Fiscal Policy and Revenue (Economic Development) Part-I

Revenue expenditure is the expenditure incurred by the government to meet its day to day needs and does not create any productive assets. Revenue expenditure is basically a short-term expenditure of the government which covers the on-going operation expenses of running government business.

It is a one time payment which means the government cannot recover the spent money. Revenue expenditure is recurring in nature.It includes Interest payments, expenditure on defence and police, subsidies, salaries and pensions.

Other expenditures such as Grants to the states, union territories and foreign countries, social services like expenditure on education, health, social security and poverty alleviation, economic services like non-capital expenditure on agriculture, industry, power, transport and communication and other general services like expenditure on tax collection, managing external affairs, etc. are also the parts of revenue expenditure.

Key Takeaways on Fiscal Policy:

1. Fiscal policy refers to the use of government spending and taxation to influence the economy.

2. Expansionary fiscal policy involves increasing government spending and/or lowering taxes to stimulate economic growth during a recession.

3. Contractionary fiscal policy involves decreasing government spending and/or raising taxes to cool down an overheated economy and control inflation.

4. Fiscal policy works alongside monetary policy to help stabilize the economy and achieve macroeconomic objectives like full employment, price stability, and economic growth.

5. Government budget deficits occur when spending exceeds revenue, while budget surpluses occur when revenue exceeds spending.

6. The effectiveness of fiscal policy depends on various factors such as the timing of implementation, the magnitude of the policy changes, and the overall economic conditions.

7. Critics argue that fiscal policy can be subject to political biases, inefficiencies, and potential crowding out effects if government borrowing increases interest rates and reduces private sector investment.

Key Takeaways on Fiscal Policy:

1. Fiscal policy refers to the use of government spending and taxation to influence the economy.

2. Expansionary fiscal policy involves increasing government spending and/or lowering taxes to stimulate economic growth during a recession.

3. Contractionary fiscal policy involves decreasing government spending and/or raising taxes to cool down an overheated economy and control inflation.

4. Fiscal policy works alongside monetary policy to help stabilize the economy and achieve macroeconomic objectives like full employment, price stability, and economic growth.

5. Government budget deficits occur when spending exceeds revenue, while budget surpluses occur when revenue exceeds spending.

6. The effectiveness of fiscal policy depends on various factors such as the timing of implementation, the magnitude of the policy changes, and the overall economic conditions.

7. Critics argue that fiscal policy can be subject to political biases, inefficiencies, and potential crowding out effects if government borrowing increases interest rates and reduces private sector investment.

Key Takeaways on Fiscal Policy:

1. Fiscal policy refers to the use of government spending and taxation to influence the economy.

2. Expansionary fiscal policy involves increasing government spending and/or lowering taxes to stimulate economic growth during a recession.

3. Contractionary fiscal policy involves decreasing government spending and/or raising taxes to cool down an overheated economy and control inflation.

4. Fiscal policy works alongside monetary policy to help stabilize the economy and achieve macroeconomic objectives like full employment, price stability, and economic growth.

5. Government budget deficits occur when spending exceeds revenue, while budget surpluses occur when revenue exceeds spending.

6. The effectiveness of fiscal policy depends on various factors such as the timing of implementation, the magnitude of the policy changes, and the overall economic conditions.

7. Critics argue that fiscal policy can be subject to political biases, inefficiencies, and potential crowding out effects if government borrowing increases interest rates and reduces private sector investment.

It became the principal tool in fighting wide-scale unemployment caused by the Great Depression of 1930s and rebuilding the war-ravaged economies of Europe and Japan after the Second World War.

As spending increases demand, it creates a situation where employment rises. This, in turn, leads to a rise in income, which proportionately boosts spending. As this continues, the economy recovers from collapse.

Increase in expenditure on public projects is most likely step to be taken at the time of an economic recession because public spending influences output growth and affects capital formation or productivity growth. As per Economic survey 2020-21, in a recession or slowdown, the government should increase public expenditure and reduce taxes to create a demand that can drive an economic boom.

The Department of Revenue of Finance Ministry exercises control in respect of revenue matters through the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC). The Ministry of Finance in consultation with CBDT and CBIC prepares revenue estimates of the Budget to be generated in the ensuing financial year.

• The Economic Survey is an annual report presented by the government before the Union Budget to assess India's economic condition.
• Prepared by the Economic Division of the Ministry of Finance under the Chief Economic Adviser's supervision, it is tabled in both houses of Parliament by the Union Finance Minister.
• The survey assesses economic performance, highlights sectoral developments, outlines challenges and provides an economic outlook for the coming year.
• The Economic Survey was first presented in 1950-51 as part of the budget and became a separate document from the Union Budget in 1964, tabled a day before the budget.
• India's Gross Domestic Product (GDP) is projected to grow between 6.3-6.8% in FY26 (2025-26), with real Gross Value Added (GVA) estimated at 6.4% in FY25 (2024-25).