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Unit 14: Macro Economic Policies: Fiscal Policy

given to govt. by diverting the savings from private investment, then there will be no net Notes
increase in savings and investment activity. But even after that public loans can help economic
growth by reallocation of resources.
If money is borrowed from the central bank then it results in the addition to aggregate money
supply in the country. This results in increment in demand and an upward pressure on prices.

14.3.4 Government Budgetary Policy

A budgetary policy is concerned with the amount of money that is available to a country and
how it is to be spent.
Typically, a budget includes the following four components:
(a) Some review of economy

(b) Major policy announcements
(c) Expenditure proposal
(d) Tax proposal

There are three major functions of fiscal policy:
1. First is allocation function of budget policy, that is , the provision for social goods. It is a
process by which the total resources are divided between private and social goods and by
which the mix of social goods is chosen.
2. Second is the distribution function of budget policy that is distribution of income and
wealth in accordance with what society consider at "fair" or "just" distribution.

3. Third is the stabilization function of budget policy, that is marinating high employment,
a reasonable degree of price stability an appropriate rate of economic growth, with due
considerations of its effects on trade and the balance of payment.
The budget includes revenue and expenditure. Revenue and expenditure is divided in capital
and revenue account. Thus receipts are broken into Revenue Receipts and Capital Receipts, and
disbursements are broken up into Revenue expenditure and capital expenditure.

Revenue Budget

It consists of revenue receipts and revenue expenditure.

Revenue Receipts

This includes tax revenue and other revenues:
Tax revenue: These comprise of taxes and other duties levied by the Union government.

Other revenue: These receipts of the government mainly consist of interest and dividends on
investment made by the government, fees and receipts for other services rendered by the
government.

Revenue Expenditure
This is expenditure for normal running of govt. departments and various services interest
charges on debt incurred by government, subsidies, etc. Expenditure which does not result in
the creation of assets is treated as revenue expenditure.

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