WHAT IS FISCAL POLICY AND ITS ROLE IN ECONOMIC GROWTH?

Fiscal policy sets out a framework for national expenditure and income. It plays a vital role in economic growth. For example, if the government increases its spending on the countrys infrastructure like roads, it may stimulate job creation, which ultimately leads to more economic activity and growth. Fiscal policy is a process by which the national government decides on the timing and composition of government spending and taxation. It is often the case that most governments will spend money and raise taxes in order to finance their expenditure. Fiscal policy is the process through which these financial activities are achieved. The principal objectives of fiscal policy in a developing economy are; To mobilize resources for economic growth, especially for the public sector. To promote economic growth in the private sector by providing incentives to save and invest. To restrain inflationary forces in the economic in order to ensure price stability. To ensure equitable distribution of income and wealth so that fruits of economic growth are fairly dist

Fiscal Policy Can Be Divided In Two Types. I) DISCRETIONARY FISCAL POLICY FOR STABILISATION Fiscal policy is an important instrument to stabilize the economy, that is, to overcome recession and control inflation in the economy. By discretionary policy we mean deliberate change in the Government expenditure and taxes to influence the level of national output and prices. Fiscal policy generally aims at managing aggregate demand for goods and services. II) NON_DISCRETIONARY FISCAL POLICY: AUTOMATICSTABILIZERS There is an alternative to use of discretionary fiscal policy, which generally involves the problem of, large in recognizing the problem of recession or inflation and large of the taking appropriate action to tackle the problem. In this Non-discretionary fiscal policy, the tax

structure and expenditure are so designed that taxes and government spending vary automatically inappropriate direction with the changes in National Income. That is, these taxes and expenditure pattern without any special deliberate action by the government and parliament automatically raise aggregate demand in times of recession and reduce aggregate demand in times of boom and inflation and thereby help in insuring economic stability. These fiscal measures are therefore called automatic stabilizers or built-in stabilizers. Since these automatic stabilizers do not require any fresh deliberate policy action or legislation by the government, they represent non-discretionary fiscal policy. Built-in-stability of tax revenue and government expenditure of transfer payment of subsidies is created because they vary with national income. These taxes and expenditure automatically bring about appropriate change in aggregate demand and reduce the

What Role Does Fiscal Policy Play in Economic Growth? Government spending and taxation are two instruments of fiscal policy, which can have a major role to play in economic growth. Expansionary fiscal policy can be applied in times when the economy is performing poorly and economic growth is low. In this case, government may tend to increase its spending and reduce taxes to stimulate the economy. By doing so, more saving and investment opportunities will be created domestically and may in turn have a positive impact on economic growth. On the contrary, contractionary fiscal policy can be applied in order to contain inflation that may occur from an excess demand in the economy and in times when the economy is doing relatively well. Government may then decide to reduce spending and increase taxes. This may hamper economic growth, because incentives for saving and investment are reduced. Government spending and taxation can also influence economic growth by lessening the level of inequality in income and wealth and by increasing employment opportunities in the country. Taxation can be used to redistribute income and wealth to those with lower incomes, ensuring their efficient contribution to economic activities. Tax rebates and concessions can be used to promote the growth of industries that have high employment-generating potential such as mining, fishing and agriculture.

BUDGET:-

Keeping budget in balance, in surplus or deficit, is in itself a fiscal instrument. When the government keeps its total expenditure equal to its revenue, as a matter of policy, it means it has adopted a balanced budget policy. When the government spends more than its expected revenue, as a matter of policy, it is pursuing a deficit-budget policy. And when the government follows a policy of keeping its expenditure substantially below its current revenue, it is following a surplus budget policy. II.TAXATION A tax is a non quid pro quo payment by the people to the government. By this definition, taxation means non quid pro quo transfer of private income to public coffers by means of taxes. Taxation takes many forms in the developed countries including taxation of personal and corporate income, so-called value added taxation and the collection of royalties or taxes on specific sets of goods. Government may want to smooth out the nation's income in order to minimize the pejorative effects of the business cycle or they may want to take steps designed to increase the national income. They may also want to take steps intended to achieve specific social objectives deemed to be appropriate by the political or legal process. Sound tax system, with moderate rates and abroad base, is an integral part of the prudent fiscal policy. The expansion in the tax base is sought to be achieved through expansion in the scope of taxes, specifically service tax, removal of exemptions and improvement in tax administration. With a decline in non-tax revenue receipts as a proportion of overall revenue receipts, the burden of fiscal corrections is expected to be mainly on tax revenues. However, the measures to increase the tax-GDP ratio must be harmonized with the overall growth objective. The strategy seeks to increase tax compliance, improve the efficiency of tax administration and with intense focus on recovery of arrears of tax revenues and prevent further build-up of such arrears. Agricultural taxation: This economic surplus mainly goes to rich farmers, landlords, intermediaries in the absence of suitable taxation on agriculture. It has potential surplus & to achieve maximum utilization of land through devising a system of land taxation which would penalize poor use of good land. III.PUBLIC EXPENDITURE Suppose the government spends more on an electricity project for which the contract is given to a PSU like BHEL. Then the money that the government spends comes back to it in the form of BHEL's earnings. Similarly, suppose that the government spends on food-for-work programmers, and then a significant part of the expenditure allocation would consist of food grain from the Public Distribution System which would account for part of the wages of workers employed in such schemes. This in turn means that the losses of the Food Corporation of India (which also includes the cost of holding stocks) would go down and hence the money would find its way back to the government. In both cases, the increased expenditure has further

multiplier effects because of the subsequent spending of those whose incomes go up because of the initial expenditure. The overall rise in economic activity in turn means that the governments tax revenues also increase. Therefore there is no increase in the fiscal deficit in such cases. IV. GOVERNMENT BORROWING: Government borrowing is another fiscal Method by which savings of the community may be mobilized for economic development. In developing economies, the government resort to borrowing in order to finances schemes of economic development. Government or what is also called public borrowing becomes necessary because taxation alone cannot provide sufficient funds for economic development. Besides, too heavy taxation has an adverse effect on private saving and investment