Public finance is the study of the role of the government in the economy. It is the branch of economics which assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones.
It includes the study of :-
- Fiscal Policy
- Deficits and Deficit Financing
- Fiscal Consolidation
- Public Debt– Internal and External Debt
Fiscal policy relates to raising and expenditure of Money in quantitative and qualitative manner.Fiscal policy is the use of government spending and Taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable Growth and reduce POVERTY. The role and objectives of fiscal policy gained prominence during the recent global economic crisis, when governments stepped in to support financial systems, jump-start growth, and mitigate the impact of the crisis on vulnerable groups.
Historically, the prominence of fiscal policy as a policy tool has waxed and waned. Before 1930, an approach of limited government, or laissez-faire, prevailed. With the stock market crash and the Great Depression, policymakers pushed for governments to play a more proactive role in the economy. More recently, countries had scaled back the size and function of government—with markets taking on an enhanced role in the allocation of goods and Services—but when the global financial crisis threatened worldwide Recession, many countries returned to a more active fiscal policy.
How does fiscal policy work?
When policymakers seek to influence the economy, they have two main tools at their disposal—Monetary Policy and fiscal policy. Central banks indirectly target activity by influencing the Money Supply through adjustments to interest rates, bank reserve requirements, and the purchase and sale of Government Securities and Foreign Exchange. Governments influence the economy by changing the level and Types of Taxes, the extent and composition of spending, and the degree and form of borrowing.
Deficit financing, practice in which a government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds.
Fiscal consolidation is a term that is used to describe the creation of strategies that are aimed at minimizing deficits while also curtailing the accumulation of more debt. The term is most commonly employed when referring to efforts of a local or national government to lower the level of debt carried by the jurisdiction, but can also be applied to the efforts of businesses or even households to reduce debt while simultaneously limiting the generation of new debt obligations. From this perspective, the goal of fiscal consolidation in any setting is to improve financial stability by creating a more desirable financial position.
The public debt is defined as how much a country owes to lenders outside of itself. These can include individuals, businesses and even other governments.public debt is the accumulation of annual budget deficits. It’s the result of years of government leaders spending more than they take in via tax revenues.
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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Public finance is the study of how governments raise and spend money. It is a branch of economics that deals with the financial activities of the government. Public finance includes topics such as BUDGETING-2/”>Government Budgeting, taxation, government spending, debt and deficit, fiscal policy, monetary policy, economic growth, inflation, Unemployment, income inequality, public goods, externalities, market failure, regulatory policy, social insurance, healthcare, Education, Infrastructure-2/”>INFRASTRUCTURE, Environment, international trade, foreign aid, development economics, public choice theory, political economy, public finance history, public finance econometrics, public finance theory, and public finance applications.
Government budgeting is the process of planning and controlling government spending. It involves setting revenue and expenditure targets, and allocating Resources to different programs and departments. Taxation is the process of collecting money from individuals and businesses to fund government activities. Government spending is the use of government revenue to finance public goods and services, such as national defense, education, and healthcare. Debt and deficit are terms used to describe the financial position of the government. Debt is the total amount of money that the government owes, while deficit is the difference between government revenue and expenditure in a given year. Fiscal policy is the use of government spending and taxation to influence the economy. Monetary policy is the use of interest rates and other tools to control the money supply. Economic growth is the increase in the amount of goods and services produced by an economy over time. Inflation is the increase in the general level of prices in an economy. Unemployment is the Percentage of the labor force that is unemployed. Income inequality is the unequal distribution of income in an economy. Public goods are goods that are non-rival and non-excludable. Externalities are costs or benefits that are not borne by the parties directly involved in a transaction. Market failure is a situation in which the market fails to allocate resources efficiently. Regulatory policy is the use of government regulation to control the behavior of businesses. Social insurance is a government program that provides income support to individuals who are unable to work due to old age, disability, or unemployment. Healthcare is the provision of medical care to individuals. Education is the process of teaching and Learning. Infrastructure is the basic physical and organizational structures and facilities needed for the operation of a Society or enterprise. Environment is the natural world that surrounds us. International trade is the exchange of goods and services between countries. Foreign aid is the transfer of money or resources from one country to another. Development economics is the study of Economic Development, which is the process of improving the economic well-being of a country’s Population. Public choice theory is the study of how individuals make decisions in the public sector. Political economy is the study of the relationship between politics and economics. Public finance history is the study of the history of public finance. Public finance econometrics is the use of econometrics to study public finance issues. Public finance theory is the study of the theoretical foundations of public finance. Public finance applications is the study of how public finance theory can be applied to real-world problems.
Public finance is a complex and important field of study. It is essential for understanding how governments work and how they can be used to improve the lives of citizens.
What is fiscal policy?
Fiscal policy is the use of government spending and taxation to influence the economy.
What are the two main types of fiscal policy?
The two main types of fiscal policy are expansionary and contractionary. Expansionary fiscal policy is used to stimulate the economy, while contractionary fiscal policy is used to slow down the economy.
What are some examples of expansionary fiscal policy?
Some examples of expansionary fiscal policy include cutting taxes, increasing government spending, and lowering interest rates.
What are some examples of contractionary fiscal policy?
Some examples of contractionary fiscal policy include raising taxes, decreasing government spending, and raising interest rates.
What are the goals of fiscal policy?
The goals of fiscal policy are to promote economic growth, full EMPLOYMENT, and price stability.
What are the tools of fiscal policy?
The tools of fiscal policy are government spending, taxation, and the budget deficit.
What is the budget deficit?
The budget deficit is the amount of money that the government spends in a given year that is more than the amount of money that it takes in through taxes and other revenue sources.
What is the national debt?
The national debt is the total amount of money that the government owes to its creditors.
What are the effects of fiscal policy?
Fiscal policy can have a significant impact on the economy. Expansionary fiscal policy can help to stimulate the economy and create jobs, while contractionary fiscal policy can help to slow down the economy and reduce inflation.
What are some of the limitations of fiscal policy?
Some of the limitations of fiscal policy include the time lag between when a policy is implemented and when it takes effect, the uncertainty about the size and timing of the effects of a policy, and the possibility that a policy may have unintended consequences.
What are some of the challenges of fiscal policy?
Some of the challenges of fiscal policy include the need to balance the need to stimulate the economy with the need to control the budget deficit, the need to coordinate fiscal policy with monetary policy, and the need to address the issue of the national debt.
What is the definition of fiscal policy?
(A) The use of government spending and taxation to influence the economy.
(B) The use of monetary policy to influence the economy.
(C) The use of Trade Policy to influence the economy.
(D) The use of regulatory policy to influence the economy.What are the two main tools of fiscal policy?
(A) Government spending and taxation.
(B) Monetary policy and fiscal policy.
(C) Trade policy and regulatory policy.
(D) Monetary policy and trade policy.What is the goal of fiscal policy?
(A) To stabilize the economy.
(B) To promote economic growth.
(C) To reduce unemployment.
(D) To reduce inflation.What is a recession?
(A) A period of time when the economy is shrinking.
(B) A period of time when the economy is growing.
(C) A period of time when unemployment is high.
(D) A period of time when inflation is high.What is a depression?
(A) A period of time when the economy is shrinking very rapidly.
(B) A period of time when the economy is growing very rapidly.
(C) A period of time when unemployment is very high.
(D) A period of time when inflation is very high.What is a Fiscal Stimulus?
(A) An increase in government spending or a decrease in taxes.
(B) A decrease in government spending or an increase in taxes.
(C) A decrease in interest rates.
(D) An increase in interest rates.What is a fiscal consolidation?
(A) An increase in government spending or a decrease in taxes.
(B) A decrease in government spending or an increase in taxes.
(C) An increase in interest rates.
(D) A decrease in interest rates.What is the Laffer Curve?
(A) A curve that shows the relationship between tax rates and tax revenue.
(B) A curve that shows the relationship between government spending and economic growth.
(C) A curve that shows the relationship between inflation and unemployment.
(D) A curve that shows the relationship between interest rates and economic growth.What is the crowding-out effect?
(A) The effect of government spending on private investment.
(B) The effect of government spending on private consumption.
(C) The effect of government spending on net exports.
(D) The effect of government spending on inflation.What is the Ricardian equivalence theorem?
(A) The theory that people will save more when taxes are cut, because they know that they will have to pay higher taxes in the future.
(B) The theory that people will spend more when taxes are cut, because they know that they will have more money to spend.
(C) The theory that people will work more when taxes are cut, because they know that they will keep more of their earnings.
(D) The theory that people will retire later when taxes are cut, because they will have more money to save.