ESSENTIALS OF MACRO-

ECONOMICS

GROUP DETAILS

COLLEGE : H L INSTITUE OF COMMERCEYEAR : FIRST YEARCOURSE : BACHELOR OF COMMERCESECTION : 2GROUP NUMBER : 5TRIMESTER : 3

ROLL NUMBER STUDENT NAME

170 Parth Jain

171 Pratik Jain

172 Pratik Jain

173 Priyanshi Jain

174 Purvi Jain

175 Romit Jain

176 Ruchika Jain

178 Sakshi Jain

180 Sarthak Jain

181 Shivangi Jain

DE-CONSTRUCTING THE FISC : A BRIEF

REPORT ON FISCAL POLICY

FISCAL POLICY

• Meaning :Fiscal Policy is a policy under which government uses its revenue and expenditure programs to produce desirable effects and avoid undesirable effects on macro economic variables.

• Scope :

Scope means the coverage/ambit of fiscal policy. It has two components :

1. Fiscal Instruments

2. Target Variables

• Components :

Fiscal Policy has 2 components, namely :

1. Revenue Budget

2. Expenditure Budget

FISCAL INSTRUMENTS

• These are the tools/levers, the government can use to stimulate the target variables i.e. the macro economic indicators.

• Also known as fiscal tools, fiscal levers and fiscal handles• Significant Fiscal Instruments include :

1. Budgetary Balance Policy

2. Government Expenditure

3. Taxation Policy

4. Borrowings

BUDGETARY BALANCE POLICY

• The decision to chalk out a balanced or surplus or deficit budget is covered here.

• The decision regarding the type of budget depends on various variables. Significant among them are –

1. Fiscal head-room available to government

2. Stage of development of the economy

3. Growth target of the government

GOVERNMENT EXPENDITURE

• Government expenditure includes expenditure on purchase of –

1. goods and services

2. public investment

3. transfer payments• Government expenditure is an injection into the economy. It adds to

the overall aggregate effective demand in the economy.• The impact of government expenditure depends upon how it is

financed and its multiplier effect.

Government Expenditure

Economic Growth

Stability

Employment

Recession Boom

Increase Expenditure

Decrease Expenditure

TAXATION POLICY

• Tax means a non quid pro quo transfer of private income to public treasury by means of taxes (direct and indirect).

• Direct taxes includes taxes on personal incomes, corporate incomes, wealth and property.

• Indirect taxes, also called commodity taxes, includes VAT, excise, CST and customs.

Taxation

Employment Generation

Stability

Economic Growth

Boom Recession

Raise rates Decrease Rates

Taxes on production and import

Of capital intensive goods

Subsidization of labour intensive

goods

BORROWINGS

• Borrowing includes internal and external borrowings.• Internal borrowings are of two types :

1. issuing government bonds and T-bills to public

2. deficit financing• External borrowings includes borrowings from:

1. foreign governments

2. international organizations

3. market borrowings

RELATIONSHIP BETWEEN BORROWINGS AND

ECONOMIC GROWTH: CONTROVERSIES

REGARDING CROWDING-OUT AND

CROWDING-IN

CROWDING-OUT

• Meaning : It is the fall in private investment due to deficit spending by the government

• Mechanism :

1. Deficit spending through deficit financing

Deficit Financing

Increase in money supply, but static supply of commodities

Inflationary Trend

Tight money policy = Increasing interest rates

“Choking off“ of private investment

• 2. Deficit spending through market borrowings :

Market borrowings

Sale of government bonds and T-bills

Transfer of purchasing power to government

Fall in private investible surplus

Crowding Out of private investment

• Effect :

Because of crowding-out of private investment, the expansionary effect of the deficit spending on the economy reduces or sometimes even gets neutralized.

CROWDING-IN

• Meaning : It means rise in the private investment due to deficit spending by the government

• Mechanism :

Deficit Spending

Increase in interest rates and aggregate demand

Increase in production to cater increased demand

More utilization of existing capital stock

Increase in demand for capital i.e. crowding-in of investment• Effect : Deficit spending spurs private investment

TARGET VARIABLES

• The target variables are the macro variables that are intended to be stimulated to achieve the intended macro-economic results.

in simple words, fiscal instruments are “means to an end” and target variables

are the “end.”• Such target variables include –

1. Private disposable incomes

2. Private consumption

3. Private savings & investment

4. Exports and imports

FISCAL POLICY FOR ECONOMIC EQUALITY

• Disparity is inherent in any system• But disparity beyond a level, is undesirable. So it is prudent to keep

disparity within acceptable levels• Tax policy to eradicate economic inequality :

1. Tax at progressive rates

2. Tax on wealth and property

3. Exorbitant taxes on luxury goods• Government expenditure policy to eradicate economic inequality :

1. Reallocation of capex to rural areas

2. Spending on skill development

3. Providing incubators for start ups

LIMITATIONS

1. Unreliable data and no proper method of forecasting

2. In under-developed economies, following problems plague fiscal policy :

i) low levels of income

ii) small population under tax net

iii) existence of parallel economy

iv) pervasive corruption

3. Time consuming to formulate a comprehensive policy

4. Inflationary trend due to deficit financing

MORE ABOUT OUR ARTICLE

• Talks about wisdom of fiscal tightening• Reflects upon usefulness of fiscal tightening for india• Also reflects upon need for cheap money policy in the west• Teaches a truth :

“Get your facts first, then you can distort them as you please.”

- MARK TWAIN

BIBLIOGRAPHY

1. www.economictimes.indiatimes.com

2. www.slideshare.net

3. www.youtube.com

4. www.fourhourworkweek.com/blog

5. en.wikipedia.org/wiki/Keynesian_economics

6. Course material provided by our college

7. www.brainyquote.com

“Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.” - RONALD REAGAN

“An economist is a man who knows a hundred ways of making love but doesn’t know any women.” - ART BUCHWALD

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