Fiscal policy is the use of government spending and taxation to influence the economy. It is decided by the Ministry of Finance and presented through the annual Union Budget. It aims to control inflation, promote growth and reduce inequality.
Objectives of Fiscal Policy
- To achieve economic growth and stability.
- To control inflation and deflation.
- To reduce income inequality through taxes and subsidies.
- To increase employment.
Tools of Fiscal Policy
The two main tools are taxation and public expenditure. During a slowdown, the government spends more and cuts taxes. During high inflation, it spends less and raises taxes.
Types of Deficit
- Fiscal Deficit – total expenditure minus total income (excluding borrowings). It shows how much the government needs to borrow.
- Revenue Deficit – revenue expenditure minus revenue receipts.
- Primary Deficit – fiscal deficit minus interest payments.
- Budget Deficit – total expenditure minus total receipts.
FRBM Act
The Fiscal Responsibility and Budget Management Act was passed in 2003. It aims to keep government borrowing in control and bring discipline in public finance. It set targets to reduce the fiscal deficit over time.
Why Fiscal Deficit Matters
A high fiscal deficit means heavy borrowing, which can raise interest rates and inflation. A controlled deficit shows healthy public finances and supports stable growth.
Quick Revision Points
- Fiscal policy uses taxes and spending.
- It is handled by the Ministry of Finance.
- Fiscal deficit = total spending - total income (excluding borrowings).
- Primary deficit = fiscal deficit - interest payments.
- Revenue deficit relates to revenue receipts and expenditure.
- FRBM Act was passed in 2003.
- High deficit can raise inflation and interest rates.
- Fiscal policy is shown through the Union Budget.