Economics-For Managers

Macroeconomics : Fiscal Policy and Budget Deficit : Chapter 15

Fiscal policy means government's plan for expenditure, revenues and borrowing to finance fiscal deficits. The objectives of the fiscal policy includes resource mobilization, economic development and growth, reduction of disparities of income, expansion of employment, price stability and correction of disequilibrium in balance of payments. The main constituents of fiscal policy are public expenditure, taxation and public borrowing.

The size and composition of public expenditure affects the development of a country. Unproductive expenditure does not promote economic growth, whereas productive expenditure promotes economic growth. Public expenditure becomes important when the economy is passing through a recession.

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.

Chapter 15 : Overview