Fiscal Policy

1. What is public finance?

Public finance or government finance is a field of economics. It deals with
budgeting the revenues and expenditures of government (or public sector).

2. What is Fiscal economics?

Fiscal economics is another name for public finance.

3. What was the role of government in early days?

Earlier governments limited their activities to

a) The maintenance of law and order

b) The defence of the country

c) Administration of justice

d) General administration.

4. What was the early state called as?

Police state

5. What is modern state called as?

Welfare state

6. What is various definition of public finance?

According to Dalton, “Public finance is concerned with the income and
expenditure of public authorities and with the adjustment of the one with
the other”.

Findlay Shirras says that, “Public finance is the study of the Principles
underlying the spending and raising of funds by public authorities”.

To quote Lutz, “Public finance deals with the provision, custody, and
disbursement of resources needed for the conduct of public or government
functions”.

7. What are the sub divisions of public finance?

1. Public expenditure

2. Public Revenue

3. Public debt

4. Financial administration and

5. Federal finance

8. What is public expenditure?

Since the modern government represents a welfare state, the responsibility
of the government is to bring about maximum social welfare. In addition to
this, it has to perform various other functions, which require heavy
expenditures. We study in this sub-division, the fundamental principles
governing the flow of government funds into different spending streams and
the methods of incurring expenditure on the various activities.

9. What is public revenue?

Public revenue means different sources of government’s income. It deals
with the methods of raising revenue for the government, principles of
taxation and other related problems. Raising of tax revenue and non- tax
revenue is the subject matter of public revenue.

10. What is the non tax revenue?

i.) Commercial revenue (income earned through sale of goods and services
and profits earned by public sector enterprises),

ii.) Administrative revenues (Fees, license fees, special assessments),

iii.) Gifts and grants.

10. What is public debt?

Borrowing by the government from the public is called public debt.

11. What are the external debts?

External debt includes borrowing from international monetary institutions
like IMF and World Bank and also from foreign countries.

12. What is financial administration?

Financial administration is concerned with the organisation and functioning
of the government machinery that is responsible for performing various
financial activities of the state. Preparing the budget for the particular
financial year is the master financial plan of the government.

13. What is federal finance?

Federal finance is a part of the study of public finance. A federation is
an association of two or more states. In a federal form of government,
there are: Central, State, and local governments. The interrelationships
between these forms of governments, and the problems related to them and
the financial functions of all these units are studied under federal
finance.

14. What is tax?

A tax is one of the important sources of public revenue. A tax is a
compulsory charge or payment levied by the government on an individual or
corporation. Therefore an element of compulsion is involved in taxation.

15. What are the canons of taxation?

Canons of taxation are considered as fundamental principles of taxation.

Adam Smith laid down the following canons of taxation:

a) Canon of equity

b) Canon of certainty

c) Canon of convenience

d) Canon of economy

16. What is canon of equity?

This canon is also called the ‘ability to pay’ principle of taxation. It
means that taxes should be imposed according to the capacity of the tax
payer. Poor should be taxed less and rich should be taxed more. This canon
involves the principle of justice. All persons contribute according to
their ability. As the cost of running the government should be equally
borne by all, this canon is justified.

17. What is canon of certainty?

Every tax payer should know the amount of tax to be paid, when to be paid,
and where to be paid and also should be certain about the rate of tax to
make investment decisions.

18. What is convenience?

Tax payment should be convenient and less burdensome to the tax payer. e.g.
income tax collected at source, sales tax collected at the time of sales
and land tax collected after harvest.

19. What is canon of economy?

This canon signifies that the cost of collecting the revenue should be kept
at the minimum possible level. The tax laws and procedures should be made
simple, so as to reduce the expenses in maintaining people’s income tax
accounts. ie. administrative expenditure to be kept at a minimum.

20. What are different types of taxes?

Kinds of tax: Taxes are of different types. They are:

1. Direct and Indirect taxes.

2. Proportional, progressive, Regressive and digressive taxes.

3. Specific and advalorem taxes.

4. Value-added tax (VAT)

5. Single and multiple taxes.

21. What is direct tax?

Direct taxes are collected from the public directly. That it is to say,
these taxes are imposed on and collected from the same person. One cannot
evade paying the tax if it is imposed on him.

Income tax, wealth tax, corporate tax, gift tax, estate duty, expenditure
tax are good examples of direct taxes.

22. What is indirect tax?

Taxes imposed on commodities and services are termed as indirect taxes.
There is a chance for shifting the burden of indirect taxes. The incidence
is upon the person who ultimately pays it. Examples of indirect taxes are
excise duties, customs duties and sales taxes (commodity taxes).

23. How is financial system of India described?

The financial system of India is federal in character. Therefore, the
powers and functions to raise revenue are divided between central
government and state and local governments as scheduled in the Indian
Constitution. This division has been made to avoid any clash in financial,
administrative and other areas.

24. What are the main sources of tax?

The main sources of tax and non-tax revenue of the central government are

1. Taxes on income (other than on agricultural income),

2. Corporate tax,

3. Expenditure tax,

4. Taxes on properties (Estate duties and Death duties),

5. Gift tax,

6. Wealth tax,

7. Taxation on capital gains,

8. Union excise duties, and

9. Customs duties (Import and Export duties).

25. What are the sources of non tax?

1. Fiscal services,

2. Receipts from interest on loans,

3. Dividend and profits,

4. General and administrative services,

5. Social and community services and

6. Economic services.

26. What are the main source of tax and non tax revenue?

The main sources of tax and non-tax revenue are

1. Land revenue,

2. Taxes on the sale and purchase of goods except newspaper,

3. Taxes on agricultural income,

4. Taxes on land and building,

5. Succession and estate duties in respect of agricultural land,

6. Excise duty on alcoholic liquors and narcotics,

7. Taxes on the entry of goods into a local area,

8. Taxes on mineral rights,

9. Taxes on the consumption of electricity

10. Taxes on vehicles, animals and boats,

11. Taxes on goods and passengers carried by road and inland water ways,

12. Stamp duties, court fees and registration,

13. Entertainment tax,

14. Taxes on advertisements other than those in newspaper,

15. Taxes on trade, profession and employment,

16. Income from irrigation and forests,

17. Grants from the central government and

18. Other incomes such as income from registration and share in the
income-tax, excise and state duties and debt services, loans and
overdrafts.

27. How are direct tax classified?

Direct taxes can also be classified on the basis of the degree of
progressiveness or distribution of their burden on the tax payers.

28. How are taxes classified based on rate structures?

a) Proportional tax

b) Progressive tax

c) Regressive tax

d) Degressive tax

29. What is budget?

Thus, ‘budget’ has been defined as the annual financial statement of the
estimated receipts and proposed expenditure of the government in a
financial year, usually April 1 to March 31 of the next year.

30. What are the different kinds of budget?

  • Balanced budget and
  • unbalanced budget

31. What is balance budget?

A balanced budget is that, over a period of time, revenue does not fall
short of expenditure. In other words government budget is said to be
balanced when its tax revenue and expenditure are equal.

32. What is unbalanced budget?

An unbalanced budget is that, over a period of time, revenue exceeds
expenditure or expenditure exceeds revenue. In other words, the
government’s income or tax revenue and expenditure are not equal. When
there is an excess of income over expenditure, it is called a surplus
budget. On the other hand, when there is an excess of expenditure over
income, it is a case of deficit budget.

33. What is revenue budget?

Budgeting is the most important constituent of the financial
administration. Preparation of the budget is one of the main operations of
budgeting. It is mandatory for the government to make a statement of
estimated receipts and expenditures which must be laid before the
Parliament every financial year. It has to distinguish expenditure on
revenue account and capital account from other expenditures. So government
budget comprises Revenue Budget and Capital Budget.

34. What is revenue budget?

Revenue budget consists of revenue receipts of the government (tax revenue
and non-tax revenue) and the expenditure met from these revenues.
Expenditures which do not result in creation of assets are called revenue
expenditure. (e.g. current revenues and current expenditure for normal
functioning of the Government departments, interest charges on debt
incurred by Govt. and other non- developmental expenditure).

35. What is capital budget?

Majority of the government expenditures form the capital expenditure.
Capital budget consists of receipts and payments. Capital receipts are
loans raised by government from the public which are called market loans,
borrowings from the RBI, sale of treasury bills, loans received from
foreign governments etc. Capital payments are expenditure on assets
creation such as land, buildings, machinery, equipment investment loans to
government companies and state governments and other developmental
expenditures.

36. What is zero budgeting?

Traditional technique of budgeting have been found to be inadequate for the
reason that, the previous year’s cost level is taken as the base for
current year’s budget. The traditional methods have not completely
addressed the problem of efficiency in the matter of allocation of funds
for various divisions. There is therefore a need for a new technique of
budgeting which devices and uses a meaningful base for budgeting. Zero
Based Budgeting is one such technique of budgeting.

37. What is fiscal policy?

Fiscal policy is the set of principles and decisions of a government
regarding the level of public expenditure and mode of financing them. It is
about the effort of government to influence the economy’s output,
employment and prices by altering the level of public expenditure, taxation
and public debt. Arthur Smithies points out, “Fiscal policy is a policy
under which the government uses its expenditure and revenue programmes to
produce desirable effects and avoid undesirable effects on the national
income, production and employment”.

38. What is the objective of fiscal policy?

1. To mobilize resources for financing the development programmes in the
public sector

2. To promote development in the private sector

3. To bring about an optimum utilization of resources

4. To restrain inflationary pressures in the economy to ensure economic
stability

5. To improve distribution of income and wealth in the community for
lessening economic inequalities

6. To obtain full employment and economic growth

7. Fiscal policy and capital formation

39. What are the limitations of fiscal policy?

1. Size of fiscal measures

2. Fiscal policy as ineffective anti-cyclical measure

3. Administrative delay

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