advantages and disadvantages of fiscal policy: What are the Advantages and Disadvantages of Solvency Ratio? IIFL Knowledge Center

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The central theme of advantages and disadvantages of fiscal policy policy includes development activities like expenditure on railways, infrastructure, etc. Non-development activities include spending on subsidies, salaries, pensions, etc. It gives incentives to the private sector to expand its activities. If authorities spending exceeds tax revenues, expansionary policy will lead to a finances deficit.

Why is fiscal policy controversial?

Expansionary fiscal policy tends to be very controversial because reducing tax rates and increasing spending will likely have adverse effect on the government's budget. That is, the deficit and national debt could grow. On the other hand, if spending is growing faster than expected, another issue can arise—inflation.

According to him, the private sector can take decisions that can cause adverse or inefficient outcomes. In order to correct them, the private sector has to intervene and stabilize the whole situation. His ideas influenced the US so much that they increased their expenditure on social welfare and public projects. The New Deal in the US led to the improvement of the US economy from the Great Depression. For instance, manufacturers who acquire a work will likewise spend additionally making occupations somewhere else in the economy.

More About Tax

Now since we are aware of the source of income and expenditure of the government, let’s understand about the deficit. The government spends can be classified as Revenue and Capital Expenditure. Revenue expenditure includes payment of salaries to government employees, payment to ministers etc. Capital expenditure leads to the formation of assets in the economy like the building of roads, bridges, schools etc.

What are the challenges with fiscal policy?

The three main dimensions that make fiscal policy difficult are 1. the real funding needs of the state, 2. the macroeconomic state of the economy and 3. the financial circuit.

Moreover, redistribution of income in favour of the poorer sections of the society is essential. We can also achieve this through an increase in public expenditure for promoting welfare to the less privileged class. Expenditure on agriculture, irrigation, education and health and medical expenses will improve the economic conditions of the weaker sections of the society. The fiscal policy must be used as an instrument for dealing with inflationary or deflationary situations. One way to achieve this is to devise a tax structure, which will automatically counter the economic disturbances as they arise. The second is to make changes in the tax system in order to deal with inflationary or deflationary situations.

How to Prepare For a Recession in 2023?

The government can take proactive measures to curb the downturn and heal the economy. To understand more comprehensively what do you mean by Fiscal Policy, you also need to know the negative aspects of the Fiscal policy too which we have discussed in the FAQs section. Economics is the branch of social science that provides the financial knowledge of how money, industries are organised and run at each level. Students are required to read and understand this subject with utmost importance because this knowledge helps students to deal with and manage their finances in a better way.

  • The various taxes that were mandatory earlier are now obsolete, thanks to this new reformed indirect tax.
  • Even though it is well known, the expansionary policy can include huge expenses and risks including macroeconomic, microeconomic, and political economy cases.
  • In the underdeveloped economies, public finance has to assume yet another role, whereas in developed economies, it aims at maintaining economic stability.
  • If the business is unable to pay its liabilities, the individual has to pay such liabilities off in the case of sole proprietorship; and the individual is not responsible for such liabilities in the case of a one person company.

Further one important thing is the change in frequency for payment of certain taxes like service tax etc. In case of proprietorships,service tax is required to be computed and deposited every 3 months, but in case of OPC, the frequency is every month. Thus converting to OPC not only reduces the floating money available for the business but also the compliance required to compute and deposit the tax is increased. Chances of missing payment and then paying interest increase accodingly.

This affect, in flip, curbs inflation (usually considered to be wholesome when between 2% and 3%), increases employment, and maintains a healthy worth of money. Fiscal policy performs an important function in managing a rustic’s economic system. For instance, in 2012 many worried that the fiscal cliff, a simultaneous enhance in tax charges and cuts in authorities spending set to occur in January 2013, would ship the U.S. economic system again into recession.


OMOs are market operations conducted by RBI by way of sale/purchase of government securities to/from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis. This means any loss or debts which is purely of business nature will not impact, personal savings or wealth of an entrepreneur. The most significant reason for shareholders to incorporate the ‘single-person company’ is certainly the desire for the limited liability.

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When you purchase stocks (or ‘values’), you turn out to be somewhat a proprietor of the business. This gives you a privilege to vote at the shareholder’s meeting and enables you to get any benefits that the organization assigns to its owners–these benefits are alluded to as profits. This certificate demonstrates that IIFL as an organization has defined and put in place best-practice information security processes. The total saving in cost only on account of fiscal incentives shall be 11.4%. Thus, the arithmetical addition of total saving on account of Excise Duty alone would be 8.94% (approximately 8% in real terms). Extension of this time limit to the year 2012 is under active consideration of the Government.

Disadvantages of Bottom up approach of Budgeting are that the budget:

With decreased investment activity, the economic system can slow down. Contractionary fiscal coverage is used to gradual economic growth, corresponding to when inflation is growing too quickly. This is because even a moderately limited stimulus if insightfully focused on, can have a multiplier impact across the whole economy.

retail investors

During times of economic boom leading to high and persistent inflation rates in the country, high-valuetreasury billsare issued to the public, which, thereby, reduces aggregate money supply in an economy. It effectively curbs the surging demand rates, and in turn, high prices hurting the poorer sections of the society. It is suitable for investors who have low-risk tolerance as they prefer security in their investment. Usually, investing in market-linked instruments, there is the uncertainty of capital appreciation.

Everyone can contribute in indirect taxes

Investors can choose to procure such government assets through depository participant commercial banks, or other registered primary dealers , wherein the security transfer follows a T+1 settlement process. Lower inflation rates, government trade, nations’ current accounts, political stability, recession, terms of trade, speculation, and other factors impact currency appreciation. The following are the types of risks while investing in government bonds.

The flipside of the expansionary fiscal policy is a contractionary fiscal policy, which includes increasing taxes or diminishing government spending, shifting aggregate demand to the left. The solvency ratio is one of the most important ratios used by investors to identify undervalued stocks that increase in price over time. The solvency ratio provides a comprehensive understanding of a company’s solvency and its ability to generate enough cash to pay off its long term debt. As an investor, you can use solvency ratios to analyse a company in the process of investing. Government bonds are debt instruments issued by the Central and State government in India to borrow money from investors.

To mobilize resources for financing the development programmes in the pubic sector

At the formulating stage, it focuses on the importance of evaluating alternative actions before the decisions are actually arrived at. Thus a is a financial plan to control future operations and results. As per the regulations put forward by the RBI, a minimum of Rs. 25,000 has to be invested by individuals willing to procure a short term treasury bill.

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In this regard, indirect taxes can be beneficial since they are spread out over a wide range of products in smaller amounts. Indirect taxes are very convenient as far as charging them is concerned. Firstly, the taxes can be very nominal and consumers do not feel burdened when paying such small amounts. Secondly, these indirect taxes are said to be ‘hidden in the price’, which means that the consumer only effectively sees the price of the commodity itself. The main sources of income for the government are Tax and Non-Tax revenue. Taxes include Income tax, Corporation tax, and Indirect taxes while the Non-Tax revenue comes from Public Sector units like income from Railways or Public sector Banks etc.

What are some problems with using fiscal policy to help the economy?

However, expansionary fiscal policy can result in rising interest rates, growing trade deficits, and accelerating inflation, particularly if applied during healthy economic expansions. These side effects from expansionary fiscal policy tend to partly offset its stimulative effects.

Should there be a rise in the price of the nation’s currency against foreign currencies, it is called currency appreciation. Make an online payment from the bank account linked to the demat account. The NSEgoBID platform can also be accessed through the NSEgoBID mobile app. You must log in and place the bid by selecting the government bond and making the online payment.

VAT was introduced on April 1, 2005 under the Congress government regime. The prime motto to introduce the VAT was to eliminate the double taxation system and abolish general sales tax laws. However, before the introduction of VAT, there was a cascading effect of taxes under which the tax was levied on a product at each step of sale. Further, the tax was levied on the value which included the tax paid by the previous buyer.

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