Discuss the key elements of fiscal policy of the government.

Published: February 6, 2016

Model Answer:
All the decisions taken by government in terms of taxation, resource mobilization and expenditure comprise the Fiscal Policy.
There are four key components of Fiscal Policy are as follows:
Taxation Policy
The government tries to keep the taxes progressive in nature and with the help of direct and indirect taxes controls the Price stability, control of Inflation and distribution of income. Higher the tax; lower is the purchasing power of people and lower is the tax; higher is the purchasing power of the people.
Expenditure Policy
Expenditure policy of the government deals with revenue and capital expenditures. Capital Expenditures of the government include acquisition of long-term assets, such as facilities or manufacturing equipment etc, which will generate business or additional profits to government.Revenue Expenditures are those expenditures which don’t create any productive assets such as interest paid by the Government of India on all the internal and external loans or pension and salaries of government employees.
Investment and Disinvestment Policy
Investment and Disinvestment Policy refers to investment in the form of FDI or FII in an economy from outside the country or disinvestment of government holding to public or private shares.
Debt / Surplus Management
If the government received more than it spends, it is called surplus. If government spends more than income, then it is called deficit. To fund the deficit, the government has to borrow from domestic or foreign sources. It can also print money for deficit financing.

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