Economics For Managers

Chapter 15 : Fiscal Policy and Budget Deficit

Objectives Of Fiscal Policy

Mobilization of Resources
Economic Development and Growth
Reduction of Disparities of Income
Expansion of Employment
Price Stability

Constituents Of Fiscal Policy

Public Expenditure
Taxation
Public Borrowing

Fiscal Policy And Efficiency Issues

Fiscal Policy and Stabilization
Automatic Stabilizers
Discretionary Fiscal Policy

Fiscal Policy And Economic Growth

Budget Deficit And Debt

What is a Budget?
What is the Budget Deficit?
What Causes a Budget Deficit?
What is National Debt?

Government Budgetary Policy

Part A - General Economic Survey
Part B - Tax Proposals
Indirect Taxes

Limitations Of Fiscal Policy

Lags in Fiscal Policy
Problems in Tax Policy
Burden of Public Debt

Chapter Summary

Taxation is the most important source of government revenue for both developed and developing countries.  There are two types of taxes: direct and indirect taxes. A direct tax is paid by the person or the firm on whom it is legally imposed. Indirect tax is imposed on one person, but paid partly or wholly by another person. Public borrowing is an important source of revenue for the government. The government usually uses debentures, bonds, etc., which carry attractive rates of interest, to borrow funds.

The government can also borrow funds from the World Bank, the International Finance Corporation, IMF etc.
Fiscal stabilization policies are undertaken by the government to maintain full employment and a reasonably stable price level. The government can also stabilize the economy by using expenditure and taxing powers to influence macroeconomic equilibrium. There are two types of fiscal policy responses to economic instability. They are automatic stabilizers and discretionary fiscal policy.

Fiscal policy has not been greatly successful in developing countries because of limitations like lags in fiscal policy, and problems in tax policy. In some countries tax incentives result in non compliance and evasion of taxes. In developing countries where agriculture is the major source of income, the tax base is reduced because agricultural income is not taxable. Corruption and inefficient administration are also responsible for poor enforcement of tax laws.

A budget is the expected or proposed revenues and expenditures of the Government during a particular period, usually one year. A budget deficit arises out of an imbalance between the receipts and payments of the Government. Huge budget deficits have a variety of harmful consequences. Another adverse consequence of a huge budget deficit is the build-up of the ‘national debt'. National debt refers to the amount borrowed by the Government to meet expenditures that arise out of the deficit in the union budget. The budget of the Indian Government consists of two parts – Part A and Part B.

While part A deals with general economic survey, the taxation proposals of the Government are dealt with in part B of the budget speech. Rising public debt is a major concern in developing countries. External debt needs more attention than internal debt because in external debt the repayment has to be made in foreign currency. Public debt has grown tremendously in India because of massive investments in infrastructure and heavy capital good industries.

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