy is the government programme of making discretionary changes in the expenditure, taxation and borrowings in order to achieve intended economic growth, employment, income equality, and stabilization of the economy on a growth path. Fiscal policy is implemented through fiscal instruments & changes are made in these instruments to work through the leakage of the target variable Fiscal Instruments Budgetary Balance Policy Government Expenditure Taxation Public Borrowings

 Budgetary Balance Policy : Keeping budget in balance, in surplus or deficit is in itself a fiscal instrument. When the govt keeps its total expenditure equal to its revenue, as a matter of policy, it means it has adopted a balanced-budget policy. When the govt spends more than its expected revenue, as a matter of policy, it is pursuing a deficit-budget policy. And, when the govts follows a policy of keeping its expenditure substantially below its current revenue, it is following a surplus-budget policy.

 Government Expenditure : This includes total public spending on purchase of goods & services, payment of wages & salaries of public servants, public investment, transfer payments. Given the expendable resources of the govt, the size & the composition of govt expenditure is a matter of govt discretion. The overall effect of govt expenditure on the economy depends on how it is financed and its multiplier effect. Taxation : This means transfer of private income to public chests by means of taxes. Taxes are classified as Direct Taxes & Indirect taxes. Direct taxes includes taxes on personal incomes, corporate incomes, wealth & property. Indirect taxes includes taxes on production & sale of the goods & services.

Public Borrowings: This includes both external & internal borrowings. Internal borrowings are of two types : 1. Borrowings from the public by means of govt bonds & treasury bills, and 2. Borrowing from the central bank , ie. Deficit financing. External borrowings includes : 1. Foreign governments 2. International organizations like World Bank, IMF 3. Market borrowing

Kinds of Fiscal Policy

1. Automatic Stabilization Policy 2. Compensatory Fiscal Policy 3. Discretionary Fiscal Policy Automatic Stabilization Policy : Here govt adopts a fiscal system with built-in flexibility of tax revenue & govt spending. This means there will be automatic adjustment in the govt expenditure and tax revenue in response to rise and fall in GNP. As a result tax revenue increases & govt expenditure decreases automatically with the increase in GNP and viceversa.

 Compensatory Fiscal Policy : This is a deliberate budgetary action taken by the govt to compensate for the deficiency in or excess of aggregate demand. This policy is taken in the form of surplus budgeting or deficit budgeting and is adopted as & when the govt is required to control inflation & deflation. During the period of depression, the govt is required to boost up aggregate demand which is done through tax reduction & enhanced govt spending. This is called deficit budgeting. Surplus budgeting is adopted during the period of high inflation which is caused by excessive demand. Here govt increases the tax rates & cut the expenditure to control the aggregate demand

Discretionary Fiscal Policy : This is one in which specific changes are made in the govt expenditure & taxation system and tax rates at the discretion of the govt. Here govt makes deliberate changes in 1. the level & pattern of taxation 2. The size & pattern of its expenditure 3. The size & composition of public debt. Such discretionary changes in these instruments are made with a view to achieve certain specific objectives