Fiscal Consolidation: A Complete Overview details

The underlying fiscal deficit is decreased through fiscal consolidation. The term “fiscal consolidation” describes the measures taken by governments (at the national and sub-national levels) to lower their deficits, debt stock accumulation, and fiscal drag. It is not intended to get rid of the national debt.

The primary indicator of the government’s financial health is the fiscal deficit. The fiscal deficit is significant because it shows how much money the government borrowed during that specific year. The two main deficits of the government are the fiscal and revenue deficits.

Fiscal Consolidation India

The benefits of the economic reforms that were implemented in India in the early 1990s could not be maintained for a very long time. The combined fiscal deficit (of the federal government and the states) almost reached levels seen in 1991, the year India experienced a severe financial crisis, around the year 2000. The sustainability of debt was also growing into a significant problem.

Below are a few negative effects of fiscal deficit.

  • The interest rates rise as a result.
  • It causes inflation to rise.
  • The government is increasingly burdened by higher interest payments.

Let’s understand the fiscal consolidation in detail to help aspirants prepare for the IAS exam.

The Fiscal Responsibility and Budget Management (FRBM) Bill was introduced in the Parliament by the Atal Bihari Vajpayee-led Government of India in December 2000 because it was believed that institutional support in the form of fiscal rules would aid in establishing the agenda for the ensuing fiscal consolidation programme.

The following is a list of the government’s planned revenue and spending actions to achieve fiscal consolidation.

  • Improved government subsidy targeting and expanded the Direct Benefit Transfer programme to provide more subsidies.
  • increasing tax compliance, decreasing tax avoidance, and other methods that will increase the effectiveness of tax administration.
  • Tax revenues are increased by expanding the tax base and reducing tax breaks and exemptions, which increases the tax-GDP ratio.
  • A higher rate of economic growth will aid the government in collecting more taxes. In India, cutting back on government spending is not possible due to constitutional restrictions, so increasing tax revenue is essential to bringing about fiscal consolidation.

Three tools of Fiscal Policy

The government’s budget is referred to as “fiscal,” which is a budget. Therefore, fiscal policy is the use of government spending, taxes, and transfer payments to affect total demand and, consequently, real GDP.

The three tools of fiscal policy are briefly explained below.

  • Government Spending – Government spending can be changed to affect economic output. Spending by the government includes purchasing goods and services for the common good; this spending is known as government final consumption expenditure. Government gross capital formation is defined as expenditures made by the government on research and infrastructure with the intention of generating future benefits.
  • Transfer Payments –It is a term used to describe payments made by the government to individuals through Social Security, student loans, and social welfare programmes.
  • Taxes – Taxes are a tool for fiscal policy because they have an impact on the income of the average consumer, and changes in consumption affect real GDP. Therefore, the government can affect economic output by changing taxes. There are several ways to alter taxes.

Fiscal Discipline

A state of the ideal balance between government revenues and expenditures in an economy is referred to as fiscal discipline. Government spending will exceed government receipts if fiscal restraint is not upheld. In this scenario, the government would have to take out loans or ask the central bank to finance its deficit. Currency depreciation and inflation could result from this in a country’s economy.

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