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Semester 5: FISCAL ECONOMICS
Introduction: Nature, Scope, Objectives, Fiscal Functions, Functional Finance
FISCAL ECONOMICS
Fiscal economics studies the role of government in the economy, focusing on government revenue generation and expenditure, how these activities affect overall economic performance, and the implications for public policy.
The nature of fiscal economics encompasses the analysis of government financial activities, including taxation, public spending, and budgetary processes, as well as their impact on economic stability and growth.
The scope of fiscal economics extends to understanding the principles behind fiscal policy, the effects of government borrowing, public debt management, and the socio-economic outcomes of various taxation policies.
The primary objectives of fiscal economics include analyzing the efficiency of resource allocation, ensuring equitable distribution of income, stabilizing the economy through fiscal policy, and sustaining long-term economic growth.
Fiscal functions refer to the various roles that government plays in economic management through taxation, public expenditure, and borrowing, which aim to provide public goods, correct market failures, and achieve macroeconomic stability.
Functional finance is a theory that focuses on the effects of fiscal policy on the economy rather than the sources of government revenue. It emphasizes the importance of achieving full employment and stabilizing the economy as central aims of government finance.
Theories of Fiscal Economics, Maximum Social Advantage, Fiscal Policy
FISCAL ECONOMICS
Theories of Fiscal Economics
Fiscal economics studies government revenue and expenditure policies. Key theories include the Keynesian theory, which emphasizes the role of government spending in stimulating economic activity, and the Classical theory, which focuses on free markets and limited government intervention. Additionally, Public Choice theory considers the decisions made by government officials and the impact of political behavior on fiscal policies.
Maximum Social Advantage
Maximum social advantage is a concept introduced to determine the optimal level of government expenditure and taxation. It seeks to identify the point at which the marginal cost of public spending equals the marginal benefit derived from that spending. This theory emphasizes the balance between maximizing social welfare and avoiding inefficiencies in resource allocation.
Fiscal Policy
Fiscal policy refers to the use of government spending and taxation to influence the economy. It can be expansionary or contractionary. Expansionary fiscal policy involves increasing government spending or decreasing taxes to stimulate economic growth, especially during recessions. Conversely, contractionary fiscal policy can be utilized to cool down an overheated economy by decreasing spending or increasing taxes.
Budget and Taxation: Role of Government, Types of Budgets, Features of Tax System, Direct and Indirect Tax, Elasticity
Budget and Taxation
Role of Government
The government plays a crucial role in the economy by managing public resources, providing public goods, and ensuring economic stability. It is responsible for the allocation of funds, distribution of resources, and regulation of economic activity to promote growth and reduce inequalities.
Types of Budgets
Budgets can be classified into various types such as: 1. Surplus Budget - When the government expects to have more income than expenditure. 2. Deficit Budget - When the government's expected expenditure exceeds its income. 3. Balanced Budget - When income equals expenditure. Each type reflects the government's fiscal strategy and impact on the economy.
Features of Tax System
A tax system should be: 1. Fair - Taxes should be equitable based on the taxpayer's ability to pay. 2. Efficient - It should minimize economic distortions and administrative costs. 3. Simple - Easy for taxpayers to understand and comply with tax obligations. 4. Certain - Tax obligations should be clear and predictable.
Direct and Indirect Tax
Direct tax is levied directly on the income or wealth of individuals, such as income tax and corporate tax. Indirect tax is imposed on goods and services, such as sales tax and value-added tax, and is collected by intermediaries during transactions.
Elasticity in Taxation
Elasticity refers to how the quantity demanded or supplied responds to price changes. In taxation, it assesses the responsiveness of the tax base to changes in tax rates. High elasticity indicates a significant change in behavior with tax changes, while low elasticity shows minimal change.
Public Expenditure and Debt: Canons, Classification, Wagners Law, Public Debt, Principles, Management, Deficit Financing
Canons of Public Expenditure
Canons of public expenditure refer to the principles that guide government spending. They include: 1. Economic Efficiency: Funds should be allocated where they generate the most benefit. 2. Equity: Distribution of expenditure should be fair across different sectors of the population. 3. Transparency: Government expenditures should be clear and accountable to the public. 4. Accountability: Public officials should be responsible for the proper use of funds.
Classification of Public Expenditure
Public expenditure can be classified into various categories such as: 1. Functional Classification: Expenditure based on the purpose it serves (e.g., education, health). 2. Economic Classification: Expenditure based on its nature (e.g., current vs capital expenditure). 3. Administrative Classification: Expenditure based on government departments and ministries.
Wagner's Law
Wagner's Law posits that as an economy develops, public expenditure tends to increase as a proportion of national income. This increase is attributed to the growing complexity of society, demand for public goods, and increased income leading to higher public spending.
Public Debt
Public debt refers to the amount of money that a government owes to external creditors. It can arise from: 1. Borrowing to finance deficits. 2. Issuing bonds or loans for public projects. 3. Intergovernmental borrowings. Public debt is often classified into domestic and foreign debt.
Principles of Public Debt Management
Effective public debt management includes: 1. Ensuring sustainability of debt levels. 2. Minimizing costs while maintaining risks at acceptable levels. 3. Maintaining a transparent framework for decision making.
Deficit Financing
Deficit financing occurs when a government spends more than it earns, typically bridged through borrowing. It can stimulate the economy but may lead to inflation if not managed properly. Key tools include: 1. Borrowing from domestic and international markets. 2. Increasing money supply.
Indian Public Finance: Budget, Receipts, GST, Expenditure, Borrowing, Deficits, FRBM Act, Finance Commission
Indian Public Finance
Introduction to Indian Public Finance
Indian Public Finance involves the study of government's financial activities, including taxation, expenditure, borrowing, and budgeting. It plays a crucial role in managing the economy and ensuring sustainable development.
Union Budget
The Union Budget is an annual financial statement presented by the government. It outlines the government's revenue and expenditure plans for the upcoming fiscal year and focuses on policy priorities and economic growth.
Receipts
Government receipts are classified into revenue receipts and capital receipts. Revenue receipts include taxes and non-tax revenues, while capital receipts consist of loans and disinvestments.
Goods and Services Tax (GST)
GST is a comprehensive indirect tax on the manufacture, sale, and consumption of goods and services across India. It aims to simplify the tax structure and enhance compliance and revenue collection.
Expenditure
Government expenditure is categorized into plan and non-plan expenditure. Plan expenditure is related to developmental projects, while non-plan expenditure includes payment of salaries, interest, and other mandatory expenses.
Borrowing
Government borrowing is used to finance budget deficits. It can be through domestic or external sources and is regulated to maintain fiscal discipline and economic stability.
Deficits
Deficits occur when government expenditure exceeds revenue. Key forms include revenue deficit, fiscal deficit, and primary deficit, each indicating different aspects of fiscal health.
Fiscal Responsibility and Budget Management (FRBM) Act
The FRBM Act was enacted to ensure fiscal discipline and maintain sustainable levels of government borrowing. It sets targets for fiscal and revenue deficits, promoting transparency and accountability.
Finance Commission
The Finance Commission is a constitutional body responsible for recommending the distribution of tax revenues between the central and state governments. It ensures financial stability and supports equitable growth across states.
