Components of Fiscal Policy

A Fiscal policy plays a vital role in many developing countries. When synchronizing with monetary policy, the decisions on the economic policy help to bring smoothness to various areas. It involves the business cycles, adequate public investment and redistributed incomes. 

Most governments aim to target the total level of spending and total consumption of spending in an economy. Although, the two means of influencing the policy are its changes in government tax and spending policies. The governing bodies can increase the money or borrow it by issuing debt securities in case of a lack of business activity or tax receipts.  

What is fiscal policy?

• It refers to optimizing government spending and tax policies to affect their economic conditions, mainly the macroeconomic conditions. It also involves employment, inflation, aggregate demand for goods and services and economic growth. 
• The policy’s primary purpose is to stabilize the economy and achieve full employment in the country. 
• The economic policy measures are helpful in conjunction with the monetary policy to achieve the mentioned macroeconomic goals. 

Understanding the economic policy 

• A government pulls out money from the economy and slows all business activities. Eventually, the economic policy is helpful for the governing bodies when the Government seeks to energize the economy. They might offer tax rebates or lower the taxes to encourage economic growth. 
• An impactful economic outcome obtained through the policy is said to be one of the core tenets of Keynesian economics. 
• When a government changes the tax policy or spends money, it should wisely choose what to tax or where to spend. In this way, the government economic policy can target specific communities, investments, commodities, or industries to discourage or favour production. 
• Sometimes, the Government’s actions depend on considerations that aren’t wholly economic. Thus, for this principle, economic policy is a matter of argument among political observers and economists. 

Components of Fiscal policy 

The components of the policy are categorized as-. 

1. Government receipts
2. Government expenditures 
3. Public account of India  

• Government receipts 

The Government’s income as interests, taxes, earnings on investments and other receipts for services provided is known as government receipts. It is the total amount of money governing bodies receive from their sources. However, their revenue enables them to spend money in other sectors. The government receipts divide into two groups, i.e., Capital receipts and Revenue receipts. Government receipts that reduce assets or create liability are Capital receipts. Government receipts that neither reduce assets nor create liability are Revenue receipts. 

1.Capital receipts– A government obtains funds from its functioning in various ways, which are capital receipts. The ways could dispose of its assets or incur liabilities to the Government. Although, capital receipts are also known as incoming cash flows. 

All types of loans and borrowings are treated as debt receipts as the governing bodies repay the money and interests.

2. Revenue receipts– Receipts that neither reduce assets nor create liabilities are revenue receipts. It is subdivided into two forms, i.e., tax and non-tax revenues. The tax revenue consists of two types: direct and indirect taxes. The non-tax revenues involve cess, interest and dividends on government investment and other receipts. 

• Government expenditure 

Government expenditure divides into two categories, i.e., revenue expenditure and capital expenditure. 

1. Revenue expenditure– The revenue expenditures are short-term expenses used within one year. It involves the expenses required to meet the operational costs of the Government. It also includes maintenance costs and ordinary repair, which is essential to keep assets working without improving their useful life. 
2. Capital expenditure– The capital expenditures involve investments made by governing bodies to generate additional revenue and expand their business. These consist of purchasing long-term assets that can last more than one year and long shelf life. 

Such expenditures are often available by buying fixed assets such as equipment. Examples are- purchases for business, factory equipment, furniture etc.  

• Public accounts of India

The Public Account of India involves the flows for those transactions where the Government acts as a banker. It was constituted under Article 266 of the Indian Constitution. Examples of Public accounts in India are- small savings, provident funds etc. These funds are not the Government’s property; instead, it asks for return at a time to their owners. Thus, the public account’s expenditures do not require the approval of the Parliament. 

Conclusion

Henceforth, these are the components of fiscal policy that together affect the government spending, budget allocations and economic policy formulations for a financial year. Although, the government receipts and government expenditures must be balanced while submitting a budget. Any shortage in the receipts obtained through borrowing leads to a fiscal deficit.