macro economics

1. START YOUR DAY WITH BISMILLAH
AND END IT WITH ALHUMDULILLAH

2. Fiscal Policy
REPRESENTED TO: SIR ZIA UR REHMAN
PREPARED BY: MUHAMMAD USMAN SHAHID
BBAE-19-11
BBA 3RD EVENING
BUSINESS ADMINISTRATION
GHAZI UNIVERSITY

3. Fiscal Policy
Definition:
Fiscal policy can be defined as the policy of the government
regarding changes in taxes, government spending and
government borrowing to affect aggregate demand in the economy.
A policy under which government uses its expenditure and
revenue program to produce desirable effects and avoid
undesirable effects in the national income, production and
employment.
-Arthur Smith

4. DIFFERENCE
FISCAL POLICY
 Deals with taxation and government spending.
 Is administered by the government through
various laws and policies.
 Measures take time to get
MONETARY POLICY
 Deals with money supply.
 Is controlled by the central bank (RBI) through interest rates
and lending rates
 Measures can be altering rate of interest

5. Objectives
 The main objective of fiscal policy is
to control inflation or deflation in
the market i.e. maintaining
economic stability.
 It helps in diverting resources from
undesirable channels to desirable
channels.
 Helps in achieving welfare objectives
i.e. basically to reduce inequalities
between rich and poor and increase
welfare.

6. Stances of Fiscal Policy
 Neutral : This is the equilibrium phase for the economy. In
this case the government spending is entirely funded by tax
revenue and there is no need of borrowing.
 Expansionary : This is the phase where the government
spending exceeds tax revenue. This happens during the
time of recessions.
 Contractionary : This is the phase where the government
spending is lower than tax revenue. This is undertaken to
pay down government debt.

7. Methods of Funding
FROM WHERE DOES THE MONEY COME FROM?
 Recovery of loans : The central government grants loans
to various states inside and outside the country. When
government recovers these loans the government gets
more money that it can now utilize for the welfare.
 Disinvestment: Government holds equity or shares of
the public sector enterprises. It can raise funds by
selling its holding in the market. It leads to reduction
in assets held by the government.

8. Methods of Funding
 Borrowings: It basically means that the government is borrowing
money from various institutions be it inside or outside the
country . The government may choose to borrow funds from public
by issuing bonds or treasury bills. The government can also
borrow funds from financial institutions like world bank or any
other country.
 Taxes:The most effective way for the government is to increase
tax rates or impose new taxes.

9. Instruments of Fiscal Policy
1. Budgetary surplus and deficit
2. Government expenditure
3. Public debt
4. Taxation

10. Public Debt
• Public debt refers to borrowing by a government from within the
country or from abroad, from private individuals or association of
individuals or from banking and NBFIs.
It can be classified in three ways:
i. Internal and external
ii. Productive and unproductive
iii. Short term and long term

11. Public Debt
 Internalpublicdebt: When the government borrows from within the
country be it from the citizens or financial institutions or the central
bank.This is called internal borrowing.
 External public debt: When the government borrows funds from
international market be it any financial institutions or any nation
in particular.
Acquiring loan from outside is comparatively difficult as the other
party first studies the financial position of the country and then only
grants a loan.

12. Public Debt
• Productivedebt: The debt that is expected to create assets which will
yield income sufficient to pay the principal amount and the interest
on it, is known as ‘productive debt’.
• In other words, they are expected pay their way, they are self-
liquidating.
• UnproductiveDebt:On the other hand, unproductive debt is the
debt that is raised for financing unproductive assets or heavy
unproductive expenditures.
• Such a debt is a deadweight debt.

13. Public Debt
 ShortTermLoan:The loans which are to be repaid within
a period of one year . The loan provided usually is for a
limited amount. It is used to fulfil short term needs of
the government.
 LongTermLoan : The loans which are to be repaid after a period
of one year.
The loan provided here can be for a huge
amount. It is very helpful for long term projects.

14. Taxation
 Tax is a legal compulsory payment paid to the government by the
people.
 It is the most common and effective way for the
government to influence the aggregate demand in the
economy.
 There are two types of taxes
i. Direct Tax
ii. Indirect Tax

15. Taxation
• DirectTax:It is the tax where the liability to pay and the
incidence lie on the same person.
example: income tax, corporate tax, property tax etc.
• IndirectTax:When the liability to pay and the incidence of
the tax lie on a different person.
example: sales tax, VAT,service tax etc.

16. Taxation
 During the time of inflation (when aggregate demand is more than
aggregate supply) the government increases the tax rates and may
also impose new tax rates.
 This would result in reduction in the money supply in the
economy and will control the inflationary gap.
 During the time of deflation (when aggregate demand is less than
aggregate supply) the government reduces the tax rates and may
also cut of some taxes temporarily.
 This would result in an increase in the money supply in the
economy and will control the deflationary gap.

17. Budgetary Surplus
 It is a situation where the revenue earned by government is more
than the expenditure.
 The surplus amount is used for repayment of loans or can be kept as
a reserve for the future.
 It can also be used to make desired purchases that were delayed
and for the development of the economy.
 It is a sign that the government is running the economy efficiently.

18. Budgetary Deficit
 It is a situation where the revenue earned by the
government is less than its expenditure.
 At this time the government reduces its expenditure on public
welfare, increases tax rates and may also opt for borrowings.
 The surplus from previous years can be used.
 It is a sign that the government is not running
efficiently.

19. Government Expenditures
 During the time of inflation the government decides to reduce its
expenditure on public welfare like police, military, courts, education
etc.
 This results in the fall of aggregate demand.
 Which leads to reduction in the inflationary gap.
 At the time of deflation (when aggregate demand is less than
aggregate supply) the government decides to increase its
expenditure for the welfare of the people.
 This injects money in the economy and helps remove unemployment
and increases the aggregate demand.
 It leads to reduction in deflationary gap.

20. Fiscal Straitjacket
 The concept of a fiscal straitjacket is a general economic principle
that suggests strict constraints on government spending and
public sector borrowing, to limit or regulate the budget deficit
over a time period.
 This term originated from the definition of straitjacket (anything
that severely confines, constricts, or hinders).
 Various states in the United States have various forms of self-
imposed fiscal straitjackets.