Page 246 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 14: Macro Economic Policies: Fiscal Policy

Moreover direct taxes are usually progressive. With increasing money incomes the direct taxes Notes
bill rises more than proportionately, and during a depression there is more than proportionate
reduction in it. Therefore, yield from these taxes also moves in line with the level of economic
activities. The result is that during the depression the tax revenue falls and with given govt.
expenditure, there is a budgetary deficit, which in turn has an expansionary effect. On the other
hand, during boom larger revenue causes a budgetary surplus, which has a contractionary
effect.
Automatic stabilizers are features of the tax and transfer systems that tend by their design to
offset fluctuations in economic activity without direct intervention by policymakers. When
incomes are high, tax liabilities rise and eligibility for government benefits falls, without any
change in the tax code or other legislation. Conversely, when incomes slip, tax liabilities drop
and more families become eligible for government transfer programs, such as food stamps and
unemployment insurance that help support their income.
Automatic stabilizers are quantitatively important at the central level. A 2000 study estimated
that reduced income and payroll tax collection offsets about 8 percent of any decline in GDP.
Additional stabilization from unemployment insurance, although smaller in total magnitude
than that from the tax system, is estimated to be eight times as effective per dollar of lost
revenue because more of the money is spent rather than saved.
Automatic stabilizers also arise in the tax and transfer systems of state and local governments.
However, state constitutions generally require balanced budgets, which can force countervailing
changes in outlays and tax rules. These requirements do not force complete balance on an annual
basis: they generally focus on budget projections rather than realizations, so deficits can still
occur when economic conditions are unexpectedly weak. In addition, many governments have
"rainy day" funds that they can draw down during periods of budget stringency. Even so, most
state and local governments respond to an economic slowdown by legislating lower spending
or higher taxes. These actions are contractionary, working at cross-purposes with the automatic
stabilizers.

Task Record the current rate of income tax and provisions prevailing in:
(a) Top five countries with highest income tax rate
(b) Top five countries with lowest income tax rate

14.3.3 Budget Deficit and Debt

A Budget Deficit is a common economic phenomenon, generally taking place on governmental
levels. Budget Deficit occurs when the spending of a government exceeds that of its financial
savings. In fact, budget deficit normally happens when the government does not plan its expenses,
after taking into account its entire savings.
Budget Deficit = Total Expenditure - Total Receipts
Total expenditure includes revenue expenditure and capital expenditure and total receipts includes
revenue receipts and capital receipts. This excess of total expenditure over total revenue is called
budget deficit. It is also defined as the fiscal deficit minus government borrowing and other
liabilities (public debt receipts). This is somewhat close to the concept of monetised deficit,
which meant the printing of the new money by the Reserve Bank of India to part finance the
deficit.
Public debt in Indian context refers to the borrowings of the Central and state government.
Gross public debt is the gross financial liability of the government. Net public debt is the gross

LOVELY PROFESSIONAL UNIVERSITY 241