Fiscal policy differs from monetary policy. Monetary policy refers to
Taxation indicates the act of imposing taxes and the fact of being taxed. The government spending includes normal government expenditures, capital expenditures on public works, relief expenditures, and subsidies of various types, transfer payments,
There are three main stances in fiscal policy namely neutral, expansionary, and contractionary. Neutral fiscal policy is usually undertaken when an economy is in equilibrium. It means the Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity. Expansionary fiscal policy is usually undertaken during recessions whenever government spending exceeding tax revenue. The contractionary fiscal policy takes place when government spending is lower than tax revenue and is usually undertaken to pay down government debt.
Source of funds for government expenditure:
(i)Taxation, (ii) Seigniorage (iii) Public debts including external debts (iv) Fiscal surplus of previous years (v) Sale of assets (Ex: disinvestment of government’s stake in public sector units)
The difference between the government’s expenditures and its revenues (excluding money borrowed by the Government) is known as fiscal deficit/fiscal surplus. The fiscal deficit or surplus is normally communicated as a percentage of its gross domestic product (GDP).