<<–2/”>a >a href=”https://exam.pscnotes.com/fiscal-policy-2/”>Fiscal Policy is that part of Government policy which is concerned with raising revenues through Taxation and other means along with deciding on the level and pattern of expenditure it operates through budget. However, generally the expenditure exceeds the revenue income of the Government. In order to meet this situation, the Government imposes new taxes or increases rates of taxes, takes internal or external loans or resorts to Deficit Financing by issuing fresh currency.
If the government spends more than it receives it runs a deficit. To meet the additional expenditures, it needs to borrow from domestic or foreign sources, draw upon its Foreign Exchange reserves or print an equivalent amount of Money. This tends to influence other economic variables.
On a broad generalisation, excessive printing of money leads to Inflation. If the government borrows too much from abroad it leads to a debt crisis. If it draws down on its foreign exchange reserves, a Balance of Payments crisis may arise. Excessive domestic borrowing by the government may lead to higher real interest rates and the domestic private sector being unable to access funds resulting in the „crowding out? of private Investment.
Various instruments of Fiscal Policy are:-
- Reduction of Govt. Expenditure
- Increase in Taxation
- Imposition of new Taxes
- Wage Control
- Rationing
- Public Debt
- Increase in Savings
- Maintaining Surplus Budget
- Increase in Imports of Raw materials
- Decrease in Exports
- Increase in Productivity
- Provision of Subsidies
- Use of Latest Technology
- Rational Industrial Policy
Taxation policy of the government has witnessed major changes. In the last ten years, there has been considerable Growth in Direct Tax collection. The collection has increased from 33.8% in 1999-2000 to 55.5 % in 2008-09. GDP-tax ratio has also been improved from 2.97% in 1999-2000 to 16.6% in 2015-16. Direct tax collection has been dramatically improved because of the following initiatives taken by the government; Moderate tax rates have been structured in order to eradicate vagueness in tax structures Information technology has been implemented in Income tax departments in order to deliver Services like e-filing of returns, electronic tax collection reporting, issue of refunds etc. This measure has improved functional efficiency of the department; Tax administration has been improved so that deterrence levels may be enhanced and better tax services may be provided.
The Fiscal Responsibility and Budget Management Act or the FRBM Act, 2003 is an Act mandating Central Government to ensure intergenerational Equity in fiscal management and long term macro-economic stability. The Act also aims at prudential Debt Management consistent with fiscal sustainability through-
- Limits on the Central Government borrowings, debt and deficits,
- Greater transparency in fiscal operations of the Central Government
- Conducting fiscal policy in a medium term framework and
- Other matters connected therewith or incidental thereto
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Fiscal policy is the use of government spending and taxation to influence the economy. It is one of the two main tools of macroeconomic policy, along with Monetary Policy.
The goal of fiscal policy is to achieve economic stability and growth. Fiscal policy can be used to stimulate the economy during a Recession or to slow down the economy during a period of high inflation.
Fiscal policy can be used to achieve a number of economic goals, including:
- Full EMPLOYMENT: Fiscal policy can be used to create jobs and stimulate the economy. This can be done by increasing government spending or by cutting taxes.
- Price stability: Fiscal policy can be used to control inflation. This can be done by raising taxes or by cutting government spending.
- Economic growth: Fiscal policy can be used to promote economic growth. This can be done by investing in Infrastructure-2/”>INFRASTRUCTURE, Education, and research and development.
The main instruments of fiscal policy are:
- Government spending: Government spending is the amount of money that the government spends on goods and services. Government spending can be used to stimulate the economy during a recession or to slow down the economy during a period of high inflation.
- Taxation: Taxation is the amount of money that people and businesses pay to the government. Taxation can be used to raise revenue for the government or to control the economy.
- Budget deficit: A budget deficit is when the government spends more money than it takes in. A budget deficit can be used to stimulate the economy during a recession.
- Budget surplus: A budget surplus is when the government takes in more money than it spends. A budget surplus can be used to reduce the national debt or to save for a rainy day.
- Public debt: The public debt is the total amount of money that the government owes. The public debt can be used to finance government spending or to stimulate the economy.
Fiscal policy in India
The government of India uses fiscal policy to achieve a number of economic goals, including:
- Full employment: The government of India has a number of programs in place to create jobs and stimulate the economy. These programs include the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and the Pradhan Mantri Kaushal Vikas Yojana (PMKVY).
- Price stability: The government of India has a number of monetary and fiscal policies in place to control inflation. These policies include the Reserve Bank of India’s monetary policy and the government’s fiscal policy.
- Economic growth: The government of India has a number of policies in place to promote economic growth. These policies include investment in infrastructure, education, and research and development.
Conclusion
Fiscal policy is a powerful tool that can be used to achieve a number of economic goals. However, it is important to use fiscal policy carefully to avoid unintended consequences.
One of the main challenges of fiscal policy is that it can be difficult to predict how the economy will respond to changes in government spending and taxation. This is because the economy is a complex system with many different factors that can affect it. As a result, it is possible that fiscal policy could have the opposite effect of what was intended.
Another challenge of fiscal policy is that it can be difficult to coordinate with monetary policy. Monetary policy is the use of interest rates to influence the economy. The central bank, which is responsible for monetary policy, sets interest rates in order to control inflation and promote economic growth. However, fiscal policy and monetary policy can sometimes conflict with each other. For example, if the government is trying to stimulate the economy by increasing spending, the central bank may need to raise interest rates in order to control inflation. This can make it difficult to achieve both economic growth and price stability.
Despite these challenges, fiscal policy can be a powerful tool for achieving economic goals. When used carefully, it can help to stimulate the economy during a recession, control inflation, and promote economic growth.
Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy.
Fiscal policy can be used to achieve a variety of economic goals, including:
- Employment: Fiscal policy can be used to increase or decrease employment. For example, the government can increase employment by increasing spending on infrastructure projects or by providing tax breaks to businesses that hire new workers.
- Stability: Fiscal policy can be used to stabilize the economy. For example, the government can increase spending during a recession to help stimulate the economy.
- Economic Development: Fiscal policy can be used to promote economic development. For example, the government can invest in education and infrastructure to help create a more productive economy.
Fiscal policy is a powerful tool that can be used to influence the economy. However, it is important to use fiscal policy carefully to avoid unintended consequences.
Here are some frequently asked questions about fiscal policy:
What is fiscal policy?
Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy.What are the goals of fiscal policy?
The goals of fiscal policy can vary depending on the economic situation. However, some common goals include:Employment: Fiscal policy can be used to increase or decrease employment. For example, the government can increase employment by increasing spending on infrastructure projects or by providing tax breaks to businesses that hire new workers.
- Stability: Fiscal policy can be used to stabilize the economy. For example, the government can increase spending during a recession to help stimulate the economy.
Economic development: Fiscal policy can be used to promote economic development. For example, the government can invest in education and infrastructure to help create a more productive economy.
How does fiscal policy work?
Fiscal policy works by changing the amount of money that is in circulation in the economy. When the government spends more money, it puts more money into the economy. This can lead to inflation, which is an increase in the general level of prices. When the government collects more taxes, it takes money out of the economy. This can lead to Deflation, which is a decrease in the general level of prices.What are the tools of fiscal policy?
The tools of fiscal policy are government spending and taxation. Government spending is the amount of money that the government spends on goods and services. Taxation is the amount of money that the government collects from individuals and businesses.What are the effects of fiscal policy?
The effects of fiscal policy can be both positive and negative. Positive effects of fiscal policy include:Increased employment: Fiscal policy can increase employment by increasing government spending or by providing tax breaks to businesses that hire new workers.
- Increased economic growth: Fiscal policy can increase economic growth by increasing government spending or by providing tax breaks to businesses.
- Reduced inflation: Fiscal policy can reduce inflation by decreasing government spending or by increasing taxes.
Negative effects of fiscal policy include:
- Increased debt: Fiscal policy can increase government debt if the government spends more money than it collects in taxes.
- Increased inflation: Fiscal policy can increase inflation if the government spends too much money.
Reduced economic growth: Fiscal policy can reduce economic growth if the government spends too much money or if it raises taxes too high.
What are the limitations of fiscal policy?
The limitations of fiscal policy include:Time lags: It can take time for fiscal policy to have an effect on the economy.
- Uncertainty: It is difficult to predict how the economy will respond to fiscal policy.
Political constraints: Fiscal policy is often constrained by political factors.
What is the role of fiscal policy in achieving employment, stability, and economic development?
Fiscal policy can play a role in achieving employment, stability, and economic development. However, it is important to use fiscal policy carefully to avoid unintended consequences.
- Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy.
- Fiscal policy can be used to achieve a variety of economic goals, including:
- Economic growth
- Full employment
- Price stability
- Economic stability
- Fiscal policy can be implemented through a variety of tools, including:
- Taxes
- Spending
- Transfer Payments
- Government borrowing
- The effectiveness of fiscal policy depends on a number of factors, including:
- The size of the government budget
- The structure of the tax system
- The level of public debt
- The credibility of the government
- Fiscal policy can be a powerful tool for economic management, but it is important to use it carefully to avoid unintended consequences.
Here are some MCQs on fiscal policy:
Which of the following is not a tool of fiscal policy?
(A) Taxes
(B) Spending
(C) Transfer payments
(D) Government borrowingWhich of the following is a goal of fiscal policy?
(A) Economic growth
(B) Full employment
(C) Price stability
(D) All of the aboveWhich of the following factors does not affect the effectiveness of fiscal policy?
(A) The size of the government budget
(B) The structure of the tax system
(C) The level of public debt
(D) The weatherWhich of the following is a potential unintended consequence of fiscal policy?
(A) Inflation
(B) Recession
(C) Debt crisis
(D) All of the aboveWhich of the following is a correct statement about fiscal policy?
(A) Fiscal policy is always effective in achieving its goals.
(B) Fiscal policy is always easy to implement.
(C) Fiscal policy is always popular with the public.
(D) None of the above.