FISCAL POLICY

Submitted by:
Huma Khan
Wajiha Khan
Sehrish Shaukat
Ziyad Bin Mehtab
Jawad Mughal
What is Fiscal Policy?
It is the use of government expenditure and
revenue collection to influence the economy.
Fiscal policy refers to the overall effect of the
budget outcome on economic activity.
Fiscal policy can be contrasted with the other main
type of economic policy, monetary policy, which
attempts to stabilize the economy by controlling
interest rates and the supply of money.
Objectives of Fiscal Policy
Economic Growth
Promotion of Employment.
Economic Stability
Economic Justice or Equity
Price Stability
Fiscal Policy And Macroeconomic Goals

Goal Description
Economic Growth
By creating conditions for increase in
savings & investment.
Employment
By encouraging the use of labor-absorbing
technology.
Stabilization
Fight with depressionary trends and booming
(overheating) indications in the economy.
Economic Equality
By reducing the income and wealth gaps
between the rich and poor.
Price stability
Employed to contain inflationary and
deflationary tendencies in the economy.
How Fiscal Policy Works
Fiscal policy is based on the theories of
British economist John Maynard Keynes. Also
known as Keynesian economics, this theory
basically states that governments can
influence macroeconomic productivity levels
by increasing or decreasing tax levels and
public spending.
This influence, in turn, curbs inflation (generally
considered to be healthy when at a level between
2-3%), increases employment and maintains a
healthy value of money.
Use of Fiscal Policy
Adjustment of income tax allowances rather than rates
of income tax
Extending or amending range of goods covered by VAT
Changing the rules under which tax has to be paid
married persons allowances, inheritance taxes, stamp
duties, etc.
Abolishment of certain tax allowances MIRAS (Mortgage
Income Relief At Source)
Accusations of stealth taxes much of it is a tinkering
with the tax system to achieve certain aims mostly non-
economic (governments these days, for example, rarely
increase taxes to dampen down the economy)
Economic Effects of Fiscal Policy
Governments use fiscal policy to
influence the level of aggregate demand
in the economy, in an effort to achieve
economic objectives of price stability,
full employment, and economic growth.
Instruments of Fiscal Policy
Government Expenditure
Taxation
Direct
Indirect
Public Debt
Impact of Instruments
Changes in the level and composition of
taxation and government spending can
impact on the following variables in the
economy:
Aggregate demand and the level of
economic activity;
The pattern of resource allocation;
The distribution of income.
Government Expenditure
It includes :
Government spending on the purchase
of goods & services.
Payment of wages and salaries of
government servants
Public investment
Transfer payments
Taxation
Non quid pro quo transfer of private
income to public coffers by means of
taxes.
Classified into:
Direct Taxes- Corporate Tax, Div. Distribution
Tax, Personal Income Tax, Fringe Benefit Taxes,
Banking Cash Transaction Tax
Indirect Taxes- Central Sales Tax, Customs,
Service Tax, Exercise Duty

Public Debt
Internal Borrowings
1. Borrowings from the public by means of treasury
bills and govt. bonds
2. Borrowings from the central bank (Monetized
Deficit Financing)
External Borrowings
1. Foreign investments
2. International organizations like World Bank & IMF
3. Market borrowings
Fiscal Policy In Inflation
Control over public expenditure
Increase in taxes
Increase in public borrowing
Delay in the payment of old debts
Fiscal Policy In Deflation
Increase in public expenditure.
Decrease in taxes.
Increase in social welfare expenditure.
Prices support policy.
Budget
A budget is a
detailed plan of
operations for some
specific future
period.
It is an estimate
prepared in advance
of the period to
which it applies.
Where The Rupee Comes From
state's share of
taxes & duties
18%
non plan assistance
to states
5%
planned state
assistance
7%
central plan
20%
interest
20%
defence
12%
subsidies
7%
other non plan exp.
11%
Where Does The Rupee Go To
state's share of
taxes & duties
18%
non plan assistance
to states
5%
planned state
assistance
7%
central plan
20%
interest
20%
defence
12%
subsidies
7%
other non plan exp.
11%