What is Fiscal Policy?

• Budget is a part of the fiscal policy which is framed by the government of India and which primarily deals with the revenue, expenditure and public debt of the government.
• Fiscal policy refers to the government’s decisions about taxation and expenditure.
• Ministry of Finance formulates the fiscal policy.
• Fiscal policy is the way through which the government modifies its spending levels and tax rates to monitor and influence a nation’s economy.
• The fiscal policy examines and influences the macro economic variables. These comprise of, aggregate demand for goods and services, employment, inflation, and economic growth.
• Fiscal policy is majorly based on ideas from British economist John Maynard Keynes.

Fiscal policy is an important factor of the economy, it is used by governments to influence the economy. These primarily include changes in the levels of taxation and government expenditure. To encourage growth, taxes are lowered and spending is increased. To cool down an overheating economy, tax rates are increased and spending is decreased.

When economic activity slows or decreases, the government may try to improve it by reducing taxes or increasing subsidies, whereas, when the economy is overly active and inflation threatens, it may increase taxes or reduce spending. 

Objectives of Fiscal Policy:

Higher Economic Growth and Development: The fiscal policy prevalent within the nation, primarily, aims to maintain a high economic growth and works towards future developments.

Price Stability Within the Economy: There has to be a balance between the demand and supply forces within the economy to create a stable price.

The government may introduce subsidy or reduce the tax rates which will increase the purchasing power and lead to the rise in demand, these things will increase the production which intern, lead to higher GDP and growth in employment ratio. With good employment opportunities, there is a growth in the purchasing power which will further lead to the growth in demand.

At times, when the government has to control the inflation rates it will reduce the subsidies and increase the tax rates which will intern, reduce the purchasing power thereby, reducing the demand which will lead to the price stability.

Reducing inequality: Equality and equity are the two important pillars of the economy. Equality means providing the same to all whereas, equity means fairness and justice. It is the distribution of resources in such a way, so as to satisfy everybody as per their imbalances. Each and every individual does not come from the same environment, equity means to acknowledge and analyse imbalances and to make adjustments to make them right.

Standard of Living: The primary aim of the fiscal policy is to increase the standard of living of its citizens.

Components of the Fiscal Policy:

Government Income: It refers to the sources from which the government earns income. For example: taxes, challan, university fees.

Government Expenditure: This is the expenditure incurred by the government on various public facilities like pension salary infrastructure projects.

Public Debt: Public debt refers to the money borrowed by the government to meet the expenditure. This situation arises when the government expenditure surpasses the government income.

Three Important Accounts of the Government:

Various transactions of the government are executed through the three following funds

The Consolidated Fund of India 266(1):

• This fund consists of various direct and indirect taxes, loans taken by the government.
• Expenditures incurred like loan repayment, interest payment to the lender.
• The government meets all its expenses through this account.
• This account needs parliamentary approval to transact money.
• The provision for this fund is given in the article 266 (1) of the Constitution of India.
• Each state can have its own consolidated fund with similar provisions.
• The controller and auditor General of India audits these funds and further makes a report to the relevant legislatures.

The Contingency Fund of India 267(1):

• This one is primarily created to meet emergency expenditures for disaster and unforeseen expenditures.
• It’s Corpus is rupees 30,000 Crore Rupees which works on an imprest system (money is maintained back upon its utilisation).
• The provision for this fund is given in the article 267 (1) of the Constitution of India.
• Post expenditure the parliament approves it.
• The secretary of Finance Ministry holds this fund on behalf of the President of India.

The Public Account of India 266(2):

• The public money other than the money in the Consolidated Fund received by or on behalf are covered under the public account.
• It consists of National Small Savings Fund, National Investment Fund, National Calamity and Contingency Fund, Defense Fund, Provident Fund, Postal Insurance
• Provisions of this fund are under article 266(2) of the Constitution of India.
• No parliamentary permission is required in order to transact this account