What is fiscal policy? Discuss in brief the main objectives of fiscal policy

Fiscal policy is the deliberate change in government spending and taxes to stimulate or slow down the economy. In the words of F. R. Glahe “By fiscal policy is meant the regulation of the level of government expenditure and taxation to achieve full employment without inflation in the economy.” J. M. Keynes describes fiscal policy as the stearing wheel for the aggregate economy.

Main objectives of Fiscal Policy:

The objectives of fiscal policy differ with the state of development in the country. In advanced countries of the world, the goal of fiscal policy may be the maintenance of full employment without inflation. In developing countries the objectives of fiscal policy may be to achieve maximum level of employment and reduction economic inequalities. However the main objectives of fiscal policy are in brief as under.

1.         Removing deflationary gap: J. M. Keynes is of the view that fiscal policy can play a major role in lifting the economy out of depression and closing the deflationary gap. When the economy is a depression, it is faced with rising unemployment falling income, severe declining investment and shrinking of economic activities. The government by undertaking public works programme increases its expenditure which helps in raising the level of aggregate demand of employment in the economy. The government can also induce changes in aggregate investment by reduction of taxes, tax, relieves, abolition of sales tax, reducing excise duties etc. The tax relief measures are also an effective method to raise the level of aggregate demand and removing deflationary gap from the economy.

2)         Fiscal policy in Inflation: If the economy of a country is faced with inflationary gap, then anti-cyclical fiscal policies should be adopted to bring down the prices and for closing the inflationary gaps. The main fiscal measures to bring down the excess demand in the economy are (i) Reduction in government expenditure (ii) Increase in taxes and (iii) Creating a budget surplus. By adopting contractionary fiscal policy, the aggregated demand curve shifts downward, and the economy begins to operate at the desired potential level of income.

3)         Counter Cyclical fiscal policy: Another important objective of fiscal policy is to minimize the fluctuations in aggregate demand so that the economy is always at its target and potential level of income. The fluctuations in the economy which are associated with the business cycles can be smoothed in a number of ways. For example when the aggregate demand rises rapidly in the expansionary phase of the business cycle, it can be tuned by reducing government expenditure or raising taxes. This will help in dampening down the expansionary phase. In the recessionary phase the problem of unemployment and low growth can be covered and remedied by cutting taxes and raising government expenditure. If timely counter cyclical fiscal measure is adopted the problems of excess or deficiency of demand will never be severe and economy operates at the potential level of income which is called fine tuning.

4)         Equilibrium in balance of payment: The level of national income is also affected by the balance of payments position of the country. If the country has a favourable balance of payments it will lead to increase in income. This rise in aggregate demand will shift the demand line upward and will increase the level of national income. The all in the balance of payments has effect. The government uses fiscal policy in such a way that the balance of payments remains in equilibrium in the short run.

5)         Economic Growth: The elements of Keynes fiscal policy were developed in 1930’s. Since then, the Keynesian fiscal policy is in action. The economists believe even now that if the economy is operating below its potential level, the increase in government expenditure and cut in taxes is the perfect medicine to bring the economy back to its full employment level. The economist’s stress that government should encourage investment to increase the rate of capital formation by using timely proper fiscal measures. The government borrowing for financing schemes of development, the increase in ratio of savings to national income, cut in taxes to increase investment spending can accelerate the rate of capital for nation in the country and lead to economic growth.

Small business owners: Get your bookkeeping done the smart way!

Small business owners are a lot of times strapped for cash. This has to do with the fact that investment is lesser than the amount of work which has to be done in the day. It is a fairly common sight to see small business owners doing the work of three or more people. In short, business owners try to do all that they can if it saves them in cost of hiring a person.

This is understandable and a clever strategy for most things but time consuming activities such as bookkeeping. It is true that bookkeeping is not rocket science. However, it is also largely accepted to be a mundane and time consuming activity. A business owner who is already pressed for time is totally frustrated when they realize that they have to spend a few hours on bookkeeping. They can’t help but think of the several other things they could have accomplished in the time spent doing bookkeeping inefficiently. That said all small business owners don’t always suffer from this problem. Some seek out the clever solution of bookkeeping outsourcing

“Bookkeeping outsourcing has allowed me to get my books done on a budget”

You will hear a lot of things being said on the same lines. Anyone who has successfully tried bookkeeping outsourcing services will never go back to getting it done in their city. Why? The cost benefit is fantastic given that it costs less than half of what it costs locally. Also the quality of work is on par with what you get in the city. Why would anyone pay more then?

If you haven’t tried this option, you really ought to let go of all the apprehension and give it a shot. Chances are that you will never be burdened by bookkeeping again.

Define Budget also the difference parts of expenditure of federal budget

Budget of a government a statement of its finances for a particular year. It indicates how the government or a public body concerned proposes to raise its revenue and incur its expenditure. If the expenditure happens to be in excess of revenue, the government state how the gap is to be met through raising various types’ taxes or loans.

A government in Pakistanwhether federal or provincial, has two sections of budget (1) Revenue budget (2) Capital budget. The revenue budget is concerned with the current needs and functions of government like defence, civil administration, judicial services, police and beneficent activities in the field of education, health, agriculture etc.

The capital budget of the government is concerned with building of lasting works of a capital nature, like irrigation, canals, dams, roads and other constructions.

Major Expenditure Heads of the Federal Budget:

As we know that Public Expenditure may be (i) Development Expenditure which is shown in the Capital Budget or what may be called Development Budget. The expenditure in the Revenue Budget is mostly Non-Development Expenditure. The major heads of expenditure are discussed below.

i) Debt Services: Under this head are included interest on debt and other obligations and provision for reduction and avoidance of debt. This expenditure has been on the increase.

ii) Defence Services: The next to debt services comes the most important spending deparnent of Federal Government and takes away a high proportion of its total is defence services.

iii) Development Expenditure or ADP: The Annual Development Programme of the Government in the Public 

Sector has following objectives.

a) To consolidate investment level.

b) To bring about improvement in the standard of living of the common man.

c) To build up social and physical infrastructure, particularly the efficient transport and communication system which can help in achieving the objectives of balanced development and integration of the economy.

d) To enlarge employment opportunities by identifying areas in which labour intensive intermediate technology can be effectively used.

e) To give maximum push to agriculture as well as to industries serving it and based on it.

f) To accelerate the pace of development in the less developed areas.

g) To make provision for implementing policies in the field of health, education labour and wages.

h) To implement people’s works and other rural development programmes.

Within this framework ADP seeks.

1) To earmark more funds for major on going projects such as Motorway and power projects.

2) To protect the requirement of agricultural inputs which yield quick returns?

3) To expand the water logging and salinity control work in view of its importance for agricultural development.

direct and indirect taxes, give examples and examine their comparative advantages and disadvantages

Direct Tax: A tax is said to be direct when impact and incidence of a tax are on one and same person i.e. when a person on who tax is levied is the same who finally bears the burden of tax. For instance income tax is a direct tax because impact and incidence falls on the same person.

Advantages of Direct Tax: Following are advantages of direct tax.

1. Direct taxes afford a greater degree of progression. They are therefore more equitable.

2. They entail less expense on collection and as such are economical.

3. They satisfy canons of certainty, elasticity productivity and simplicity.

4. They create civic consciousness in people. When a person has to bear burden of tax, he takes active interest in affairs of state.

Disadvantages of Direct Tax: Disadvantages of direct tax are as follows:

1. It is easy to evade a direct tax than an indirect tax. Tax payer is seldom happy when he pays tax. It pinches him that his hard earned money is being taken by government. So he often submits false statements of his income and thus tries to evade tax. Direct tax is in fact a tax of honesty.

2. Direct tax is very inconvenient because tax payer has to prepare lengthy statements of his income and expenditure. He has to keep a record of his income up to date throughout the year. It is very laborious for tax payer to prepare and keep these records.

3. Direct tax is to be paid in lump sum every year while income which a person earns is received in small amounts. It often becomes difficult by tax payer to pay large amounts in one instalment.

Indirect Taxes: Indirect taxes are those taxes which are paid in the first instance by one person and then are shifted to some other persons. The impact is on one person but the incidence is on another person. For example sale tax on saleable articles is usually an indirect tax because it can be shifted onto the customers.

Advantages of Indirect Tax: Advantages of indirect taxes are as under.

1. It is not possible to evade indirect tax. The only way to avoid this tax is not to by taxed commodities.

2. They are more convenient because they are wrapped in prices. Customer does not know often that he is paying tax.

3. Every member of the society contributes something towards the revenue of the state.

4. Indirect tax is also elastic to a certain extent. State can increase its revenue with in limits by increasing rates of taxes.

5. If state wishes to discourage consumption of intoxicants and harmful drugs, it can raise their prices by taxing them. This is a great social advantage which a community can achieve from tax.

Disadvantages of Indirect Tax: Disadvantages of indirect tax are as under.

1. A very serious objection levelled against indirect taxation is that it is regressive in character. It is inequitable. Burden of tax falls on poor people than rich.

2. Indirect tax is also uneconomical. State has to spend large amounts of money on collection of indirect taxes.

3. Revenue from indirect taxes is uncertain. State cannot correctly estimate as to how much money it will receive from this tax.

4. An indirect tax is wrapped in prices; therefore, it does not create civic consciousness.

5. If goods produced by manufacturers are taxed at higher rates, it hampers trade and industry and causes widespread unemployment in the country.

What are the various Canons or Principles of taxation followed by the modern government

Adam Smith, the father of modern political economy has laid down four principles or canon of taxation in his famous book “Wealth of Nations”. These principles are still considered to be the starting point of sound public finance. Adam Smith’s celebrated canons of taxation are:

(1) Canon of equality or ability.

(2) Canon of certainty

(3) Canon of convenience

(4) Canon of economy

(5) Other canons.

These canons of taxation are described as under.

1)         Canon of equality or ability: Canon of equality or ability is considered to be a very important canon of taxation. By equality we do not mean that people should pay equal amount by way of taxes to the government. By equality is meant equality of all sacrifice, which is people, should pay taxes in proportion to their incomes. This principles point to progressive taxation. It states that the rate of percentage of taxation should increase with increase in income and decrease with decrease in income. In the words of Adam Smith “The subject of every state of ought to contribute towards the support of the government as early as possible in the proportion to their respective abilities that is in proportion to the revenue which they respectively enjoy under the protection of the state.”

2)         Canon of certainty: The canon of certainty implies that there should be certainty with regard to the amount which tax payer is called upon to pay during the financial year. If the tax payer is definite and certain about the amount of the tax and its time of payment, he can adjust his income to his expenditure.

The state also benefits from this principle, because it will be able to know roughly in advance the total amount which it is going to obtain and the time when it will be at its disposal. If there is an element of arbitrariness in a tax, it will then encourage misuse of power and corruption. Adam Smith in this connection remarks, “The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment the manner of payment, the quantity to be paid all ought to be clear and plain to the contributor and to every other person.”

3)         Canon of convenience: By this canon, Adam Smith means that the tax should be levied at the time and the manner which is most convenient for the contributor to pay it. For instance, if tax on agriculture land is collected in instalments after the crop is harvested, it will be very convenient for the agriculturists to pay it. Similarly property tax, house tax, income tax etc should be realised at a time when tax payer is expected to receive income. The manner of payment of tax should also be convenient. If the tax is payable by cheques, the contributor will be saved from much inconvenience. In the words of Adam Smith “Every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay it.”

4)         Canon of economy: The canon of economy implies that the expenses of collection of taxes should not be excessive. They should be kept as little as possible consistent with administration efficiency. If the government appoints highly salaried staff and absorbs major portion of the yield, the tax will be considered uneconomical. Tax will also be regard as uneconomical if it checks the growth of capital or cause to immigrate to other countries. In the words of Adam Smith, “Every tax is to be so contrived as both to take out and keep out of pockets of the people as little as possible over and above what it brings into the public treasury of the state.”

5)         Other canons: Some writers on Public Finance have formulated four other important principles of taxation. They in brief are as follows.

(i) Canon of productivity: The canon of productivity indicates that a tax when levied should produce sufficient revenue to the government. If a few taxes imposed yield a sufficient fund for the state, then they should be preferred over a large number of small taxes which produce less revenue and are expensive in collection.

(ii) Canon of elasticity: Canon of elasticity states that the tax system should be fairly elastic so that if at any time the government is in need of more funds, it should increase its financial resources without incurring any additional cost of collection. Income tax, railway fares, postal rates etc are very good examples of elastic tax. The government by raising these rates a little can easily means its rising demand for revenue.

(iii) Canon of simplicity: Canon of simplicity implies that the tax system should be fairly simple, plain and intelligible to the tax payer. If it is complicated and difficult to understand, then it will lead to oppression and corruption.

 
(iv) Canon of diversity: Canon of diversity says that the system of taxation should include a large number of taxes which are economical. The government should collect revenue from its citizens by levying direct and indirect taxes. Variety in taxation is desirable from the point of view of equity, yield and stability.

Would you love it if you got bookkeeping services at your rates?

Now this is something a lot of business owners would die for. Bookkeeping is one of those things that really come in the way of having more time for business, at least in the beginning stages. First off, it is assumed to be very simple. It is said to be simple enough that you need not hire a bookkeeper to do the job. This is what gets most business owners into trouble.

It is not as simple as it looks!

The crux of bookkeeping is nothing but recording of expenses and income with documents to back the transactions. It is not rocket science. However, things get complicated when there is software involved. Let’s face it. A lot of us are not software savvy. We are maybe good at many tasks but software could baffle us and leave us struggling. Most of today’s bookkeeping is software based. What’s worse is that popular bookkeeping software is designed for bookkeepers and accountants rather than lay people. Hence if a bookkeeper were to learn the ropes of bookkeeping, he/she is going to have to struggle quite a bit.

Hiring a bookkeeper is not an option for many

This is understandable given that there are obvious budget constraints with small businesses. Also, there are always more urgent expenses to attend to. However, all is not lost with hiring a bookkeeper when you can take up bookkeeping outsourcing services with a credible outsourcing company.

Yes, you read right. There are companies today that offer bookkeeping outsourcing services. It functions like any outsourcing service. You need not worry about the costs and the risks. There are systems in place to assure you that your financial data is safe and in the best hands they could be.

The benefits are immense, the cost savings being the biggest one. Next to that comes flexibility. You are paying the bookkeeper only for the amount of time (hours) they spent on your task.

All in all this is the smartest way to get bookkeeping done on a budget.