Transcript
8/6/2019 Fiscal Policy- PP - IBE-12
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Modern Macroeconomics:Modern Macroeconomics:
Fiscal Policy, BudgetFiscal Policy, Budget
Deficits and theDeficits and theGovernment DebtGovernment Debt
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Objectives of the SessionObjectives of the Session
To know about the fiscal policy and its instrumentsTo know about the fiscal policy and its instruments
To know about fiscal policy and efficiency issuesTo know about fiscal policy and efficiency issues
To understand budget deficitsTo understand budget deficits
To understand public debtTo understand public debt
To know about the measurement of public debt in IndiaTo know about the measurement of public debt in India
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The Fiscal InstrumentsThe Fiscal Instruments
The tax and expenditure policies together constitute fiscalThe tax and expenditure policies together constitute fiscalpolicy of a government.policy of a government.
The fiscal policy has a direct bearing on the level ofThe fiscal policy has a direct bearing on the level of
aggregate demand and the level of economic activity.aggregate demand and the level of economic activity. The overall conduct of these policies play an importantThe overall conduct of these policies play an important
role in maintaining economic stability, including highrole in maintaining economic stability, including highemployment and control of inflation.employment and control of inflation.
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Modern Macroeconomics: Fiscal Policy,
Budget Deficit and the Government Debt 5
The Fiscal InstrumentsThe Fiscal Instruments
Tax Policy and StructureTax Policy and Structure
Principles ofTaxationPrinciples ofTaxation
Horizontal and Vertical EquityHorizontal and Vertical Equity Choice of BaseChoice of Base
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Requirements of a Good StructureRequirements of a Good Structure
Revenue yield should be adequateRevenue yield should be adequate
The distribution of tax burden should beThe distribution of tax burden should be
equitableequitable It is not only the impact point at which the tax isIt is not only the impact point at which the tax is
imposed, but also its final resting place whichimposed, but also its final resting place which
matters, for constructing a good tax structure.matters, for constructing a good tax structure.
Taxes should be chosen so as to minimizeTaxes should be chosen so as to minimizeinterference with economic decisions ininterference with economic decisions in
otherwise efficient markets.otherwise efficient markets.
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Requirements of a Good StructureRequirements of a Good Structure
The tax structure should facilitate the use of fiscal policy forThe tax structure should facilitate the use of fiscal policy forstabilization and growth objectives.stabilization and growth objectives.
The tax system should permit fair and nonThe tax system should permit fair and non--arbitraryarbitrary
administration and it should be understandable to theadministration and it should be understandable to thetaxpayer.taxpayer.
Administration and compliance costs should be as low as itAdministration and compliance costs should be as low as itis compatible with the other objectives.is compatible with the other objectives.
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The Problem ofTax IncidenceThe Problem ofTax Incidence
The problem of tax incidence deals with theThe problem of tax incidence deals with theway the tax burden is ultimately borne andway the tax burden is ultimately borne and
its total effect on work effort, saving,its total effect on work effort, saving,commodity prices, factor prices, resourcecommodity prices, factor prices, resourceallocations and the composition ofallocations and the composition ofproduction and consumption.production and consumption.
Taxes are not voluntary purchase paymentsTaxes are not voluntary purchase paymentsbut mandatory imposition, payable inbut mandatory imposition, payable in--linelinewith whatever tax statute has beenwith whatever tax statute has beenlegislated.legislated.
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The Tax StructureThe Tax Structure
Depending on whether the base is income determined orDepending on whether the base is income determined or
consumption determined, the authorities decide on theconsumption determined, the authorities decide on the
tax rate structure. They are:tax rate structure. They are: Progressive TaxProgressive Tax Regressive TaxRegressive Tax
Proportional TaxProportional Tax
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Fiscal Policy and Efficiency IssuesFiscal Policy and Efficiency Issues
Fiscal policy also influences growth performanceFiscal policy also influences growth performance
of an economy through its effects on allocation ofof an economy through its effects on allocation of
resources and how far they are efficientlyresources and how far they are efficientlymanaged.managed.
Among the various aspects of efficiency issues,Among the various aspects of efficiency issues,
the level of Incremental Capital Outputthe level of Incremental Capital Output RatioRatio
(ICOR) is an important issue for any economy.(ICOR) is an important issue for any economy. The development of an economy is dependentThe development of an economy is dependent
upon ICOR.upon ICOR.
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Fiscal Policy and StabilizationFiscal Policy and Stabilization
Even without understanding Public FinanceEven without understanding Public Finance
anyone is aware of the fact that theanyone is aware of the fact that the
Government is having tremendous powers in itsGovernment is having tremendous powers in itshands to influence the purchasing power of thehands to influence the purchasing power of the
consumer, through affecting his disposableconsumer, through affecting his disposable
income.income.
Stabilization policies are the policiesStabilization policies are the policiesundertaken by the government authorities toundertaken by the government authorities to
maintain full employment and a reasonablymaintain full employment and a reasonably
stable price level.stable price level.
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Modern Macroeconomics: Fiscal Policy,
Budget Deficit and the Government Debt 12
Automatic StabilizersAutomatic Stabilizers
Every economy suffers from cyclical fluctuations in output,Every economy suffers from cyclical fluctuations in output,
employment and prices.employment and prices.
Automatic stabilizers are features of the governmentAutomatic stabilizers are features of the governmentbudget that automatically adjust net taxes to stabilizebudget that automatically adjust net taxes to stabilize
aggregate demand as the economy expands or contracts.aggregate demand as the economy expands or contracts.
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Modern Macroeconomics: Fiscal Policy,
Budget Deficit and the Government Debt 13
Fiscal Policy and Economic GrowthFiscal Policy and Economic Growth
The role of fiscal policy in securing stability and growth inThe role of fiscal policy in securing stability and growth in
the less developed countries (LDCs) is of fundamentalthe less developed countries (LDCs) is of fundamental
importance.importance. Fiscal policy should be so employed that while promotingFiscal policy should be so employed that while promoting
consumption and investment to the level of optimumconsumption and investment to the level of optimum
utilization of the available resources of the economy.utilization of the available resources of the economy.
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Modern Macroeconomics: Fiscal Policy,
Budget Deficit and the Government Debt 14
Government RevenueGovernment Revenue
The Central Government levies four major categories ofThe Central Government levies four major categories of
taxes, viz., personal income tax, corporation tax,taxes, viz., personal income tax, corporation tax,
customs duties and union excise duties for mobilizationcustoms duties and union excise duties for mobilizationof resources.of resources.
These taxes account for almost total tax revenues of theThese taxes account for almost total tax revenues of the
government.government.
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Modern Macroeconomics: Fiscal Policy,
Budget Deficit and the Government Debt15
Government ExpenditureGovernment Expenditure
With the expansion of the government activitiesWith the expansion of the government activities
during the planning period, there has been aduring the planning period, there has been a
spectacular rise in government spending.spectacular rise in government spending. However, the finances of the government haveHowever, the finances of the government have
expenditure far exceeding the revenue income.expenditure far exceeding the revenue income.
Among the various components of revenueAmong the various components of revenue
expenditure, the increase in nonexpenditure, the increase in non--plan expenditureplan expenditure
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Modern Macroeconomics: Fiscal Policy,
Budget Deficit and the Government Debt16
Budget DeficitBudget Deficit
The annual budget is a financial plan.The annual budget is a financial plan.
It gives estimates of how the government proposed toIt gives estimates of how the government proposed to
spend that year both as part of the five year plan (i.e.spend that year both as part of the five year plan (i.e.plan expenditure) and outside the plan (i.e. nonplan expenditure) and outside the plan (i.e. non--planplan
expenditure) and how that expenditure is to be financed.expenditure) and how that expenditure is to be financed.
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Modern Macroeconomics: Fiscal Policy,
Budget Deficit and the Government Debt17
Basic DefinitionsBasic Definitions
Revenue DeficitRevenue Deficit It is the difference between Governments revenue expenditure andIt is the difference between Governments revenue expenditure and
revenue receipts whereas capital deficit is the difference betweenrevenue receipts whereas capital deficit is the difference between
capital expenditure and capital receipts.capital expenditure and capital receipts.
Gross Fiscal DeficitGross Fiscal Deficit It is equal to borrowings and other liabilities.It is equal to borrowings and other liabilities.
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Modern Macroeconomics: Fiscal Policy,
Budget Deficit and the Government Debt18
Basic DefinitionsBasic Definitions
High Fiscal Deficits: ImplicationsHigh Fiscal Deficits: Implications Money Supply GrowthMoney Supply Growth InflationInflation CrowdingCrowding--out of Private Investmentout of Private Investment CrowdingCrowding--out of Essential Public Expenditureout of Essential Public Expenditure
Monetized DeficitMonetized Deficit It is the increase in net RBI credit to the CentralIt is the increase in net RBI credit to the Central
Government, comprising the net increase in theGovernment, comprising the net increase in theholdings ofTreasury Bills of the RBI and itsholdings ofTreasury Bills of the RBI and itscontribution to the market borrowings of thecontribution to the market borrowings of theGovernment.Government.
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Modern Macroeconomics: Fiscal Policy,
Budget Deficit and the Government Debt19
Basic DefinitionsBasic Definitions
Primary DeficitPrimary Deficit It is calculated by deducting the interest payments of theIt is calculated by deducting the interest payments of the
government from the gross deficit.government from the gross deficit.
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Modern Macroeconomics: Fiscal Policy,
Budget Deficit and the Government Debt20
Public DebtPublic Debt
Growth of public debt is now a major concern inGrowth of public debt is now a major concern in
India.India.
Repayment of external debt has already createdRepayment of external debt has already createda balance of payments crisis in 1991.a balance of payments crisis in 1991.
Growth of internal debt as yet has not attractedGrowth of internal debt as yet has not attracted
as much public attention, as it ought to have,as much public attention, as it ought to have,
mainly because unlike external debt, internalmainly because unlike external debt, internaldebt can be repaid by monetization.debt can be repaid by monetization.
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Modern Macroeconomics: Fiscal Policy,
Budget Deficit and the Government Debt21
Measurement of Public Debt in IndiaMeasurement of Public Debt in India
As per the current Indian budgetary practice there areAs per the current Indian budgetary practice there are
three sets of liabilities which constitute centralthree sets of liabilities which constitute central
government public debt via..government public debt via.. Internal debtInternal debt External debtExternal debt
Other liabilitiesOther liabilities
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Modern Macroeconomics: Fiscal Policy,
Budget Deficit and the Government Debt22
Public Debt: Problems and IssuesPublic Debt: Problems and Issues
Public debt in India has grown tremendouslyPublic debt in India has grown tremendouslyover the planning period as massiveover the planning period as massive
investments were made in th fields ofinvestments were made in th fields ofdevelopment infrastructure and setting up ofdevelopment infrastructure and setting up ofheavy capital goods industries.heavy capital goods industries.
Problems that have risen in the context ofProblems that have risen in the context ofrising public debt in India are:rising public debt in India are: The Burden of Public DebtThe Burden of Public Debt The Inflationary PotentialThe Inflationary Potential Increasing Cost of BorrowingsIncreasing Cost of Borrowings
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