Scribd
Upload
8 views

End Semester Lecture 03 Pakistan Economy

Uploaded by

Moazzam Alee
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
8 views

End Semester Lecture 03 Pakistan Economy

Uploaded by

Moazzam Alee
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 10

Lecture 03

Fiscal Policy Deficit & Debt


Introduction:-
The word fiscal has been existence since the days of
the Roman Empire. The original word “Fisc” implies
the meaning to the word treasury.
Today the word fiscal policy usually deals with public
finance.
Classification of Public Finance
(i) Government Revenue
(ii) Government Expenditure
(iii)Government Debt and Management 1
What is Fiscal Policy?
By fiscal policy is meant the process of shaping government
taxation and government spending so as to achieve certain
objectives.
Different Definitions
(i) Prof.Lipsey defines public policy as “government revenue
raising and government spending activities”.

(ii) Prof Lindholm define public finance as the determinations


of the type, the time and the procedure to be followed in
obtaining govt: revenue and in making govt: expenditure.

(iii) Samuleson defines “Fiscal policy concerned with all those


arrangements which are adopted by government to collect the
revenue and make the expenditures so that economic stability
could be maintained without inflation and deflation. 03
Objectives of Fiscal Policy
1. To maintain price stability:- The main purpose of fiscal
policy is to maintain price stability in the general price
level. In free economy prices are likely to fluctuate. In
order to achieve price stability, prices should not be
allowed to rise too, the purchasing power of the fixed
income group will fall.
2. Achievement of Desirable level of Consumption:- Fiscal
policy effectively used in achieving desirable level of
consumption in the society of various commodities
supply by bringing changes in market prices.

3
3. To Raise the Level of Employment:- Developing countries
due to increasing population, shortage of resources,
underemployment exists. Fiscal policy helps by reducing
government expenditure.
4. Income Distribution:- In UDCs low per capita income is
accompanied by great inequalities in income distribution.
Thus, there is need redistribution of income. In this
connection, progressive system of taxation is essential.
5. Economic Development:- It is a process whereby the real
national and per capita income of the country increase over a
long period of time. To attain economic development, there is
need of natural resources, technology, human skill and
management. Economic development be achieved by new
technology and human skill in right direction.
6. Removal of Deficit in Balance of Payments
4
Tools of Fiscal Policy
(i) The automatic Or The Built-in-Stabilizers
(ii) The Discretionary Fiscal Policy

(iii)Automatic Stabilizers
(a) Progressive Taxes
(b) Unemployment allowance/social security payments.
(c) Stable Government Expenditures
(d) Farm Price Support Policy

(a) Progressive Taxes:- Progressive taxes e.g. personal income tax, corporate
profit tax etc. play vital role in stabilizing the economy automatically. We take the
case of income tax. During the trend of expansions/boom money incomes of the
people increase. Tax exemption ceiling being fixed more people enter in the income
tax bracket resulting thereby an increase in tax revenue and hence the surplus
budget. The government stabilizes the economy. In this way progressive taxes play
their role automatically to stabilize an economy

5
(b) Unemployment Allowances: Unemployment allowances and other
social security payments are also automatic stabilizers. In the expansion
process there is a tendency towards full employment. Hence, social
security payments are automatically reduced which help to cut down
Government expenditures and hence stabilizes the economy. In a phase of
depression, there is always widespread payments increase to a larger
extent. This results in additional purchasing power for goods and services
induces private investment in the economy. In this way, the economy is
eliminated automatically.
(c)Stable Government Expenditures:- Government expenditures remain
stable in the presence of economic fluctuations, the economy will be
automatically stabilized. The budget becomes surplus automatically which
will help stabilized the economy.
(d)Farm Price Support Policy:- The Price of agricultural products fluctuate
more than prices of all other goods. In this way, it brings economic
flotation. Government policy to stabilize the prices of agricultural products
automatically help to achieve economic stability.

06
(ii) The Discretionary Fiscal Policy
It defines the deliberate changing of taxes and government
spending by the central authority for the purpose of
offsetting cyclical fluctuations in output and employment.
Objectives:
(i) Short Run Counter Cyclical Fiscal Policy
(ii) The Long Run of Fiscal Policy

07
Short Run Counter Cyclical Fiscal Policy
(i) Precaution:- In a capitalistic society, the entrepreneurs are not aware of
each others investment plans. They, therefore in competition with one an
other over-invest capital in a particular industry or industries and thus
cause overproduction and unemployment in the economy. This
government informs them by publishing the total investment plans and
MEC in various industries to avoid over production.
(ii) Changes in Tax rates:- It is an important weapon of fiscal policy for
eliminating the swings of business cycle. The government increases the tax
rate and saves economy from inflation
(iii)Credit Aids:- The government also avert depression by offering long term
credit aids to the needy industrialists for expanding the business. It can
also give financial help to insurance companies and bankers to prevent
their failures.
(iv)Transfer Payments:- Variation in transfer expenditure programmes can also
help in moderating business cycle. When the business brisk, the government
refrain from giving bonuses to the workers and thus can lessen the pressure of
too great spending to some extent. When the economy is in recession, these
payments can be released and more bonuses can be given to stimulate aggregate
effective dement. 08
The Long-run Objectives of Fiscal Policy
1. High Level of Employment:- the modern economists are of the
opinion that if by adopting expansionary fiscal policy, the ups and
downs of the business cycles are leveled, it does not necessarily
follow that the economic system will be functioning at the full
employment level. The economic system may operate below or
above the high level of employment. They, therefore, advocate that
long run basic aim of the fiscal policy should be to maintain growing
high level of employment without inflation in the country.
2. Stabilization of Price Level:- Stabilization of price level is long-run
objective of the fiscal policy. When prices begin to rise, the
government should adopt contracting fiscal policy ad when they
begin to fall, the expansionary fiscal should policy should be
adopted.
3. Reduction in inequality of Income:- The government fix the rich
people at progressive tax rate and spend the proceeds for the
exclusive benefit of the poor 09
Public Debt:- It is accumulation of all past
deficits, minus surpluses of the government.

Reasons:-
(a)Low GDP Growth Rate
(b)Increasing interest rate
(c)Unemployment Increasing
(d)Unfavorable terms of trade

10

You might also like