fiscal policy essay economics

Fiscal Policy and Macroeconomics Essay

Fiscal policy can be considered a powerful tool that is used by the state to regulate its economy and monitor its state. It can be determined as a set of regulations and means by using which the government of a country adjusts and controls its spending levels and tax rates to guarantee that the national economy evolves and enjoys a beneficial environment (McConnell, Brue, & Flynn, 2016). The given policy impacts all spheres or interactions presupposing monetary operations, which means that it also becomes one of the factors shaping macroeconomics. Moreover, the peculiarities and current state of the fiscal policy can be discussed by the Council of Economic Advisers, which means that this body is another aspect that might include macro.

To demonstrate how fiscal policy can shape macroeconomics, three various spheres can be discussed. For instance, speaking about the circular flow and its models, the regulations offered by the government play a crucial role here. It is a model that describes how money flows through the economy and what regulatory acts should be applied to observe the laws and establish a practical and working model guaranteeing the positive outcome (McConnell et al., 2016).

The basic components of the circular flow are savings and taxes that exist at the moment. Fiscal policy presupposes the influence on economic activities by adjusting government revenue and introducing special taxation policies. It proves the idea that fiscal policy is one of the factors directly impacting circular flow.

Failing businesses are another example demonstrating the role of this element in the macroeconomics. Taxation is traditionally one of the potent measures that can be used by the government to support some problematic areas. Lower taxes leave more money and resources for companies to evolve, improve their current status, and create the basis for their further growth (De Jesus & Correia, 2016). For this reason, tax remissions might be used to support sectors that face problems and need additional regulation. Moreover, CEA might outline fields that demand specific attention and application of modified fiscal policy regarding the current statistics and financial data.

Finally, fiscal policy is an effective tool in addressing the most problematic areas in the economy that demand immediate intervention from the government. For thriving businesses, tax regulations might be higher to ensure that money acquired from companies belonging to this cohort is redirected to create the pool that can be used to support fading or less successful sectors and provide new stimuli for their rise (Papaioannou, 2019).

CEA also remains an essential component of this model as one of its primary functions is to gather timely and relevant information about the economic developments and trends to ensure the appropriate work of all its sectors (“Council of Economic Advisers,” n.d.). Using the data provided by this body and shaping the fiscal policy, the government can directly impact macroeconomics and create the basis for its stable development.

In such a way, fiscal policy can be considered a potent tool that can be used by the government of the state with the primary aim to regulate the work of its economy and eliminate undesired trends. CEA, as an authority responsible for the monitoring of these aspects, can also be taken as a potent organization that can provide pieces of advice aimed at the introduction of some changes to avoid critical deterioration and the development of problems. The examples used above show the direct correlation between fiscal policy and the elements of macroeconomics.

Council of Economic Advisers . (n.d.). Web.

De Jesus, S., & Correia, M. (2016). Active fiscal policy and macroeconomic stability. Journal of Economic Studies, 43 (43), 699-718. Web.

McConnell, C., Brue, S., & Flynn, S. (2016). Macroeconomics (21st ed.). New York, NY: McGraw-Hill Education.

Papaioannou, S. (2019). The effects of fiscal policy on output: Does the business cycle matter? The Quarterly Review of Economics and Finance, 71 , 27-36.

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Fiscal Policy, Essay Example

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Fiscal policy is basically noted as the procedural policies that are imposed by the government to make sure that the national budget is used for the needs and demands of the public. It also constitutes how the government is able to gain revenue from its national and public operations thus making a distinct effect on increasing national budget for the overall development of the country. The consistency on how the different policies of the government are followed especially when it comes to monetary budget specifically affects the overall development of the nation. This is the reason why the status of a nation’s fiscal policy is considered highly important especially when it comes to building the nation and the lives of its people.

In the article of Richard and Peggy Musgrave, a distinct identification on the different roles that the fiscal policy take in relation to the overall development and establishment of a nation’s community, it could be noted that in the article, the authors pointed out how fiscal policy could affect the overall condition of the public’s living status. The authors specifically indicated that there are particular functions that the fiscal policy responds to. Among these functions, the capacity of the government to allocate funds and resources to different households that it is supposed to serve is seemingly considered as the most important aspect of its application. The function of a fiscal policy to create a pattern of procedures that will specifically help the members of the society to realize their financial capacities creates a distinct element of balance among the people, likely aiming to develop a more dependable economy that specifically satisfies the majority of the people operating within it. Question is, what particular characteristics does a fiscal policy need to contend with to be noted as efficient enough in making a distinct impact upon the development of the country and its people? At present, most nations tend to operate under the capacity of earning revenue from the public and making sure that such revenue is redistributed to the people in a balanced manner. This is often noted as the stabilization function of fiscal policies. However, a huge conflict between revenues and redistribution of resources is found to have a distinct effect on how efficient a particular policy is notably able to provide what the public requires for personal satisfaction and for the establishment of government trust. The conflict specifically entails to define the collection of revenue through tax application on social goods to be quite inadequately redistributed to the people. This is because of the fact that tax price tagged on particular products and services sold to the public follow a distinct price-range that is applied to everyone regardless of their income, their employment and other elements that are necessarily able to define whether or not a person is able to respond to a particular price-offer in the market. Most of these products are basic which includes food, shelter, clothing and education. The tax placed atop the original price of the said products and services are fully passed on to consumers in the public. People who have a lower range of income compared to others may have a difficulty in acquiring the services and products offered to them both by the private and public entities in the market. This is most often than not the result of meager earnings that they get from their jobs. Most often than not, the government responds to this through creating public projects that are designed to generally give ease to the lives of the people. However, if individuals living within the lower edge of the economy could not enjoy the benefit from such public projects, how then could such pattern of redistribution of resources be called ‘balanced’ or ‘equal’ in nature?

Taking from the details of the written statements of both Peggy and Richard Musgrave, one specific truth could be derived, that when it comes to economy, the overall concept of balance and equality cannot be fully realized especially when the government is going to depend on the traditional way of managing funds as relatively connected to the considerable operations of capitalism. Private and public sectors operating in the market all have one purpose in relation to their existence and that is to gain the amount of revenue they hope to get from the people. Regardless of the economic capacities of the people in the society, they are supposed to respond to the pattern of paying to the government what the government is supposedly ‘due’. While it is said that such operation is specifically vital to the creation of a balanced economy, it does not benefit all members of the community as expected. The truth behind the establishment of a good economy may seemingly not provide good news to all the members of the society in an overall context. While this is true, it could not be denied that this is the same system that constitutes the creation of an operation that pushes every individual in the household sectors to find a way to reach a higher level of economic competence which again boosts the overall status of the national economy. True, in the end, however a fiscal policy is established or created around the needs of the public, the realization of its benefits specifically depend on how the households are to take into account their role in contributing to the system through making their own moves in reaching a higher level of the economic ladder. It is only through this manner that each household is to get the chance to benefit from their hard earned money through the returned values of the tax that they pay for whenever they consume basic products and basic services that are offered by both public and private entities in the market. The truth is, this particular imbalance among individuals in a specific nation is considered effective in developing and keeping a healthy national economy among many countries around the globe today. Relatively, such system has been seen to have effectively fueled development among different regions of the world; although it is a sad truth in relation to the condition on how fiscal policies are applied, it is considered as vital section that brings about a distinct realization of results which better indicates a distinction on how people tend to contribute to the development of their community within an overall context.

Peretz, P. (1987). The Politics of American Economic Policy. Section Article: Musgrave, R and Musgrave, P. Fiscal Function: An Overview.

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Fiscal Policy and Economic Growth

One view of government fiscal policy is that it stifles dynamic economic growth through the distortionary effects of taxation and inefficient government spending. Another view is that government plays a central role in economic development by providing public goods and infrastructure. This paper develops a generalized model of fiscal policy and output growth that allows for (i) a positive or negative effect of government spending on private productivity, (ii) increasing or decreasing returns to scale, (iii) a transition path away from the equilibrium growth path, and (iv) intratemporal tax distortions. Using data from 107countries during the period 1970-85,and correcting for the potentially serious problem of endogeneity in government policy, we find that a balanced-budget increase in government spending and taxation is predicted to reduce output growth rates.

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Taxation and Economic Growth, NTJ, Vol. 50, no. 4 (December 1997): 617- 642.

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Essay: Fiscal policy

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The term fiscal policy means that the government will adjust spending levels and tax rates accordingly to help monitor the influences on the nation’s economy. Both branches of the government control fiscal policy. Its sister policy, monetary policy helps set the Federal Reserve to help influence the economy so that it meets its economic goals. Fiscal policy will increase or decrease revenue and expenditures to help influence inflation. The two main tools of fiscal policy are taxes, and spending. (Miller, R.L., 2016) Taxes will influence the economy by giving the government and the people a limit on how much they have to spend in certain areas. For example, if taxes decrease then it provides families with a little extra spending money which in turn the people will spend on goods and services which helps spur the whole economy. Spending on the other hand is used more for fiscal policy to help drive money to certain parts of the sectors that need a little economic boost. But just like with taxes, the government hopes that it will be spent on goods and services. The key to fiscal policy is finding the right balance so that the economy doesn’t lean too far to the left or too far to the right. (Hyun, Park 2009)

There are two main types of fiscal policy that the government uses which are contractionary and expansionary. Contractionary fiscal policy is mostly used to help slow down the economic growth in an economy. This gets implemented when inflation is growing so fast that they have to use contractionary fiscal policy to raise taxes and cut spending. Expansionary fiscal policy is usually implemented when the economy is in a recession, usually when there are times of high unemployment and low spending by the people. Expansionary fiscal policy means to lower taxes, spend more government money or doing both. The goal with this policy is to help put more money in the hands of consumers so that the consumers will spend more money and help stimulate the economy, where does the extra money come from? expansionary fiscal policy gets financed thru the nations credit market to help boost the spending by the economy. (Miller, R.L., 2016)

The downside to using any fiscal policy does vary. Let take expansionary fiscal policy for example, if we increase the AD by implementing this policy then we will see an increase in real GDP which will cause a lower unemployment rate but the trade-off here is that there will be higher inflation as a result of this. This is just one example that I can think of where the expansionary policy would have a downside. But not every microeconomics theorist believed that the fiscal policies had downsides.

Monetary Policy on the other hand consists of a either a regulatory committee, actions that are controlled by a central bank, or a currency board. One of these would help regulate and determine the rate at which the growth of the money supply would happen which in turn would affect the interest’s rates. Monetary policy gets regulated through actions by modifying the interest rates, changing the amount of money a bank is required to keep at all times or the buying and selling of government bonds. Monetary policy is mostly controlled by the reserves. (Miller, R.L., 2016)

Unlike monetary policy which is controlled by the federal reserves, fiscal policy is controlled by Congress and the administration. Which you could imagine would be very ugly to try and find some common ground since the left and the right have such different views on so many policies. The challenges I would see is that if the left and the right side were truly not seeing eye to eye on anything then this would create a difficult environment to help get anything passed to help with either raising taxes or decreasing taxes and deciding on which sectors the extra money would be spent you could say that the right would want extra spending on the military sector where as the left would want more spending in creating better healthcare for the people. I believe both are equally important but those are some of the challenges I would see them having to face. (Miller, R.L., 2016)

Exactly 10years ago the economy crashed, the housing market crashed and so did wall street. Everything was gone. People lost their jobs left and right along with their houses. There wasn’t even equity in the house you had bought because the houses had become so far upside down that everyone was just flat out broke. Even the rich were considered “broke” at this time. Nothing was flourishing, everything just crashed and burned. This was cause by the big banks approving loans to people who didn’t have the money to pay them back, this happened because Wall Street sold trillions of dollars of fraudulent securities. All of this lead us to a $211 dollar fiscal gap debt. Fiscal gap is the gap between our already debt and our (IOU’s that we are still planning to spend. So, with this information I would say that in the past 10 years nothing has really changed, sure unemployment is down but our country is still in a significant amount of debt and it doesn’t look like there is an end in sight any time soon. (Kotlikoff and Burns, 2012)

So, in conclusion before we start going any more off topic, fiscal policy plays a very important role in our economy and society. It helps alleviate some of the pressures on our economy and sometimes it can make it worse, it just depends on who is implementing the polices and for what purposes. The branch implementing the policies must also have a feel for the economy to make sure they are implementing the right policy at the right time otherwise the policy will fail and have the opposite desired effect which most of the time will lead to a loss of money and a bigger recession. Because if they lower the taxes to much we could go broke as a country if they taxed the people to much there could be anarchy. It is always a checks and balances system. Again, it is not very black and white and it is not always easy to understand that policies should be implemented and when.

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Fiscal Policy - Impact of Tax Rises (Revision Essay Plan)

Last updated 14 Feb 2022

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Here is an exemplar essay plan to a question on the possible macroeconomic impact of a rise in the tax burden.

Macro Impact of Tax Increases on UK Economy

At the Budget in March 2021 the Chancellor announced a phasedrise in UK corporation tax from 19 per cent to 25 per cent, and froze income tax thresholds for five years, raising £17 billion per year and £8 billion per year respectively. The Government has also temporarily increased the rate of National Insurance by 1.25 percentage points, and will introduce a new Health and Social Care Levy from 2024 onwards raising £17 billion per year. These tax rises are forecast to take the UK tax burden to a historically high level. The tax burden is forecast to rise from 33 per cent of GDP recorded before the pandemic in 2019 to 36 per cent of GDP by 2026 – its highest level since the early 1950s.

Government borrowing surged from £57 billion in 2019 to over £300 billion in 2020. At the end of 2021, the National Debt was 96% of GDP. Prior to the pandemic, in November 2019, the debt-to-GDP ratio was 81%.

Evaluate the macroeconomic impacts of an increase in the tax burden on the UK economy. (25 marks)

KAA Point 1

One possible impact of the phased rise in corporation tax from 19% to 25% could be to reduce the level of capital spending by domestic firms and also make the UK economy a less attractive venue for inward FDI. This is because higher corporation tax reduces the post-tax return on investments such as new plant and machinery and factories . Assuming businesses will only go ahead with a project if the expected real return is high enough, a fall in investment would lead to a lower level of aggregate demand (C+I+G+X-M) which in turn will cause weaker economic growth and perhaps also hit productivity since the economy might have a smaller and older capital stock which breaks down more frequently.

Evaluation Point 1

However, many factors influence planned investment spending. These factors include interest rates on corporate loans, the pace of technological change and other tax decisions by the government including the recent super-deduction tax incentive. Under the super-deduction, for every £100,000 a company invests, their taxes are cut by up to £25,000. This has been important for many small businesses. If the economy is still growing and unit labour costs and the exchange rate remain competitive, then a steady rise in corporation tax back towards 25% might have only a limited impact on domestic investment and FDI. For example, corporation tax in Germany is 30 per cent – higher than the UK.

KAA Point 2

A second possible impact of a rise in taxes is a slowdown in consumer spending leading to a rise in unemployment. The extract says that freezing of income tax allowances will raise £8 billion in extra tax and this will then reduce the real disposable income of millions of households which is the main determinant of their spending power. Freezing tax allowances creates something called “fiscal drag” which is a rise in tax as people get wage increases. The jump in national insurance contributions is another direct tax on incomes and it is also paid by employers, which means that many businesses will experience an increase in the costs of employing extra workers. Some may look to control costs by reducing employment and hours for existing workers which will reduce economic growth.

Evaluation Point 2

However, in evaluation, the extract mentions that the pandemic lead to a five-fold in the budget deficit from £57 billion in 2019 to over £300 billion in 2020 and the size of the nationaldebt has expanded by 16% of GDP over the same period. One might argue that a higher tax burden is needed now to helpimprove government finances to ensure that the fiscal deficit has come down before the next recession. A high budget deficit and rising national debt can lead to rising bond yields and higher taxes in the future which could damage prospects for investment and the UK’s international competitiveness.

Final Reasoned Judgement

Overall, the UK government’s decision to raise the tax burden seems to a calculated risk that the economy will be sufficiently strong as the UK emerges from the pandemic and that households and businesses can cope with rising taxes. Some might argue that a rising tax burden is needed now to help pay for growing NHS and social care spending in the post-covid pandemic period. Others believe that there are alternative ways of raising taxes including a windfall tax on the supernormal profits of energy companies and tougher measures to address corporate tax avoidance which is estimated to cost the UK government billions of pounds of lost tax revenue each year.

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Fiscal Policy Notes & Questions (A-Level, IB)

Relevant Exam Boards: A-Level (Edexcel, OCR, AQA, Eduqas, WJEC), IB, IAL, CIE Edexcel Economics Notes Directory | AQA Economics Notes Directory | IB Economics Notes Directory

Fiscal Policy Definition: Fiscal policy occurs when the government uses government spending or taxation to change the amount of aggregate demand (AD) and national income (GDP) in the economy.

Fiscal Policy Examples & Explanation: Fiscal policy is a type of demand-side policy, as it helps the government achieves its macroeconomic objectives by changing AD. For example, during the coronavirus pandemic in the UK, the government spent more by providing business grants , and reduced taxes for UK businesses. This increases AD in the economy as government spending (G) is part of AD (AD = C + I + G + X – M). Note that this will trigger the multiplier effect and also raise the price level (causing inflation). Hence, fiscal policy is often used to address a cyclical recession caused by a downturn in the business/economic cycle. On the other hand, an increase in taxation can be used to tackle inflationary pressure by decreasing AD, causing a withdrawal from the circular flow of income.

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Essay on Fiscal Policy of India

In this essay we will discuss about Fiscal Policy in India. After reading this essay you will learn about: 1. Definition of Fiscal Policy 2. Objectives of Fiscal Policy 3. Role 4. Techniques 5. Merits 6. Shortcomings 7. Suggestions 8. Measures.

• Essay on the Measures of Fiscal Policy Reforms

Essay # 1. Definition of Fiscal Policy :

Fiscal policy is playing an important role on the economic and social front of a country. Traditionally, fiscal policy in concerned with the determination of state income and expenditure policy. But with the passage of time, the importance of fiscal policy has been increasing continuously for attaining rapid economic growth.

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Accordingly, it has included public borrowing’ and deficit financing as a part of fiscal policy of the country. An effective fiscal policy is composed of policy decisions relating to entire financial structure of the government including tax revenue, public expenditures, loans, transfers, debt management, budgetary deficit, etc.

The policy also tries to attain proper balance between these aforesaid units so as to achieve the best possible results in terms of economic goals. Harvey and Joanson, M., defined fiscal policy as “changes in government expenditure and taxation designed to influence the pattern and level of activity.”

According to G.K. Shaw, “We define fiscal policy to include any design to change the price level, composition or timing of government expenditure or to vary the burden, structure or frequency of the tax payment.” Otto Eckstein defined fiscal policy as “changes in taxes and expenditure which aim at short run goals of full employment price level and stability.”

Essay # 2. Objectives of Fiscal Policy :

In India, the fiscal policy is gaining its importance in recent years with the growing involvement of the government in developmental activities of the country.

Following are some of the important objectives of fiscal policy adopted by the Government of India:

1. To mobilise adequate resources for financing various programmes and projects adopted for economic development.

2. To raise the rate of savings and investment for increasing the rate of capital formation;

3. To promote necessary development in the private sector through fiscal incentive;

4. To arrange an optimum utilisation of resources;

5. To control the inflationary pressures in economy in order to attain economic stability;

6. To remove poverty and unemployment;

7. To attain the growth of public sector for attaining the objective of socialistic pattern of society;

8. To reduce regional disparities; and

9. To reduce the degree of inequality in the distribution of income and wealth.

In order to attain all these aforesaid objectives, the Government of India has been formulating its fiscal policy incorporating the revenue, expenditure and public debt components in a comprehensive manner.

Essay # 3. Role of Fiscal Policy in Economic Development :

One of the important goals of fiscal policy formulated by the Government of India is to attain rapid economic development of the country.

To attain such economic development in the country, the fiscal policy of the country has adopted following two objectives:

1. To raise the rate of productive investment of both public and private sector of the country.

2. To enhance the marginal and average rates of savings for mobilising adequate financial resources for making .investment in public and private sectors of the economy.

The fiscal policy of the country is trying to attain both these two objectives during the plan periods.

Essay # 4. Techniques of Fiscal Policy:

Following are the four important techniques of fiscal policy of India:

(i) Policy of Taxation of Government of India:

One of the important sources of revenue of the Government of India is the tax revenue. Both the direct and indirect taxes are being levied by the Government of India. Direct taxes are progressive by nature and most of indirect taxes are regressive in nature. Taxation plays an important role in mobilising resources for plan.

During the First, Second and Third Plan, additional taxation alone contributed nearly 12.7 per cent, 22.8 per cent and 34 per cent of public sector plan expenditure respectively. The shares during the Fourth, Fifth, Sixth and Seventh Plan were 27 per cent, 37 per cent 22 per cent and 15 per cent respectively.

Total tax revenue collected by the Government of India stands at 72.13 per cent of the total revenue of the Government. Mobilisation of taxes by the Government stands around 15 to 16 per cent of the national income of the country during recent years.

Main objectives of taxation policy in India includes:

(a) Mobilisation of resources for financing economic development;

(b) Formation of capital by promoting saving and investment through time deposits, investment in government bonds, in units, insurance etc.;

(c) Attainment of equality in the distribution of income and wealth through the imposition of progressive direct taxes; and

(d) Attainment of price stability by adopting anti-inflationary taxation policy.

(ii) Public Expenditure Policy of Government of India:

Public expenditure is playing an important role in the economic development of a country like India. With increase in responsibilities of the government and with the increasing participation of government in economic activities of the country, the volume of public expenditure in a highly populated country like India is increasing at a galloping rate. In 1992-93, the public expenditure as percentage of GDP was around 30 per cent.

Public expenditure is of two different types, i.e., developmental and non-developmental expenditure. Developmental expenditure of the Government is mostly related to the developmental activities viz., development of infrastructure, industry, health facilities, educational institutions etc.

The non-developmental expenditure is mostly a maintenance type of expenditure and which is related to maintenance of law and order, defence, administrative services etc. The public expenditure incurred by the Government of India has been creating a serious impact on the production and distribution pattern of the economy.

Following are some of the important features of the policy of public expenditure formulated by the Government of India:

(a) Development of infrastructure:

Development of infrastructural facilities which include development of power projects, railways, road, transportation system, bridges, dams, irrigation projects, hospitals, educational institutions etc. involves huge expenditure by the Government as private investors are very much reluctant to invest in these areas considering the low rate of profitability and high risk involved in it.

(b) Development of public enterprises:

Development of heavy and basic industries are very important for the development of underdeveloped country. But the establishment of these industries involves huge investment and a considerable proportion of risk. Naturally private sector cannot take the responsibility to develop these industries.

Development of these industries has become a responsibility of the Government of India particularly since the introduction of Industrial Policy, 1956. A significant portion of public expenditure has been utilised for the establishment and improvement of these public enterprises.

(c) Support to Private Sector:

Providing necessary support to the private sector for the establishment of industry and other projects is another important objective of public expenditure policy formulated by the Government of India.

(d) Social Welfare and Employment Programmes:

Another important feature of public expenditure policy pursued by the Government of India is its growing involvement in attaining various social welfare programmes and also on employment generation programmes.

(iii) Policy of Deficit Financing of Government of India:

Following the policy of deficit financing as introduced by J.M. Keynes, the Government of India has been adopting the policy for financing its developmental plans since its inception. The deficit financing in India indicates taking loan by the Government from the Reserve Bank of India in the form of issuing fresh dose of currency.

Considering the low level of income, low rate of savings and capital formation, the Government is taking recourse to deficit financing in increasing proportion. Deficit financing is a kind of forced savings.

Accordingly, Dr. V.K.R.V. Rao observed, “Deficit financing is the name of volume of those forced savings which are the result of increase in prices during the period of the government investment. Thus deficit financing helps the country by providing necessary funds for meeting the requirements of economic growth but at the same time it also create the problem of inflationary rise in prices. Thus the deficit financing must be kept within the manageable limit.”

During the First, Second, Third and Fourth Plan deficit financing as percentage of total plan resources was to the extent of 17 per cent, 20 per cent, 13 per cent and 13.5 per cent respectively. But due to adverse consequence of deficit financing through inflationary rise in price level, the extent of deficit financing was reduced to only 3 per cent during the Fifth Plan.

But due to resource constraint, the extent of deficit financing again rose to 14 per cent and 16 per cent of total plan resources respectively.

Thus knowing fully the evils of deficit financing, planners are still maintaining a high rate of deficit financing in the absence of increased tax revenue due to large scale tax evasion and negative contribution of public enterprises. But considering the present inflationary trend in prices, the Government should give lesser stress on deficit financing.

(iv) Public Debt Policy of the Government of India:

As the taxation has got its limit in a poor country like India due to poor taxable capacity of the people, thus the Government is taking recourse to public debt for financing its developmental expenditure. In the post-independence period, the Central Government has been raising a good amount of public debt regularly in order to mobilise a huge amount of resources for meeting its developmental expenditure. Total public debt of the Central Government includes internal debt and external debt.

Internal Debt:

Internal debt indicates the amount of loan raised, by the Government from within the country. The Government raises internal public debt from the open market by issuing bonds and cash certificates and 15 years annuity certificates. The Government also borrows for a temporary period from RBI (treasury bills issued by RBI) and also from commercial banks.

External Debt:

As the internal debt is insufficient thus the Government is also collecting loan from external sources, i.e., from abroad, in the form of foreign capital, technical knowhow and capital goods. Accordingly, the Central Government is also borrowing from international financing agencies for financing various developmental projects.

These agencies include World Bank, IMF, IDA, IFC etc. Moreover, the Government is also collecting inter-governmental loans from various developed countries of the world for financing its various infrastructural projects.

The volume of public debt in India increased at a considerable rate i.e. from Rs 204 crore during the First Plan to Rs 2,135 crore during the Fourth Plan and then to Rs 1,03,226 crore during the Seventh Plan. During the Eighth Plan, the volume of internal debt of the Central Government was amounted to Rs 1,59,972 crore and that of external debt was to the extent of Rs 2,454 crore.

At the end of the second year of the Twelfth Plan, i.e., in 2013-14, total outstanding loan (liabilities) of the Central Government stood at Rs 55,87,000 crore.

Essay # 5. Merits or Advantages of Fiscal Policy of India :

Following are some of the important merits or advantages of fiscal policy of Government of India:

(i) Capital Formation:

Fiscal policy of the country has been playing an important role in raising the rate of capital formation in the country both in its public and private sectors. The gross domestic capital formation as per cent of GDP in India increased from 8.4 per cent in 1950-51 to 19.9 per cent in 1980-81 and then to 39.1 per cent in 2007-08. Therefore, it has created a favourable impact on the public and private sector investment of the country.

(ii) Mobilisation of Resources:

Fiscal policy of the country has been helping to mobilise considerable amount of resources through taxation, public debt etc. for financing its various developmental projects. The extent of internal resource mobilisation for financing plan increased considerably from 70 per cent in 1965- 66 to around 90 per cent in 1997-98.

(iii) Incentives to Savings:

The fiscal policy of the country has been providing various incentives to raise the savings rate both in household and corporate sector through various budgetary policy changes, viz., tax exemption, tax concession etc. The saving rate increased from a mere 8.6 per cent in 1950-51 to 37.7 per cent in 2007-08.

(iv) Inducement to Private Sector:

Private sector of the country has been getting necessary inducement from the fiscal policy .of the country to expand its activities. Tax concessions, tax exemptions, subsidies etc. incorporated in the budgets have been providing adequate incentives to the private sector units engaged in industry, infrastructure and export sector of the country.

(v) Reduction of Inequality:

Fiscal policy of the country has been making constant endeavour to reduce the inequality in the distribution of income and wealth. Progressive taxes on income and wealth tax exemption, subsidies, grant etc. are making a consolidated effort to reduce such inequality. Moreover, the fiscal policy is also trying to reduce the regional disparities through its various budgetary policies.

(vi) Export Promotion:

The Fiscal policy of the Government has been making constant endeavour to promote export through its various budgetary policy in the form of concessions, subsidies etc. As a result, the growth rate of export has increased from a mere 4.6 per cent in 1960-61 to 10.4 per cent in 1996-97.

(vii) Alleviation of Poverty and Unemployment:

Another important merit of Indian fiscal policy is that it is making constant effort to alleviate poverty and unemployment problem through its various poverty eradication and employment generation programmes, like, IRDP, JRY, PMRY, SJSRY, EAS, NREGA etc.

Essay # 6. Shortcomings of Fiscal Policy in India :

Following are the major shortcomings of the fiscal policy of the country:

(i) Instability:

Fiscal policy of the country has failed to attain stability on various fronts. Growing volume of deficit financing has created the problem of inflationary rise in price level. Disequilibrium in its balance of payments has also affected the external stability of the country.

(ii) Defective Tax Structure:

Fiscal policy has also failed to provide a suitable tax structure for the country. Tax structure has failed to raise the productivity of direct taxes and the country has been relying much on indirect taxes. Therefore, the tax structure has become burdensome to the poor.

(iii) Inflation:

Fiscal policy of the country has failed to contain the inflationary rise in price level. Increasing volume of public expenditure on non-developmental heads and deficit financing has resulted in demand-pull inflation. Higher rate of indirect taxation has also resulted in cost-push inflation. Moreover, the direct taxes has failed to check the growth of black money which is again aggravating the inflationary spiral in the level of prices.

(iv) Negative Return of the Public Sector:

The negative return on capital invested in the public sector units has become a serious problem for the Government of India. In-spite of having a huge total investment to the extent of Rs 4,21,089 crore in 2007 on PSUs the return on investment has remained mostly negative or lower. In order to maintain those PSUs, the Government has to keep huge amount of budgetary provisions, thereby creating a huge drainage of scarce resources of the country.

(v) Growing Inequality:

Fiscal policy of the country has failed to contain the growing inequality in the distribution of income and wealth throughout the country. Growing trend of tax evasion has made the tax machinery ineffective for the purpose. Growing reliance on indirect taxes has made the tax structure regressive.

Essay # 7. Suggestions for Necessary Reforms in Fiscal Policy:

Following are some of the important measures suggested for necessary reforms of the fiscal policy of the country:

(i) Progressive Taxes:

The tax structure of the country should try to infuse more progressive elements so that it can put heavy burden on the rich and less burden on the poor. Necessary amendments should be made in respect of irrigation tax, sales tax, excise duty, land revenue, property taxes etc.

(ii) Agricultural Taxation:

The tax net of the country should be extended to the agricultural sector for rapping a huge amount of revenue from the rich agriculturists.

(iii) Broad-based Tax Net:

Tax net of the country should be broad-based so that it can cover increasing number of population having the taxable capacity.

(iv) Checking Tax Evasion:

Adequate measures be taken to check the problem of tax evasion in the country. Tax laws should be made stricter for prosecuting the tax evaders. Tax machinery should be made more efficient and honest to gear up its operations. Tax rate should be reduced to encourage the growing trend of tax compliance.

(v) Increasing Reliance on Direct Taxes:

Tax machinery of the country should attach much more reliance on direct taxes instead of indirect taxes. Accordingly, the tax machinery should try to introduce wealth tax, estate duty, gift tax, expenditure tax etc.

(vi) Simplified Tax Structure:

Tax structure and rules of the country should be simplified so that it can encourage tax compliance among the people and it can remove the unnecessary harassment of the tax payers.

(vii) Reduction of Non-Development Expenditure:

The fiscal policy of the country should try to reduce the non-developmental expenditure of the country. This would reduce the volume of unproductive expenditure and can reduce the inflationary impact of such expenditure.

(viii) Checking Black Money:

The fiscal policy of the country should try to check the problem of black money. In this direction schemes like VDIS should be repeated. Tax rates should be reduced. Corruption and political interference should be abolished. Smuggling and other nefarious activities should be checked.

(ix) Raising the Profitability of PSUs:

The Government should try to restructure its policy on public sector enterprises so that its efficiency and rate of return on capital invested can be raised effectively. PSUs should be managed in rational manner with least government interference and on commercial lines. Accordingly, the policy of budgetary provisions for maintaining the PSUs should gradually be eliminated.

Essay # 8. Measures of Fiscal Policy Reforms:

The Government of India has introduced several fiscal policy reforms which constitute the main basis of the stabilisation policy of the country.

Following are some of the important measures of fiscal policy reforms adopted by the Government of India in recent years:

(i) Reduction of Rates of Direct Taxes:

The peak rate of income tax was reduced to 30 per cent in 1997-98 budget. This has resulted in an increase in the share of direct taxes in total revenue of the country from 19 per cent in 1990-91 to around 61 per cent in 2008-09.

(ii) Simplification of Tax Procedure:

In recent years as per the recommendation of Raja Chelliah or Taxation Reform Committee, several steps have been taken to simplify the tax procedure in the successive budgets. The 1998-99 budget has introduced a series of tax simplification measures, viz., “Saral”, “Samadhan” and “Samman”, which is considered as an important step in right direction.

(iii) Reforms in Indirect Taxes:

These reforms include introduction of advalorem rates, MODVAT scheme etc.

(iv) Fall in the volume of Government Expenditure:

Several measures were undertaken recently by the government. Accordingly, total expenditure of the Government under various heads has been reduced. As a result, total public expenditure as per cent of GDP has declined from 19.7 per cent of GDP in 1990-91 to 16.9 per cent in 2008-09.

(v) Reduction in the Volume of Subsidies:

Central Government has been making huge payments in the form of subsidies, i.e., food subsidies, fertiliser subsidies, export subsidies etc. Steps have been taken to reduce these subsidies in a phased manner.

(vi) Reduction in Fiscal Deficit:

The Central Government has been trying seriously to contain the fiscal deficit in its annual budget. Accordingly, it has reduced the extent of fiscal deficit from 7.7 per cent of GDP in 1990-91 to 6.1 per cent in 2008-09. But fiscal stabilisation necessitates containing the fiscal deficit at least to 3 per cent of GDP.

(vii) Reduction in Public Debt:

Recently, the Central Government has been trying to reduce the burden of public debt. Accordingly, the external debt as per cent of GDP which was 5.4 per cent in 1990-91 gradually declined to 4.9 per cent in 2008-09. The internal debt as per cent of GDP has declined from 48.6 per cent in 1990-91 to 37.9 per cent in 2008-09.

Similarly, the total outstanding loan or liabilities as per cent of GDP also declined from 63.0 per cent in 2003-04 to 58.9 per cent in 2008-09.

(viii) Disinvestment in Public Sector:

Another important fiscal policy reforms introduced by the Government of India is to disinvest the shares of the public sector enterprises. The government has disinvested as part of its stake in 39 selected PSUs since the disinvestment process began in 1992. Till 2006-07, it has raised around Rs 51,608 crore through disinvestment of share of PSUs.

In the mean time, the Government has constituted a Disinvestment Commission to advise it on how to go about disinvesting the shares of PSUs. The Commission, in its first three reports has given its recommendations on 15 PSUs out of 50 referred to it.

The Commission submitted at least eight reports covering 43 PSUs and also undertook diagnostic studies in 1998-99 in respect of these undertakings for giving recommendations.

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The Managing Director's Global Policy Agenda, Spring Meetings 2024: Rebuild, Revive, Renew

Publication Date:

April 18, 2024

Electronic Access:

Free Download . Use the free Adobe Acrobat Reader to view this PDF file

The global economy has shown remarkable resilience, and appears headed for a soft landing. But buffers have been eroded, growth prospects are lackluster, and vulnerable countries are at risk of falling further behind. While inflation has fallen, it remains above target in many countries. Against this background, the key policy priorities are to: (i) rebuild buffers; (ii) revive medium-term growth; and (iii) renew the IMF’s commitment to ensure that our policies, lending toolkit, and governance are fit for purpose. Central banks need to finish the job on inflation, carefully managing its descent to target. With a soft landing in sight, policymakers’ focus needs to shift to fiscal consolidation to safeguard public finances. Reviving growth prospects will require accelerating structural reforms and joint efforts by countries to tackle transformational challenges. Firmly grounded in its mandate, working with its members, and in partnership with other international organizations, the IMF will continue to serve its members with policy advice, financial lifelines, and capacity development to help safeguard their economic and financial stability, a foundation for inclusive and sustainable growth.

Policy Paper No. 2024/018

Artificial intelligence Economic growth Financial sector policy and analysis Financial sector risk Financial sector stability Fiscal consolidation Fiscal policy Inclusive growth Monetary policy Political economy Technology

9798400272110/2663-3493

PPEA2024018

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Fiscal And Monetary Policy Economics Essay

Published Date: 23 Mar 2015

Disclaimer: This essay has been written and submitted by students and is not an example of our work. Please click this link to view samples of our professional work witten by our professional essay writers . Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of EssayCompany.

Like the Economics for Dummies states, anti-recessionary economic policies come in two flavors: Fiscal Policy and Monetary Policy. Monetary policys technique is to increase the money supply and lowers interest rates. When interest rates are lowered, more people are about to access loans, buy houses, and increase purchasing power. Fiscal Policy involves lowering taxes and increasing government spending so that the economy will have more after tax money.

Fiscal Policy

Expansionary and contractionary are two types of fiscal policy. Expansionary policy involves raising government expenditures and lowering taxes so the government budget deficit can grow or the surplus to fall. In 2011, Japan suffered from a natural disaster. The north east area of the country was struck by a tsunami causing their country to endure financial issues. Japan used expansionary fiscal policy to help get them out of that terrible economic situation. Expansionary fiscal policy helped Japan by raising their private consumption growth. Contractionary fiscal policy is the opposite of expansionary policy. Government expenditures will be decreased and taxes will be raised to help the budget deficit or surplus.

The Role of Government Budgeting

One of the main tools of fiscal policy is the federal budget. Aggregate demand is affected by the government expenditures and taxes affect investing and consuming. The effects of government expenditure and tax revenues are important in the aggregate demand equation because they can cause AD increase or decrease. "Government expenditures include transfer payments, purchases of goods and services, and interest payments on government debt" Swanenberg. Tax revenues are brought in from social security, indirect taxes, income tax, and corporate taxes. When the amount of taxes brought in is above expenditure expectations, this will factor to a budget surplus.

Fiscal Policy Pros and Cons

Fiscal policy is the usage of government spending and the use of taxes to control the economy. As defined by Investopedia, "fiscal policy is the means by which a government adjusts its level of spending in order to monitor and influence a nation's money supply," (2009). Whenever the government makes a decision on what service and good to buy, how much to tax on said good or service, or the payment relegations dispersed, the government is exercising the fiscal policy. The fiscal policy is mostly used to show how government spending and taxation affects the aggregate economy levels. The fiscal policy really was not used as much until after World War II. "When there is a surplus in the government budget, (revenue is higher than spending), the fiscal policy is a contradiction whereas when there is a deficit in the budget, (spending is higher than the budget), the fiscal policy is defined as being expansionary," as stated by the Library of Economics and Liberties (Weil 2008). The Library of Economics and Liberties also states, "when there is a deficit in the fiscal policy, economists focus more on the difference in the deficit and not the levels of the deficit," (Weil 2008).

The fiscal policy however is not perfect. Just like everything in nature, the fiscal policy has its strengths and weakness. According to Dr. Wood, one main strength about the fiscal policy is that since it is basically government ran, "it has good stability when used properly in the economy" (Wood 2009). Contrary to monetary policy, the fiscal policy focuses on one area instead of the economy as a whole which can result in less mistakes and less headaches. Government interaction aids the fiscal policy by helping with resource allocation.

As mentioned before, the fiscal policy is not perfect. Because the fiscal policy deals with the government, there may be little to no room for flexibility, (Wood 2009). An example would be, the government can't decide to raise taxes to compensate government spending. David Weil has stated that, "fiscal policy also changes the burden of future taxes," (Weil 2008). The fiscal policy can sometimes result in the "domino effect," meaning having one problem can cause more problems, which can result in another problem, and so on. The fiscal policy is usually only implemented once a year so this itself can be a weakness. One reason is because the government may be funding a project, such as a highway being built, and may not be finished in the allotted time, thus causing a problem in government spending. As of October 2012, Forbes has elucidated that the fiscal policy is not as effective as it once was by stating, "the Central Bank can't lower its interest rates," (Smith 2012). Smith also goes on to state that, "if the government steps in and borrows lots of money then the rate of interest will tend to rise," (Smith 2012).

Monetary Policy

After the Great Depression, market economies learned that they were not adjusting to economic downturns quickly enough. The lack of response was one of the causes of long-lasting economic crises. Therefore the government started to stick its hand in the economy to keep it from spiraling out of control using fiscal policy. When GDP contracts, the government spends more, and taxes less, which gets the economy growing. Another form of government macroeconomics is monetary policy and it is practiced by the Federal Reserve Bank. The Fed fiddles with the money supply to keep the economy in between inflation and recession.

Back in the 1960's President Johnson had to increase government spending due to the Vietnam War. Economists believed as the President kept spending money, it would lead to inflation. The inflation would be caused by an economy that is already stable, plus increased government spending, which only creates higher prices and aggregate supply will be limited. The Federal Reserve Bank and monetary policy was then instituted. Its job is to make the necessary corrections in the economy that the government will not make. The Fed is a private sector.

The Federal Reserve Bank affects the economy's rate of interest. Our central bank increases the amount of money circulating in the economy because the higher quantity of something decreases its price. With a lower price of money, also called a lower interest rate, more people will be willing to borrow money, which means they spend more money in turn giving the economy a boost. The only problem is some economists believe it will cause prices to spike quickly. So out of fear of inflation, the Fed decreases the amount of money circulating in the economy which raises the price of money, or raises the interest rate. Higher interest rates mean less borrowing, which means less spending, which slows the economy down. Now the fear is the economy will fall into a recession so the Fed lowers interest rates again.

The Fed raises the interest rate out of fear of inflation which then causes Recession. The Fed lowers the interest rate out of fear of recession which then leads to inflation. The Fed controls the money supply, which increases or decreases interest rates that can potentially boost or slow an economy and the Fed must keep a good balance because one direction is recession and the other is inflation.

Overall monetary policy plays a big part in our economy, without it there would be a lot of confusion in the business world. In particular, the main one would be the banking system. The Federal Open Market Committee (FOMC) is the body that's responsible for most of the monetary policy decisions that are made. Monetary Policy has to do with recession and inflation which is very important in our economy. Another important fact about monetary policy is aggregate supply and demand. Monetary policy affects them deeply depending on the economies input, output, and rate of inflation.

Strengths and Weakness of Monetary

Furthermore, monetary policy that is speedy and flexible and somewhat isolated from Political pressure. It doesn't raise inflation value of money by weaken its purchasing Power. Whenever inflation advance faster than expected, they may sell government bonds to take money out of circulation. This also can minimize access to credit and slow consumer spending. The decisions they had made really had an effective impact on our economy. Monetary policy has stable prices which is keeping inflation low, it also quality business and households to make financial decisions without worrying about sudden unexpected prices increasing. The long term enable policy makers assess. The best policy tends to seek between these short- and long- term goals. Lower interest rates to expand the money supply and stem rising unemployment Rates during recession. Although the weaknesses practicing monetary policy cause the central bank to lose control of currency valuation, it wouldn't be possible for interest rates. It also devalues the currency; further more monetary policy can achieve low inflation in the long run and affect economic output and employment in the short run. Sustainable Low inflation and economic growth off disagree. When inflationary pressures decrease, the unemployment rate may advance for a short period as the pace of the economy slows. It also can take up to months or even an year maybe even longer to have the intected effect.

Monetary and Fiscal policy both have their pros and cons. Fiscal policy can result in a nasty domino effect causing one problem to make another and repeat. Fiscal can also have issues with time lags. Although monetary policy is not very effective in a recession, it is flexible and works well to slow down the economy. Many prefer fiscal over monetary because its brings low taxes and low interest rates.

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