Fiscal Policy and Government Budgeting
Fiscal Policy and Government Budgeting
What is Fiscal Policy?
Fiscal policy refers to the government’s use of taxation, public spending, and borrowing to influence economic growth, employment, and inflation. It’s primarily handled by the Ministry of Finance and is a key tool for economic management.
Objectives of Fiscal Policy
- Economic Growth – Public investment in infrastructure, health, and education boosts long-term growth.
- Employment Generation – Job creation through government programs.
- Redistribution of Income – Progressive taxation and welfare programs reduce inequality.
- Price Stability – Managing inflation through fiscal controls.
- Fiscal Discipline – Ensuring sustainable government borrowing.
Components of Fiscal Policy
1. Taxation Policy
- Direct Taxes – Personal Income Tax, Corporate Tax.
- Indirect Taxes – GST, Customs Duty, Excise Duty.
- Progressive Taxation – Higher income, higher tax rate.
Example
A software engineer earning ₹30 lakh per year pays higher income tax than a farmer earning ₹3 lakh per year.
2. Public Expenditure
- Spending on infrastructure, welfare schemes, education, defence, etc.
- Expenditure classified into:
- Revenue Expenditure (day-to-day expenses like salaries, pensions).
- Capital Expenditure (investments in assets like highways, hospitals).
Government Budget
The Union Budget is the annual financial statement presented by the Finance Minister to outline the government’s revenue and expenditure plans for the coming year.
Budget Components
- Revenue Budget – Income from taxes, fees, dividends, and revenue expenditure.
- Capital Budget – Capital receipts (borrowings, disinvestment) and capital expenditure (infrastructure creation).
Types of Fiscal Deficit
- Revenue Deficit – Revenue Expenditure > Revenue Receipts.
- Fiscal Deficit – Total Expenditure > Total Receipts (excluding borrowings).
- Primary Deficit – Fiscal Deficit – Interest Payments.
Example
If government expenditure is ₹100 lakh crore and revenue is ₹80 lakh crore, the fiscal deficit is ₹20 lakh crore.
FRBM Act (Fiscal Responsibility and Budget Management Act)
- Enacted in 2003 to promote fiscal discipline.
- Sets targets for fiscal deficit reduction.
- Mandates medium-term fiscal policy statements.
Types of Budgets
- Balanced Budget – Revenue = Expenditure.
- Surplus Budget – Revenue > Expenditure (rare in developing economies).
- Deficit Budget – Expenditure > Revenue (common in India).
Statement-based MCQs
MCQ 1
Consider the following statements regarding fiscal policy:
- Fiscal policy deals with government expenditure, taxation, and borrowing.
- It is implemented by the Reserve Bank of India.
- Fiscal policy can influence both inflation and economic growth.
Which of the statements given above is/are correct?
a) 1 and 2 only
b) 1 and 3 only
c) 2 and 3 only
d) 1, 2 and 3
MCQ 2
Which of the following is part of capital expenditure in the Union Budget?
- Construction of highways.
- Payment of salaries to government employees.
- Disbursement of old-age pensions.
Select the correct answer using the code below:
a) 1 only
b) 1 and 2 only
c) 2 and 3 only
d) 1, 2 and 3
MCQ 3
Which of the following best defines Fiscal Deficit?
a) Difference between exports and imports.
b) Total expenditure minus total revenue (excluding borrowings).
c) Total revenue minus total expenditure.
d) Borrowings minus grants received from foreign governments.
MCQ 4
Which of the following objectives is/are covered under the FRBM Act?
- Achieving fiscal discipline.
- Reducing revenue deficit.
- Mandating monetary policy targets for RBI.
Select the correct answer using the code below:
a) 1 and 2 only
b) 2 and 3 only
c) 1 only
d) 1, 2 and 3
MCQ 5
Which of the following could be a fiscal tool to manage a slowdown in the economy?
- Increasing capital expenditure on infrastructure projects.
- Raising corporate tax rates.
- Expanding social welfare programs.
Select the correct answer using the code below:
a) 1 only
b) 1 and 3 only
c) 2 and 3 only
d) 1, 2 and 3
