Notes of Budget-tools
Budget-tools
Economic Policy and Fiscal Framework
Economic Policy (EP) refers to a government's strategic approach to managing the country’s economy. It outlines how the state influences:
- Total production across agriculture, industry, and services
- National trade, both domestic and international
- Key economic variables such as savings, investments, employment, inflation, and prices
Types of Economic Systems
- Open Economy
- Engages freely in international trade with minimal restrictions.
- Controlled (Planned) Economy
- The government centrally plans and directs all economic activity.
- Mixed Economy
- Combines elements of both market freedom and government regulation.
The government can intervene actively or adopt a hands-off approach, using policy instruments to shape economic outcomes. Two primary tools used are:
- Fiscal Policy (taxation and spending)
- Monetary Policy (money supply and interest rates)
In essence, economic policy defines how and to what extent the government gets involved in regulating and guiding the economy.
Fiscal Policy: Government Budget
A budget is a comprehensive financial plan that forecasts government revenue and expenditure for a specific fiscal year. It serves as:
- A roadmap for economic direction
- A policy instrument for achieving national development
- An official statement of government priorities and strategies
- A mechanism for economic management and stability
Main Goals of the Budget
- Sustainable Economic Growth and Stability
- Promoting Social Justice and Equity
Key Fiscal Instruments (Budget tools):
| Instrument/tools | Role |
|---|---|
| Taxation | Primary source of revenue for government activities |
| Government expenditure | Funds infrastructure, social programs, and public services |
| Borrowing | Used to finance deficits and investments (domestic or foreign loans) |
1. Taxation (Revenue Income of the Government)
Taxation is the process by which the government collects money from individuals and businesses to fund public services and development.
Types of Taxes:
- Direct Taxes: Paid directly to the government by individuals or organizations (e.g., income tax, property tax).
- Progressive in nature; helps reduce income inequality.
- Indirect Taxes: Levied on goods and services (e.g., VAT, excise duty).
- Regressive in nature; affects all income groups equally.
Purpose:
- To generate revenue for running the state
- To reduce income disparities
- To control inflation and regulate demand
- To discourage harmful activities (e.g., taxes on tobacco, alcohol)
Impact:
- Influences savings, investment, demand, and consumption
- Shapes social equity when used progressively
2. Government Expenditure
This refers to the money the government spends on public services, development projects, subsidies, and administration.
Types of Government Spending:
- Recurrent Expenditure: Day-to-day running costs like salaries, pensions, subsidies, and interest payments.
- Capital Expenditure: Investments in infrastructure like roads, hospitals, schools, etc.
Purpose:
- To stimulate economic growth
- To create employment
- To reduce poverty and ensure access to basic services
- To improve infrastructure and productivity
Impact:
- Increases aggregate demand
- Improves living standards
- Can lead to budget deficits if not matched by revenue
3. Borrowing (Loans – Domestic and Foreign)
When government spending exceeds its revenue, the gap is financed through borrowing from internal or external sources.
Types:
- Domestic Borrowing: Borrowing from banks, financial institutions, or the public within the country (e.g., through bonds, treasury bills).
- Foreign Borrowing: Loans or grants from foreign governments, international organizations (e.g., World Bank, IMF).
Purpose:
- To finance development projects without immediately raising taxes
- To manage budget deficits
- To support foreign exchange reserves in some cases
Impact:
- Helps in economic expansion if used for productive purposes
- Excessive borrowing can lead to debt burden and interest liabilities
- Foreign debt may affect sovereignty and policy freedom
Other Relevant Budget Tools
4. Budget Surplus and Deficit Management
- A surplus occurs when revenue > expenditure
- A deficit occurs when expenditure > revenue
The government can adjust taxes, spending, or borrowing to maintain fiscal discipline and economic stability.
5. Public Debt Management
- Involves planning how to repay and service debts efficiently
- Aims to ensure that borrowing does not harm long-term economic health
6. Transfers and Subsidies
- Government provides financial support to vulnerable groups (e.g., farmers, poor households)
- Helps achieve social protection and income redistribution
7. Contingency Reserves
- Funds kept aside for emergencies like natural disasters, pandemics, or sudden economic shocks
Conclusion
These budget tools are vital components of a government’s economic strategy. By adjusting taxation, expenditure, and borrowing, the state influences the economy’s direction — whether it's promoting growth, ensuring stability, or achieving fairness.
Understanding these tools helps assess how government policy affects everyday life — from job creation to inflation control, and public services to national debt.
Impact of Fiscal Policy (Budget) on the Economy
Changes in taxation and government spending directly affect:
- Inflation and prices
- Levels of investment and savings
- Employment opportunities
- Demand and consumption
- Trade balance and production output
Tax Policy and Its Effects on Budget Goals
Direct Taxes (e.g., Income Tax, Property Tax)
- Help reduce income inequality
- Support social equity by redistributing wealth
- Prevent excessive accumulation of wealth by a few groups
Indirect Taxes (e.g., VAT, Excise Duties)
- Often regressive, placing a larger burden on low-income groups
- Do not significantly reduce the economic gap
- Have limited effect on achieving social justice
Summary & Insights
- Nepal's government heavily relies on tax revenue, especially indirect taxes like VAT.
- Direct taxes are more effective for achieving equity, while moderate tax rates support growth.
- A large portion of the budget goes to recurrent expenses, leaving less room for development projects.
- Borrowing remains essential to bridge the fiscal gap and support capital investment.
Prepared by Madhu Dahal
