Fiscal Policy Instruments: Budget, Revenue, Debt
Main Fiscal Policy Instruments
The main fiscal policy instruments are explained below:
1. Budget
A budget is an estimate of government expenditures and revenues for a fiscal year, usually presented to the parliament by the finance minister. In Nepal, the budget is submitted to the parliament by the finance minister in the month of Ashadh, each fiscal year. It is a financial document containing a preliminary approval of estimates of government expenditures and revenues. In other words, the estimated statements of the government revenues and expenditures are called a budget. There are three types of budgetary policies:
- Balanced Budget Policy: When the government keeps its total expenditure equal to its revenue, as a matter of policy, it means it has adopted a balanced budget policy.
- Deficit Budget Policy: When the government spends more than its expected revenue, as a matter of policy, it is following a deficit budget policy.
- Surplus Budget Policy: When the government follows a policy of keeping its expenditure considerably below its current revenue, it is following a surplus budget policy. These budgetary policies affect the economy in different ways and in different directions.
2. Public Expenditure
Public expenditure refers to the expenses made by public authorities, central and local governments. The expenditure incurred by the central authorities (in running the government) in the form of public expenditure on administration and maintenance of law and order are examples of public expenditure. Expenditure made on health, education, transport, communication, public works, etc. are also common examples.
- Current Expenditure and Capital Expenditure: All types of administrative and defense expenditure and debt services fall under current expenditure. This expenditure is incurred on civil administration such as police, parliament, government staff salary, judiciary, etc. Capital expenditures are intended for the creation of net productive capacity of the nation. Expenditures on the construction of dams, public works, and agricultural and industrial development are examples of capital expenditure.
- Direct Expenditure and Transfer Expenditure: All types of expenditure incurred by the government on the purchase of current services of factors of production are called direct expenditure. Expenditure incurred on defense, civil services, educational services, the judiciary, post office, and investment expenditure are examples of direct expenditure. Transfer expenditures are the expenditures which take the form of payments made without a corresponding return of any factor services.
- Productive and Unproductive Expenditure: Productive expenditures are those expenditures which help in or add to the productive capacity or efficiency of the economy. Unproductive expenditures are those expenditures which do not add to the productive efficiency of the economy directly.
3. Public Revenue
The government needs income to perform a variety of functions. The income of the government, which is obtained through sources such as taxes, grants, fees, and borrowings, is called public income or public revenue. Generally, government revenue implies the income raised from the public by the state through taxes. There are various other non-tax sources of public revenue such as prices, fees, fines, penalties, gifts, profits, and special assessments. A fund raised through taxes is referred to as tax revenue. A tax is a compulsory payment to the government. Tax may be direct or indirect.
4. Public Debt
In modern times, borrowing by the government has become a normal method of government finance, similar to taxes and fees. Borrowing by the government leads to public debt. Public debt is the debt which the government owes to its subjects or to the nationals of other countries. The government can borrow from individuals, business enterprises, and banks. It can borrow from within the country and from outside the country. The main objectives of government borrowings are to meet the budgetary deficit, to finance a war, to finance development plans, and to fight depression. Internal debt refers to the public loans floated within the country. External debt refers to the obligations of a country to borrow from a foreign government or an international organization.