Public Finance
Public finance is the study of the role of the government in the economy. It is the branch of economics which assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones.
It includes the study of :-
- Fiscal Policy
- Deficits and Deficit Financing
- Fiscal Consolidation
- Public Debt- Internal and External debt
Fiscal policy relates to raising and expenditure of money in quantitative and qualitative manner.Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty. The role and objectives of fiscal policy gained prominence during the recent global economic crisis, when governments stepped in to support financial systems, jump-start growth, and mitigate the impact of the crisis on vulnerable groups.
Historically, the prominence of fiscal policy as a policy tool has waxed and waned. Before 1930, an approach of limited government, or laissez-faire, prevailed. With the stock market crash and the Great Depression, policymakers pushed for governments to play a more proactive role in the economy. More recently, countries had scaled back the size and function of government—with markets taking on an enhanced role in the allocation of goods and services—but when the global financial crisis threatened worldwide recession, many countries returned to a more active fiscal policy.
How does fiscal policy work?
When policymakers seek to influence the economy, they have two main tools at their disposal—monetary policy and fiscal policy. Central banks indirectly target activity by influencing the money supply through adjustments to interest rates, bank reserve requirements, and the purchase and sale of government securities and foreign exchange. Governments influence the economy by changing the level and types of taxes, the extent and composition of spending, and the degree and form of borrowing.
Deficit financing, practice in which a government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds.
Fiscal consolidation is a term that is used to describe the creation of strategies that are aimed at minimizing deficits while also curtailing the accumulation of more debt. The term is most commonly employed when referring to efforts of a local or national government to lower the level of debt carried by the jurisdiction, but can also be applied to the efforts of businesses or even households to reduce debt while simultaneously limiting the generation of new debt obligations. From this perspective, the goal of fiscal consolidation in any setting is to improve financial stability by creating a more desirable financial position.
The public debt is defined as how much a country owes to lenders outside of itself. These can include individuals, businesses and even other governments.public debt is the accumulation of annual budget deficits. It’s the result of years of government leaders spending more than they take in via tax revenues.
Fiscal policy is that part of Government policy which is concerned with raising revenues through taxation and other means along with deciding on the level and pattern of expenditure it operates through budget. However, generally the expenditure exceeds the revenue income of the Government. In order to meet this situation, the Government imposes new taxes or increases rates of taxes, takes internal or external loans or resorts to deficit financing by issuing fresh currency.
If the government spends more than it receives it runs a deficit. To meet the additional expenditures, it needs to borrow from domestic or foreign sources, draw upon its foreign exchange reserves or print an equivalent amount of money. This tends to influence other economic variables.
On a broad generalisation, excessive printing of money leads to inflation. If the government borrows too much from abroad it leads to a debt crisis. If it draws down on its foreign exchange reserves, a balance of payments crisis may arise. Excessive domestic borrowing by the government may lead to higher real interest rates and the domestic private sector being unable to access funds resulting in the „crowding out? of private investment.
Various instruments of Fiscal Policy are:-
- Reduction of Govt. Expenditure
- Increase in Taxation
- Imposition of new Taxes
- Wage Control
- Rationing
- Public Debt
- Increase in savings
- Maintaining Surplus Budget
- Increase in Imports of Raw materials
- Decrease in Exports
- Increase in Productivity
- Provision of Subsidies
- Use of Latest Technology
- Rational Industrial Policy
Taxation policy of the government has witnessed major changes. In the last ten years, there has been considerable growth in direct tax collection. The collection has increased from 33.8% in 1999-2000 to 55.5 % in 2008-09. GDP-tax ratio has also been improved from 2.97% in 1999-2000 to 16.6% in 2015-16. Direct tax collection has been dramatically improved because of the following initiatives taken by the government; Moderate tax rates have been structured in order to eradicate vagueness in tax structures Information technology has been implemented in income tax departments in order to deliver services like e-filing of returns, electronic tax collection reporting, issue of refunds etc. This measure has improved functional efficiency of the department; Tax administration has been improved so that deterrence levels may be enhanced and better tax services may be provided.
The Fiscal Responsibility and Budget Management Act or the FRBM Act, 2003 is an Act mandating Central Government to ensure intergenerational equity in fiscal management and long term macro-economic stability. The Act also aims at prudential debt management consistent with fiscal sustainability through-
- Limits on the Central Government borrowings, debt and deficits,
- Greater transparency in fiscal operations of the Central Government
- Conducting fiscal policy in a medium term framework and
- Other matters connected therewith or incidental thereto
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