Fiscal policy is the means by which a government adjusts its levels of revenue and spending in order to monitor and influence the national economy. It directly deals with budget especially through taxation and borrowing. It influences moon economic conditions. These policies effect the tax rates and government spending money in public expenditure. Higher the taxation and reduce the public expenditure will tighten the fiscal policy.
Achievement of fiscal policy
Growth, equity, encouragement to agriculture, location of small scale industries in rural areas, labor intensive growth etc.
Mandates that expenditure can be shown in revenue and other categories.
Fiscal Policy Tools
Non- plan Expenditure
- It’s not a constitutional term.
- But it is in use to emphasize on the point of revenue generation & Maintenance. (e.g. Defense, subsidies public administration).
- Recurrent receipts
- Tax and non-tax sources.
- Excise duty, income tax, corporation tax etc…
Revenue Account Expenditure
- It is non-plan expenditure.
- Subsidies, defense, public administration.
- Does not crate assists.
- Loans made to union governments of states, UTs, PSUs.
- It create assists through creation of infrastructure and social areas.
- Different between the revenue receipts and revenue expenditure. – e.g. NREGA (Social expenditure).
Fiscal Deficit =Total expenditure + Revenue receipts. In other words, different between what government earns and spending in non-Debt creating capital receipts.
- Total budget receipts and expenditure à Abolished in 1997.
- Fiscal Deficit is better than Budget Deficit.
- Budget Deficit only covers the portion of borrowing linked to printing money by RBI.
- Borrowings mode from RBI to print fresh money (curry) in order to push growth up.
- Situation that government can’t able to borrow money from market, financial instrument and LIC etc…
- It disgraced in 2006 as a part of FRBMA 2003.
- Gap between revenue and expenditure.
- When there is no finance (Money) in government and it borrows from RBI.
- It is the opposite side of the same coin (Monetized Deficit) (BD)
- FRMA 2003 discontinued the Deficit financing since 1997.
WMA’s (ways and means averages)
- RBI lends to central government against ad hoc Treasurybills to match the gap between government’s revenue and expenditure.
- However it rerated in monetized deficit.
- 90 days à 8.0% (2015) interest rate.
Two types of WMA’s
- Against unsecured loans to state government at bank rate.
- Secured loans to state government against government securities called special WMA’s.
State government borrows over & above money from RBI is called overdraft.
Ad hoc treasury bills and WMA’s
- GOI replaced ad hoc TB’s into WMA’s in 1997.
- Interests are charged at revenue repo rate & penalty at 2% above the repo rate (10%).
- Automaticity’s is dropped in the creation of currency by the RBI to fund GOI expenditure.
Fiscal deficit is right? Then how much?
- FD is bridged by market borrowings & monetization.
- FD may cane instability in macroeconomic conditions if the money supply rises.
- FD is absolutely right when the country’s economy is down. In order to boost up it may supply money (currency) to the central government with certain conditions.
- Governments liabilities increase and for less development.
- High taxes for corporate.
- PIGS à Portugal, Ireland, Greece, Spain.