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Payong, Kendrick

Rami, Fiona N.
Del Rosario, Moneth
Allera, Ma. Yazmine Glofe
Bautista, John Myers
NATURE OF FISCAL POLICY
Fiscal policy is commonly looked upon as
comprising those variations in
government tax and expenditure
programs which are undertaken with the
express purpose of securing the goals of
macro-economic policy. It is therefore but
one aspect of the system of public finance
and does not include measures which are
undertaken for reasons of allocate
efficiency or which reflect a concern with
the distribution of income.
Since changes in tax and expenditure policies
often imply a change in the size of the
national debt, variations in debt policy are
often included under the general heading of
fiscal policy. Whilst we refer briefly to the
choice between taxation and debt in the
financing of any given expenditure program,
we consider debt management policy — by
which we mean changes in the composition
of a given debt — to be an entirely separate
and distinct policy question and one beyond
the scope of our current concern.
Example :
A government is capable of directly affecting
economic activity in response to fluctuations in
macroeconomic growth. Via taxation and public
spending, a government can control price inflation,
unemployment rates, and interest rate levels.

For instance, in order to curb price inflation, which is


associated with high levels of consumer spending, a
government may institute higher taxes resulting in
lower levels of disposable income. Likewise, a
government might engage in public spending in
order to increase an economy's cash flow during
times of recession.
FISCAL FUNCTION
There are four primary Functions of Fiscal Policy

1. THE ALLOCATIVE FUNCTION

• The first major function of fiscal policy is to determine


exactly how funds will be allocated. This is closely
related to the issue of taxation and spending, because the
allocation of funds depends upon the collection of taxes
and the government using that revenue for specific
purposes.

• The national budget determines how funds are allocated.


This means that a specific amount of funds is set aside for
purposes specifically laid out by the government. This
has a direct economic impact on the country.
FISCAL FUNCTION
2. THE DISTRIBUTIVE FUNCTION

 The distribution function of fiscal policy is to


determine more specifically how the funds will
be distributed throughout each segment of the
economy.

 It is the adjustment of the distribution of income


and wealth to assure conformance with what
society considers a ‘fair’ or ‘just’ state of
distribution.
FISCAL FUNCTION
3. THE STABILIZATION FUNCTION

 Stabilization is another important function of fiscal


policy in that the purpose of budgeting is to provide
stable economic growth. Without some restraints on
spending, the economic growth of the nation could
become unstable, resulting in periods of unrestrained
growth and contraction.

 The cyclical nature of the market means that


unrestrained growth cannot continue for an indefinite
period. When growth period end, they are followed y
contraction in the form of recessions or prolonged
recession known as depression.
FISCAL FUNCTION
4. DEVELOPMENT FUNCTION

 Development seems to indicate economic growth, and that


is, in fact, its overall purpose. However, fiscal policy is far
more complicated than determining how much the
government will tax citizens one year and then
determining how that money will be spent.

 True economic growth occurs when various projects are


financed and carried out using borrowed funds. This stems
from the belief that the private sector cannot grow the
economy by itself. Instead, some government input and
influence are needed. Borrowing is one way in which the
government brings about development.
FISCAL POLICIES
It refers to decisions about government
spending, taxes and debt in both the short
and the long run.
PUBLIC EXPENDITURES
It is spending made by the government of a country
on collective needs and wants such as pension,
provision, infrastructure, etc.

Ex. Expenditure on Education, Health


TAXATION
Taxation is the practice of collecting taxes
(money) from citizens based on their
earnings and property. The money raised
from taxation supports the government
and allows it to fund police and courts,
have a military, build and maintain roads,
along with many other services.

Ex. Reduction in taxable personal (or


household)
FOREIGN DEBT
WHAT IS FOREIGN DEBT?

Foreign debt is an outstanding loan or set of


loans that one country owes to another
country or institutions within that country.
Foreign debt also includes obligations to
international organizations such as
the World Bank, Asian Development
Bank or Inter-American Development
Bank.
FOREIGN DEBT
EXAMPLE OF FOREIGN DEBT

The debt must be owed by a resident to a non-


resident. Residence is determined not by
nationality, but by where
the debtor and creditor have headquartered
their centers of economic interest.
Debtors can be sovereign nations,
corporations or private individuals. The debt
itself can take the form of money owed to
private banks, outside governments or
global financial institutions like the World
Bank or International Monetary Fund (IMF).
FOREIGN DEBT
Foreign debt is placed within four broad
categories:

 Private non-guaranteed debt


 Public and publicly guaranteed debt
 Central bank deposits
 Loans due to the World Bank and IMF
THE BIGGEST DEBTOR
COUNTRIES (Top 10)
1. JAPAN
 National Debt: ¥1,028 trillion or $9.08 trillion USD
 Debt-to-GDP Ratio: 220.82%
2. GREECE
 National Debt: €332.6 billion ($379 billion US)
 Debt-to-GDP Ratio: 179%
3. PORTUGAL
 National Debt: €232 billion ($264 billion US)
 Debt-to-GDP Ratio: 138.08%
4. ITALY
 National Debt: €2.17 trillion ($2.48 trillion US)
 Debt-to-GDP Ratio: 137.81%
5. BHUTAN
 National Debt:$2.33 billion (USD)
 Debt-to-GDP Ratio: 118.6%
THE BIGGEST DEBTOR
COUNTRIES (Top 10)
6. CYPRUS
 National Debt: €18.95 billion ($21.64 billion USD)
 Debt-to-GDP Ratio: 115.47%
7. BELGIUM
 National Debt: €399.5 billion ($456.18 billion USD)
 Debt-to-GDP Ratio: 114.78%
8. UNITED STATES OF AMERICA
 National Debt: $19.23 trillion (USD)
 Debt-to-GDP Ratio: 106.1%
9. SPAIN
 National Debt: €1.09 trillion ($1.24 USD)
 Debt-to-GDP Ratio: 105.76%
10. SINGAPORE
 National Debt: $350 billion ($254 billion US)
 Debt-to-GDP Ratio: 104.7%
STRINGS ATTACHED TO FOREIGN
LOANS FOR THE POOR
 The debtor allows the borrower to make a long
term business, medium term business and for
purposes of business plans.
 Investment project of the enterprise that the
business has direct capital contribution, provided
that, the ratio of borrower’s loan on the total loan
turnover for the business plan.
 Investment projects does not based on borrower’s
capital contribution ratio in that enterprise.
 These business plans, investment projects must be
approved by competent authority and must be in
accordance with licenses of business/enterprises
that borrower has direct capital contribution.
THE NEGATIVE EFFECTS
OF FISCAL POLICY
 Recognition Lag
 Crowding Out
 Rational Expectations
 Increased Deficit Levels
LIMITATIONS OF FISCAL
POLICY
 Forecasting: serious limitation of fiscal policy is the
practical difficulty of observing the coming events of
economic instability.
 Correct Size and Nature of Fiscal Policy: The most
important necessity on which the success of fiscal policy
will depend is the ability of public authority to frame the
correct size and nature of fiscal policy on the one hand and
to foresee the correct timing of its application on the other.
Cont..
 Inadequacy of Fiscal Measures: In anti-
depression fiscal policy, the expansion of
public spending and reduction on taxes are
always important elements.
 Adverse Effect on Redistribution of
Income: It is felt that fiscal policy measures
redistribute income, the actual effect will
be uncertain.
 Solution for Unemployment: The purpose
of fiscal policy will be defeated if the
policy can not maintain a rising supply
level of work effort.
COORDINATION OF FISCAL
AND MONETARY POLICY
The fiscal policies have a direct impact
on good market and monetary policies
have a direct impact on the asset
market; Since the 2 markets are
connected to each other within the
output and interest rates, the policies
interact whole influencing output and
interest rates.
Fiscal Politics
Politics influence economic outcomes through
various channels, including structural reforms
and monetary and fiscal policies. The
proximity to elections can affect the mix of
government’s spending plans. Political
divisions could lead to larger fiscal deficits
and public debt. Political ideology can have
an influence on the design of tax and
expenditure policies. With politics affecting
fiscal outcomes, the issue that arises is
whether fiscal rules and institutions can make
a difference.