UPSC Economics Handwritten Notes Chapter 10

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Fiscal Policy refers to the government’s use of taxation and public expenditure to influence economic activity. It is mainly reflected in the government budget, which shows estimated receipts and expenditure for a financial year.

Taxes are broadly classified into direct taxes (like income tax) and indirect taxes (like GST). Government spending is divided into revenue expenditure (which does not create assets, such as salaries and subsidies) and capital expenditure (which creates assets like infrastructure).

An important concept is Aggregate Demand (AD), the total demand for goods and services in the economy. Fiscal policy regulates AD through:

• Expansionary policy (increasing spending or reducing taxes) during recession to boost growth and employment

• Contractionary policy (reducing spending or increasing taxes) during inflation to control rising prices

Key terms include fiscal deficit, the gap between total expenditure and total receipts (excluding borrowings), and public debt, the borrowing undertaken to finance this deficit.

Overall, fiscal policy aims to achieve economic stability, promote growth, ensure income redistribution, and support overall economic development.