Fiscal policy refers to the government's spending and tax policies to influence macroeconomic goals like economic growth, employment, stabilization, and equality. The major instruments of fiscal policy are the budget, government expenditures, taxation, public debt, and deficit financing. A budget outlines the government's estimated revenues and expenditures for a period and can aim for a surplus, deficit, or balance. Sticking to targets set in the Fiscal Responsibility and Budget Management Act aims to reduce deficits and debt over time to support long-term macroeconomic stability and intergenerational equity.

1. Fiscal Policy and Budget

2. Fiscal Policy-Meaning
• The word fisc means ‘state treasury’ and fiscal
policy refers to policy concerning the use of
‘state treasury’ or the govt. finances to achieve
the macroeconomic goals.
• “any decision to change the level, composition
or timing of govt. expenditure or to vary the
burden ,the structure or frequency of the tax
payment is fiscal policy.”
- G.K. Shaw

3. Objectives of Fiscal Policy
• It has 2 major objectives:
i. GENERAL obj-. aimed at achieving
macroeconomic goals
ii. SPECIFIC obj-. relating to any typical
problems of an economy

4. Fiscal Policy And
Macroeconomic Goals
• Economic Growth: By creating conditions for increase in
savings & investment.
• Employment: By encouraging the use of labour-
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.

5. Instruments of Fiscal Policy
• Budgetary surplus and deficit
• Government expenditure
• Taxation- direct and indirect
• Public debt
• Deficit financing

6. Budgetary surplus and deficit
• “A budget is a detailed plan of operations for
some specific future period”
• Keeping budget balanced (R=E) or deficit (R<E)
or surplus (R>E) as a matter of policy is itself a
fiscal instrument.
• An accumulated deficit over several years (or
centuries) is referred to as the government debt
• A deficit is a flow. And a debt is a stock. Debt is
essentially an accumulated flow of deficits

7. Government Expenditure
It includes :
• Government spending on the purchase of
goods & services.
• Payment of wages and salaries of
government servants
• Public investment
• Transfer payments

8. Taxation
• Meaning : Non quid pro quo transfer of
private income to public coffers by means
of taxes.
• Classified into
1. Direct taxes- Corporate tax, Div. Distribution
Tax, Personal Income Tax, Fringe Benefit taxes,
Banking Cash Transaction Tax
2. Indirect taxes- Central Sales Tax, Customs,
Service Tax, excise duty.

9. 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

10. 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.

11. COMPONENTS OF BUDGET
• Revenue receipts
• Capital receipts
• Revenue expenditure
• Capital expenditure

12. BUDGET FINANCIALS
2007-08

13. Where The Rupee Comes From
service & other taxes
7%
excise
17%
customs
12%
income tax
13%
corporation tax
21%
borrowings
19%
non-debt capital reciepts
1%
non-tax revenue
10%

14. Where Does The Rupee Goes 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%

15. Fiscal Responsibility And Budget
Management (FRBM) Bill
• Introduced in Lok Sabha in December 2000.
• Objectives include:
1. Long-term macroeconomic stability
2. Inter-generational equity in fiscal management.
• It aimed at:
1. Reducing revenue deficit
2. Reducing gross fiscal deficit
3. Reducing the Public debt
4. No Borrowing from the RBI

16. Sticking to FRBM Targets
Items Units
2005-
06
2006-
07
2007-
08*
Central Government Finances
Revenue deficit/ GDP % 2.6 2 1.5
Fiscal deficit/ GDP % 4.1 3.7 3.3
Gross Tax/ GDP % 10.3 11.4 12.0
Expenditure/ GDP % 14.2 14.1 14.0**
Debt/ GDP % 65.1 64.4 58.6
*From Budget proposals ** SBI share transfer excluded

17. Thank You