Preview

Evolution of Fiscal Policy

Good Essays
Open Document
Open Document
310 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Evolution of Fiscal Policy
This financial year, the budget (2009-10) has a fiscal deficit of 6.8 per cent of the GDP (and this does not include the fiscal deficit of the states). The fiscal deficit will be financed mainly by market borrowings of nearly Rs.400,000 cr. There have been concerns about the high fiscal deficit. The IMF, while praising India’s ability to face the global crisis, has warned that India's debt as a percentage of GDP was too high and, therefore, a sharp rise in the deficit could raise concerns about fiscal sustainability. The RBI governor too has underlined the need for returning to the path of fiscal consolidation to contain borrowing requirements. And the finance minister came out with the statement that the high fiscal deficit was not sustainable and in the fiscal responsibility and budget management document for 2009-10, the government plans to bring down the fiscal deficit to 5.5 per cent in 2010-11 and further to 4 per cent in 2011-12. Is the concern over the high fiscal deficit justified?

Though a large fiscal deficit by itself is not bad, it can affect the country’s economic growth adversely. A large fiscal deficit implies high government borrowing and high debt servicing (the total debt servicing will be 37 per cent of revenue expenditure in 2009-10), which in turn could mean a cut back in spending on critical sectors like health, education and infrastructure. This reduces growth in human and physical capital, both of which have a long-term impact on economic growth. Large public borrowing can also lead to crowding out of private investment, inflation and exchange rate fluctuations (impacting exports). However, if productive public investments increase and if public and private investments are complementary, then the negative impact of high public borrowings on private investments and economic growth may be

You May Also Find These Documents Helpful

  • Good Essays

    Fiscal Policy Paper Eco372

    • 1420 Words
    • 6 Pages

    The United States deficit, surplus, and debt will always have an impact on taxpayers. In the state of high deficit the government seeks ways to cut and save money for debt payment. The government does this by pulling funding from programs that have little government impact. Increasing taxes also supplies the government with extra income. In addition to the reduction or elimination of certain tax credits, the government analyzes school funding for cost effectiveness. Each step the government takes has a trickling effect on taxpayer’s dollar.…

    • 1420 Words
    • 6 Pages
    Good Essays
  • Satisfactory Essays

    Between 2007 and 2009 the U.S. economy experienced a severe recession. In an effort to stimulate the economy, the federal government passed a stimulus package. Explain the federal government’s use of fiscal policy (the stimulus) to promote growth and employment. Support your ideas with concepts found in the assigned reading. Include the following in your response:…

    • 541 Words
    • 3 Pages
    Satisfactory Essays
  • Better Essays

    Fiscal Policy

    • 1560 Words
    • 7 Pages

    In the current economic recession, the United States’ fiscal policy has placed unrest and instability among the population. The positive and negative outcomes of the fiscal policy, with regard to the country’s deficit, surplus, and debt, have different effects on how many different people and organizations view the current economy, make decisions, and react to changes. The Unites States’ deficit, surplus, and debt affect not just the American tax payers but also future social security and Medicare users, unemployed individuals, students, exporters, and importers. The deficit, surplus, and debt also affect the gross domestic product (GDP) and also the United State’s financial reputation on an international level. Focus must be placed on making objective decisions that will provide both short-term and long-term benefits especially during economic uncertainty. Individual decisions during a recession has a great impact on the economy collectively; when people reinvest and increase spending in the tough economy, it can propel the economy towards the upward trend.…

    • 1560 Words
    • 7 Pages
    Better Essays
  • Powerful Essays

    Fiscal policy is the use of presidential and governmental spending and taxation to change or even repair what is or might be wrong in the economy. The basic idea behind many of the fiscal policy ideas were introduced by British economist John Maynard Keynes during the Great Depression (Heakal, n.d.). When the government decides on the goods and services it will be purchasing, the payments it distributes, or even the taxes it collects, it is participating in fiscal policy. The economic influence of any change in the government budget can and in theory will benefit people such as a tax cut for families with children, can help raise their disposable income (Weil, n.d.).…

    • 1588 Words
    • 7 Pages
    Powerful Essays
  • Satisfactory Essays

    Eco 372 Week 4 Reflection

    • 396 Words
    • 2 Pages

    To analyze the influence of the deficit, surplus, and debt on the health of the United States macroeconomy you have to understand what exactly is deficit and surplus. A deficit is a shortfall of revenues are under payments, and a surplus is the excess of revenues are over payments. The influence of surplus and deficit on the economy differs in the short-term framework and the long-term framework. In a short-term framework the view of deficits and surplus certainly depends on the current state of the U.S. economy relative to the economy potential output. In a long-term framework surpluses are good they provide additional savings for the economy. In a long-term framework deficits are view as bad because they reduce growth, income, and savings, but if the U.S. economy is operating below the potential its deficits is view as good for the economy. This is because deficits increase expenditures increasing the economy output closer to its potential.…

    • 396 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Problem Set 2 Econ 214

    • 495 Words
    • 2 Pages

    The budget deficit is the excess of expenditure incurred by an economy over the incomes generated by it (Gwartney, Stroup, Sobel, Macpherson p.221). In order to ensure that the budget deficit is financed, the government has to ensure it has extra funds available with it. The government, also works out the methods in which, it asks for loans to other countries around the world. By borrowing from other countries and loaning out money to other countries, this now becomes part of our national debt and surplus (Gwartney, Stroup, Sobel, Macpherson p.221). However, Budget deficits do increase aggregated demand as the government has increased in the supply of money to a certain…

    • 495 Words
    • 2 Pages
    Good Essays
  • Good Essays

    Fiscal Policy

    • 483 Words
    • 2 Pages

    The traditional Keynesian approach to fiscal policy differs in three ways from that is presented in the Fiscal Policy Chapter in your textbook.…

    • 483 Words
    • 2 Pages
    Good Essays
  • Good Essays

    Fiscal Policy

    • 627 Words
    • 1 Page

    there are certain lags it is faced with. The first one is the recognition time lag, where it takes time…

    • 627 Words
    • 1 Page
    Good Essays
  • Satisfactory Essays

    eco/372 fiscal policy

    • 467 Words
    • 2 Pages

    Ho Ching’s power comes from Expert power because she is trained and very skillful in what she does, referent power because she is very relatable and has a lot of respect from her peers and coworkers and legitimate power because not only is she skillful but she is also trusted to be placed in a high position of power and fulfills her position well.…

    • 467 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    The main worry about deficits is crowding out. Crowding in was just described ?€" it occurs when deficits cause output to go up and business confidence is increased. Crowding out comes about when deficit spending raises interest rates. There is a limited amount of funds available for investment, and when government competes with the private sector for a share of these funds to finance its deficit spending, it drives the cost of these funds ?€" interest rates ?€" higher. The increase in the interest rates causes investment to fall, and lower investment translates into lower output and lower economic growth. In addition, to the extent that the private sector is more efficient than the public sector, crowding out, i.e. more government spending and less private investment, can result in a less efficient use of resources (though in the case of public goods government can be the more efficient provider, and hence it is not always the case that efficiency falls).…

    • 1328 Words
    • 6 Pages
    Good Essays
  • Better Essays

    High budget deficits today will reduce the growth rate of the economy. Economic growth is defined in the text, Principles of Macroeconomics, as “an increase in the total output of an economy. It occurs when a society acquires new resources or when it learns to produce more using existing resources” (Case, Fair & Oster, 2009, Pg. 422). It is assumed that future generations will be better off than we are now and that the economy will grow due to technological advances. However, technological growth has been slowing. “Global growth is slowing – especially in advanced-technology economies”. Future generations might be left with a debt they may not be able to pay off. This may leave the Federal Reserve Bank (Fed) to make drastic increases in interest rates and/or taxes. High budget deficits today can make it harder for future generations to prosper as it deprecates the value of the dollar and increases bill/fines. If new resources are not found, the debt can only increase with inflated prices that perpetually make it harder and harder for future generations.…

    • 1671 Words
    • 7 Pages
    Better Essays
  • Good Essays

    The federal budget is an important part of the economy in any country; and, as the Deficit in the United States grows, it is more important to maximum employment, production, and purchasing power. The current deficit as a percentage of GDP is near 11% which is the highest since the 1940s during WWII. The government debt is will rise even higher with the recent health care bill which brings unrealistic spending and tax increases. America’s economy is drawing near to fiscal train wreck. One article by Holtz-Eakin states that, within the next 30 years, the 20% of GDP dedicated to federal expenditure could increase to 30 or 40% of GDP. The conditions do not seem to have any improvement in the near future, and the federal deficit will only increase with the recent government’s health care bill. The results of a widening deficit are increased demands from foreign investors and the reduction of the value of the U.S. dollar. The consistent increase in the deficit could greatly drive up interest rates and eventually cause lenders to lose trust in the United States. As the world loses faith in the strength of the dollar, government bankruptcy, economic chaos, and the collapse of the west as an economic power could be at hand. However, in reaction to these bleak times, the Obama administration created the bipartisan National Commission on Fiscal Responsibility and Reform to attend to our nation 's fiscal challenges. The Commission was created to compose policies to improve the fiscal situation in the immediate tenure and to reach fiscal sustainability over the long run. One main goal of the commission is to cap revenue at 21% of GDP and get spending below 22% and eventually to 21%. Various other goals of the Commission include: Reduce the deficit to 2.3% of GDP by 2015, achieve nearly $4 trillion in deficit reduction through 2020, and stabilize debt by 2014 and reduce debt to 60% of GDP by 2023 and 40% by 2035. The Commission will propose recommendations designed…

    • 781 Words
    • 4 Pages
    Good Essays
  • Good Essays

    There has been much debate on the role and the size of government interference in the macroeconomic outlook throughout countries. As a result, governments attempt to stimulate economic growth through different instruments. Public expenditure has traditionally been a component of fiscal policy which is an instrument of the State to influence economic growth. Several models of government investment and growth have been designed to investigate the relation between government expenditure and economic growth. However, some debate prevails. To illustrate, studies done by Landau (1986), Barro (1990), Grier and Tullock (1989) reveal a negative relationship between government expenditure and economic growth, while Ram (1986) and Aschauer (1989) disclose a negative relationship.…

    • 9763 Words
    • 66 Pages
    Good Essays
  • Satisfactory Essays

    Lp 9 Assignment

    • 512 Words
    • 3 Pages

    We are assuming that a country’s real growth is 2 percent per year while its real deficit is rising 5 percent per year. I do not think a country can afford such deficits indefinitely simply because of the fact that borrowing will cause the interest rates to rise and remain high for an extended period of time. This increase of rates will devalue currency and lead to investment decrease causing the economy to go into a recession.…

    • 512 Words
    • 3 Pages
    Satisfactory Essays
  • Powerful Essays

    public fiscal administration

    • 3514 Words
    • 11 Pages

    Fiscal Institutions and Fiscal Performance shifts emphasis away from narrow economic factors to more broadly defined political and institutional factors that affect government policy and national debt. This collection brings together new theoretical models, empirical evidence, and a series of in-depth case studies to analyze the effect of political institutions, fiscal regulations, and policy decisions on accumulating deficits. It provides a fascinating overview of the political and economic issues involved and highlights the role of budgetary institutions in the formation of budget deficits.…

    • 3514 Words
    • 11 Pages
    Powerful Essays