FISCAL POLICY

• Fiscal policy implies the activities related to the revenue and expenditure of the government.
• The aim of the fiscal policy is maintaining the stability of the macro economy.
• Government revenue is the income for a certain financial year of the economy and
  government expenditure is the total expenditure for a year spent on activities of economic
  growth and expenses on maintaining daily affairs.

Government revenue and expenditure can be categorized as follows:

THE IMPACT OF FISCAL POLICIES ON BUSINESS 

• Taxes charged by business are used for the development of Infrastructural facilities.
• Local industries are protected by some taxes on imports.
• Tax imposed on productions may cause price increases.

 

 

TAX

• Tax is a compulsory payment that should be paid by an individual or institute imposed by the government or government authorized institution.
• Tax can be  classified as follows:

Direct tax

Direct tax is a tax paid by the  person himself or the  institution itself.

Indirect tax 

Indirect tax is the  tax that can be transferred  to another.

NON TAX REVENUE

• The government receives tax revenues as well as non tax revenues.
• The following are the examples for non tax revenue
  • Licence fees
  • Fines/ Penalties
  • Stamp duties

 

CURRENT EXPENDITURE

• Recurrent expenditure is the expenses spent on the maintenance of state services.
• Examples of current expenditure:
  • Wages and salaries
  • Interest payments

CAPITAL EXPENDITURE

• Long term investments of the government are known as capital expenditure.
• Examples of capital expenditure:
  • Construction of highways
  • Construction of bridges

 

• The government uses  monetary policy  to influence the money supply  in the economy.
• The Central Bank of Sri Lanka implements the monetary policy on behalf of the government.
• The main  aim of the monetary policy is stability of  prices   in the  home economy.
• Price stability means the long-term stability of prices.
• The following instruments are used to implement the monetary policy.
  • Interest Rates
  • Changing statuary reserve requirements
  • Open market operations
  • Changing discount rates
  • Restrictions on credit
• The interest rate used by the Central Bank of Sri Lanka to implement the monetary policy is known as Policy interest rate.
• There are three types of policy interest rates as follows:
  • Repurchase rate (Repo)
  • Reverse repurchase rate (Reverse Repo)
  • Bank intent rates

Repurchase rate 

Repurchase rate means the  interest rate paid to commercial banks and primary dealers when they  invest  their excess funds in government securities hold by the Central Bank.

Reverse repurchase rate 

Reverse repurchase rate means the interest rate charged by the Central Bank from commercial banks and primary dealers when they obtain funds from the Central Bank using government securities as collateral.

Bank rate 

Bank rate means the interest rate charged by the Central Bank when it provides loans to commercial banks to solve their liquidity problems as a “Leader of last resort”.

Statutory reserve 

• Statutory reserve means the amount of money to be kept with the Central Bank by the commercial banks according to their deposit liabilities.
• The money supply in the economy can be controlled by changing statutory reserve requirements.

Open Market Operations

Buying and selling of government securities by the Central Bank is called Open Market Operations.

• The money supply in the economy can be controlled by changing the discount rate when government securities are discounted before maturity by the commercial bank or by the parties who have bought them from the Central Bank issues.
• Restrictions on credit are implemented as quantitative and qualitative methods.

QUALITATIVE RESTRICTIONS

Credit restrictions only for selected areas are known qualitative restrictions.

QUANTITATIVE RESTRICTIONS

Quantitative restriction  methods are implemented in the following manner:

• Decide on maximum maturity period on commercial bank an loan
• Ban or limit the supply of new loans by commercial banks
• Decide on minimum deposits in issuing letter of credit