Fiscal Policy refers to the Government spending and income to run a country and support the growth. It mainly deals with the Budget allocation, Government spending, Government income, taxation, fiscal deficit, Government borrowings, current account deficit and surplus and trade deficit and surplus. All these terms will be explained in much detail.
Let us first understand the balance of Government or how a Government earns and spends money.
Government spends in the following manner
Pays salaries and provide retirement benefits to all the government employees.
Buys defense and other defense related goods. To fund this, Government allocates money for the defense sector during budget preparation.
Spends in the infrastructure sector to improve infrastructure of the country.
Spends in Education, health and agricultural sector to improve education quality, health quality and farm output respectively.
Provide subsidy to petrol/diesel/cooking gas/kerosene/fertilizers etc. for the farmers and households.
Pays the interest on all the outstanding loans or debts taken by the government to fund the fiscal deficit.
Spends to improve social security and provide better social services.
Government earns revenue to support the spending by the following
Direct tax: Every earning individual citizen and companies operating within the country pay taxes on their annual income and profit. This is the only source of direct taxes.
Indirect Tax: Government’s revenue comes from different indirect taxes as sales tax, excise duty, import and export duty etc.
Government can also earn revenue from the Government owned companies or public sector companies.
Can earn from its own sovereign wealth fund. If the fund invests in some other country’s government bond, then the periodic interest payment will be the steady income for the government.Chinais the biggest contributor inUStreasury which helps him to earn steady income in terms of period interest or coupon payment made by US government.
When the government earns less revenue than the government expenditure or spending, the difference between expenditure and revenue is called as Fiscal Deficit. If the government earns more revenue than the government expenditure or spending then the difference between revenue and expenditure is called as Fiscal Surplus. Having fiscal surplus is a Contractionary fiscal policywhich does not support growth, while having fiscal deficit is an expansionary fiscal policy which supports economic growth by the Government. Fiscal deficit within proper limit is good to maintain long term economic growth and attract money from outside investors.