Fiscal Policy Meaning
Fiscal Policy refers to the use of government spending and tax policies to affect macroeconomic conditions, particularly employment, inflation, and macroeconomic variables such as aggregate demand for goods and services. These actions are primarily intended to stabilize the economy. To accomplish these macroeconomic objectives, fiscal and monetary policy actions are usually combined.
Everything relating to the government’s income and expenditures is covered under Fiscal Policy. The most significant aspects of the economy are addressed through fiscal policy measures, which range from budgeting to taxation. The three components of fiscal policy in India are as follows. Public Debt, Government Expenditures, and Government Revenues. The Ministry of Finance establishes the fiscal policy with support from NITI Ayog.
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Fiscal Policy Objectives
1. Price Stability
This policy primarily controls the absolute regulation of prices for all goods or things. It regulates prices while the nation is through an economic crisis and keeps them steady during an inflationary time; as a result, it regulates prices throughout the nation.
By regulating the supply of essential goods and services, the government supports price stability. As a result, it invests money in rationing and stores with reasonable prices and a sufficient supply of food grains. Additionally, it provides subsidies for utilities like transportation, water, and cooking gas, keeping their prices low enough for regular people to afford.
2. Complete Employment
Employment should be the top priority in every nation that needs to better its economic situation. India has the highest number of young people, which increases the likelihood of development. The younger generation is more capable than the older generation in several areas. Therefore, if our nation could offer full or almost full employment, it would elevate our economic statistics to the next level. The Fiscal policy guides all choices pertaining to employment. The government creates more job opportunities in a number of different ways.
One, it produces jobs when it builds public sector businesses. Two, it provides the private sector with incentives and other benefits, such as tax breaks, lower tax rates, and so on, to increase output and employment. Additionally, it promotes people to launch small, cottage, and rural businesses in order to provide employment. Giving them tax benefits, incentives, subsidies, and low-interest loans are a few ways to do this.
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3. Economic Growth
Specific fiscal policy initiatives can boost the nation’s growth rate and aid in meeting its needs. The establishment of heavy industries like steel, chemicals, fertilisers, and industrial machinery is one way the government promotes economic growth. It also builds infrastructures that support economic development, including roads, bridges, railways, schools, hospitals, water and electricity supplies, telecommunications, and so forth.
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Fiscal Policy Types
1. Expansionary Fiscal Policy
These entail the choices made by the governments to increase their financial contributions to the national economy. Thus, it produces a large number of goods and services. Additionally, it expands employment prospects, increasing both individual and governmental profits as a result of all the growth.
2. Contractionary Fiscal Policy
The second kind of fiscal policy is this one. When there is an economic boom, this is employed. The rapid economic expansion can occasionally be risky, though. The government is attempting to halt the current economic boom in this instance. Both inflation and economic growth are controlled by this, which also aids in doing so.
3. Neutral Fiscal Policy
When the country’s economy is in balance, this fiscal policy is employed. With economic highs and lows, it suggests things are moving well. It covers expenditures made by the governments that are paid for through taxes levied against citizens, businesses, or sectors of the economy. and won’t have any impact on the nation’s economic situation.
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Fiscal Policy Instruments
1. Control Over Consumption
This is the method by which the nation’s savings are increased. Consequently, it can be used to acquire things later on and improve the nation’s current economic situation.
2. By increasing the rate of investment
This may be the best course of action to improve both the current and future state of the economy. When people invest, money is not wasted on unnecessary items; instead, it is put to good use, rising in value every day. Consequently, the nation’s economic situation will improve greatly in the future.
3. Infrastructure Development
The infrastructure of a country has a significant role in deciding whether it is considered to be developed or underdeveloped. Thus, if we want to improve the economy, infrastructure development is more crucial.
4. Maximum taxes on Overseas products and Luxury Products
There are approximately 100% taxes involved in some goods that are directly imported into India from other nations. Because of this, the nation gains the most from its revenue. Additionally, it will encourage the purchase of homegrown goods, which will advance the nation’s industries.
Aside from overcharging for some items based on their quality and other elements, there are other crucial considerations to consider. The biggest reason why the price of a product has grown is the enormous tax that the government has imposed on luxury goods. Because this significant tax is applied to luxury goods, the income earned by these products will be at its highest, directly affecting the economic health of the nation.
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Fiscal Policy Components
- Government Receipts
- Government Expenditures
- Public Accounts of India
1. Government Receipts
These government receipts take into account the government’s income, which has been achieved through the collection of taxes, interest, and the revenue produced by investments, cess, and other forms of revenue the nation has generated. This represents the total funding received by the government from all sources.
There are two types for government receipts. Income Receipts Any government payment that neither increases liabilities nor decreases assets is referred to as a revenue receipt. Revenues from taxes and other sources can also be separated out from this. The interests and dividends earned on government investments, as well as cess and some other receipts, constitute non-tax revenues. Direct tax and indirect tax make up the two categories of tax revenues.
All government payments that increase liabilities or decrease assets are considered capital receipts. These funds are used by the governments to run smoothly. Another kind of capital receipt is the existence of an incoming cash flow. It is known as a debt receipt if the government borrows money since the money must be repaid to the government from whom it was borrowed.
Non-debt receipts are those payments that do not require repayment. Non-debt receipts make up around 75% of all budgets. Loans taken by the general public, some foreign governments, and the Reserve Bank of India make up the majority of capital receipts.
Non-debt receipts are those payments that do not require repayment. Non-debt receipts make up around 75% of all budgets. Loans taken by the general people, some foreign governments, and the Reserve Bank of India make up the majority of capital receipts (RBI).
2. Government Expenditure
They are one-time costs that are incurred now or usually within a year. Revenue expenditures are essentially the same as operating expenses since they cover the charges necessary to cover the government’s continuing operational costs (OPEX). regular costs for upkeep and repairs on state-owned property. Unlike most capital expenditures, which are one-time costs, they are ongoing expenses. An illustration would be paying for electricity, rent, employee salaries, and government-owned property taxes.
Investments made by the government in capital to run or grow its operations and bring in more money. Purchasing long-term assets, such as equipment, and purchasing fixed assets, which are tangible assets. Therefore, compared to revenue expenditures, capital expenditures are frequently for bigger sums. An illustration would be the acquisition of manufacturing equipment, commercial purchases, other government expenditures like furniture, infrastructure investment, etc.
3. Public Accounts of India (Public Debt)
When the government is only acting as a banker in a transaction, the Public Account of India records the flows for those transactions. According to Article 266(2) of the Constitution, this fund was established. It takes into consideration flows for transactions in which the government only serves as a banker. Examples include minor savings, provident funds, etc. This money doesn’t belong to the government; instead, they must be returned to their original owners at some point. Consequently, the Parliament is not required to authorize spending from the public account.
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Fiscal Policy FAQs
Q) What is the meaning of fiscal policy?
Ans. 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.
Q) What are the 3 fiscal policies?
Ans. There are three types of fiscal policy. They are neutral policy, expansionary policy, and contractionary policy.
Q) What are 2 examples of fiscal policy?
Ans. The two major examples of expansionary fiscal policy are tax cuts and increased government spending. Both of these policies are intended to increase aggregate demand while contributing to deficits or drawing down budget surpluses.
Q) What is fiscal policy and its features?
Ans. Fiscal policy, measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals.
Q) Who introduced fiscal policy?
Ans. Fiscal policy is largely based on ideas from British economist John Maynard Keynes. Keynes argued that governments could stabilize the business cycle and regulate economic output rather than let markets right themselves alone.
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