Bihar Public Finance and fiscal Policy

Bihar Public Finance and fiscal Policy

Basic Understanding of Public Finance

Public finance as a concept may be understood on two levels –

  1. as a practical activity of all components of public administration and
  2. As a theoretical area.
  • The term “public finance“ may be defined as the identification of specific financial relationships and functions running between public administration bodies and institutions (i.e. public sector entities – the state) as one party and in mutual interaction with other entities of the economic system as the other party (i.e. private entities – households and companies).
  • These relationships and functions may be considered special as they include:
  1. Procuring public goods (production and provision);
  2. arranging and funding various transfers (particularly in the social area);
  3. Directing entities existing in the economy towards socially desirable behaviours; for instance through taxes, penalties, subsidies and other stimuli and charges.
  • In order to arrange the funding of the above-mentioned areas, there is a fiscal system (public budgeting system) whose aim is to collect the required amount of public revenue. Public revenue serves, at various levels of public budgets (governmental, regional and local), to fund public expenditures.
  • Public expenditures, public revenue and particularly taxes may be considered to be the fundamental elements of public finance. Important terms derived from these three elements include deficit, public debt, budgetary policy and fiscal policy.
  • The development of public finance is connected with economic mechanisms that should ideally lead to the effective and fair allocation of limited resources.

Public Finance – Causes of Development

  • The reason for developing public funding is the state intention to soften the drawbacks resulting from economic decisions made by individual entities (households and companies). It uses fiscal tools (public revenue and expenditure) to accomplish this.
  • Certain behaviour is classified as the “quasi-fiscal funding principle”, where publiclaw goods are funded from off-budgetary resources (e.g. the public-law television in the Czech Republic is funded from television licence fees).
  • Another important term that relates to public finance, and that is also a strong argument for its development, is market failure.
  • The market system follows supply and demand through the price mechanism. It is a system that has developed itself, and that has strong ties with the interactions between people and companies.
  • All these entities strive to maximize their benefit (welfare). The greatest benefit is strongly interconnected with reaching the economic optimum condition.
  • A system that reaches the optimum is considered, in the neoclassical economics concept, to be efficient, fair and stable.
  • The ideal condition is called the Pareto optimum. This exists in an economy when none of the involved entities can improve its position without worsening another entity’s position. If any of the entities intends to improve its position, it is possible for it to do so only to the detriment of another entity. The existence of perfect competition is a necessary requirement for reaching the optimum.
  • The three above-mentioned elements (efficiency, stability and fairness) are connected with microeconomics from the viewpoint of efficiency, connected with macroeconomics from the viewpoint of stability, and connected with sciences outside economics from the viewpoint of fairness. The perception of fairness is investigated by other social sciences, and is closely linked to ethics, etc.
  • If no conditions exist for reaching a market-efficient solution, or the conditions are simply violated for any reason, market failure will ensue.
  • It consists of the following:
  1. The allocation of resources is not efficient,
  2. The economy in the area of macroeconomics indicators oscillates around the desired values and
  3. The distribution of wealth and income may diverge from the consensus on fairness.
  • It is then up to the state to perform its fiscal function (the public finance function) in those three areas in order to preferably eliminate or at least reduce market failure. Specifically, those are microeconomic failures from the allocation function perspective, macroeconomic failures from the stabilization function perspective, and the redistribution function then falls into the area of market failure caused by outside economies.
  • If the conditions for perfect competition are not met, a malfunction in the price mechanism will arise, which disturbs the allocation mechanism. Some failures can be eliminated without public finance intervention through auto-regulation (the internalization of externalities). However, others are part of the government’s allocation function and its fiscal tools (taxes and governmental purchases or transfers).
  • Macroeconomic failure is indicated by instability in the economic system that usually suffers from cyclical inflation, a high rate of unemployment, low or even negative growth of production or problems in the foreign trade balance, etc.
  • The above-mentioned macroeconomic cases of instability are why governments perform the state stabilization functions (stabilization fiscal functions).
  • The state uses several tools to perform the stabilization function. The basic classification is a division into monetary and fiscal tools. The monetary tools include open market operations, the setting of basic interest rates, determining the level of mandatory minimum reserves, etc. Fiscal tools may include public expenditure, public revenue and ways of funding deficits.
  • The causes of market failure outside the economy relate to reaching fairness in society through the distribution of wealth and income. With the distribution of wealth, the market does not practically perceive fairness. In this case, the state performs a redistributive role with 5h3 principles of solidarity, social conscience, charity, etc. based on the social consensus.
  • The state performs the redistribution function through two basic categories of tools. The first includes revenue (tax) and the other expenditures (transfers, grants and subsidies).
  1. First, a tax transfer mechanism may be implemented through a combination of progressive taxation of high incomes and transfers (subsidies) in favour of low income households.
  2. Secondly, this can occur through the taxation of luxury goods combined with subsidies on goods for the low-income population.

Fiscal Policy Meaning

  • Arthur Smithies defines fiscal policy as “a policy under which the government uses its expenditure and revenue programmes to produce desirable effects and avoid undesirable effects on the national income, production and employment.”
  • Though the ultimate aim of fiscal policy in the long-run stabilisation of the economy, yet it can be achieved by moderating short-run economic fluctuations.
  • In this context, Otto Eckstein defines fiscal policy as “changes in taxes and expenditures which aim at short-run goals of full employment and price-level stability.

Objective of Fiscal PolicyBihar Public Finance and fiscal Policy

  1. To maintain and achieve full employment.
  2. To stabilise the price level.
  3. To stabilise the growth rate of the economy
  4. To maintain equilibrium in the balance of payments.

To promote the economic development of underdeveloped countries

Data of Bihar Fiscal situation in 2016 (Based on CAG report)

The significant changes during 2015-16 over the previous year are given below:

  • Revenue receipts during the year increased by 22.58 per cent (17,705.56 crore). The increase was mainly due to increase in State’s share of Union taxes and duties by 32.36 per cent (11,959.61 crore) and own tax revenue by 22.65 per cent (4,698.95 crore).
  • State’s tax revenue (25,449.18 crore) was below the FFC assessment (31,881 crore) by 20.17 per cent (6,431.82 crore) and below the Budget estimate (30,875 crore) by 17.57 per cent (5,425.82 crore). The increase in tax revenue was mainly due to increase in Taxes on Sales, Trade etc. by 23.19 per cent (1,996.24 crore), Taxes on Goods and Passengers by 36.75 per cent (1,635.87 crore), Taxes on Stamps and Registration by 26.27 per cent (709.08 crore).
  • Non-tax revenue (NTR) (2,185.64 crore) increased by 40.29 per cent (627.66 crore) over the previous year. The increase in non-tax revenue was mainly due to increase in Interest Receipts by 238.89 crore and owing to increase in Contributions and Recoveries towards Pension and Other Retirement Benefits by 175.16 crore. However, the Non- tax revenue was 35.64 per cent (1,210.22 crore) below the Budget estimate (3,395.86 crore) and 20.70 per cent (570.36 crore) below the assessment made by FFC (2,756 crore).
  • Revenue expenditure (83,615.94 crore) during the year increased by 15.22 per cent (11,045.96 crore). The increase was mainly due to increase in expenditure on Economic Services by 36.35 per cent (5,251.34 crore), Social Services by 13.34 per cent (4,230.33 crore) and General Services by 5.92 per cent (1,564.12 crore). However, Revenue expenditure during the year was below by 8.32 per cent (7,592.17 crore) than the budget estimate (91,208.11 crore) for the year 2015-16. • During the year the Non-Plan expenditure (revenue and capital) increased by 14.61 per cent (6,884.34 crore) and the Plan expenditure (revenue and capital) increased by 22.88 per cent (9,977.23 crore), when compared with the previous year.
  • Recoveries of loans and advances decreased by 98.76 per cent (1,474.56 crore). However, disbursements of loans and advances increased by 68.49 per cent (252.52 crore).
  • Capital expenditure increased by 32.04 per cent (5,815.61crore) during the year.
  • Public Account receipts increased by 22.00 per cent (8,854.76 crore) whereas disbursements increased by 17.15 per cent (6,722.36 crore).
  • The receipts under Public Debt increased by 32.09 per cent (4,465.48 crore) whereas its repayment increased by 14.30 per cent (515.90 crore).
  • The net impact of these transactions led to an increase by 84.89 per cent ( 5,379.61 crore) in the cash balance at the end of the year

Budget Highlights 2017-18

  • The Gross State Domestic Product of Bihar for 2017-18 at current prices is estimated to be Rs 6, 32,180 crore. This is 17% higher than the revised estimates for 2016-17.
  • Total expenditure for 2017-18 is estimated to be Rs 1,60,086 crore, 3.7% higher than the revised estimates of 2016-17. In 2016-17, there was an increase of Rs 9,631 crore (6.7%) in the government’s expenditure during the year, over the budget estimate.
  • Education received the highest allocation of Rs 25,251 crore in 2017-18, which is 11% higher than the revised estimates of 2016-17. Other departments that have witnessed an increase in allocation include Rural Works (24%) and Panchayat Raj (21%). On the other hand, the Department of Energy (-30%) and Health (-16%) have witnessed a decrease in allocation.
  • Total receipts (excluding borrowings) for 2017-18 are estimated to be Rs 1,37,176 crore, an increase of 9.5% over the revised estimates of 2016-17. In 2016-17, total receipts exceeded the budgeted target by Rs 1,163 crore. This is primarily on account of an increase in grants received from the centre to implement the National Food Security Act, and the Mahatma Gandhi National Rural Employment Guarantee Act, among others.
  • Bihar’s tax revenue is expected to be Rs 32,001 crore in 2017-18. This is an increase of 14.7% (Rs 4,104 crore) over the revised estimates of 2016-17. Sales Tax collection (76% of the total own tax revenue) is expected to be Rs 24,400 crore. This is 74% higher than the revised estimates of 2016-17.
  • No tax proposals have been made in the budget. Note that the Goods and Services Tax (GST) is expected to be rolled out in 2017-18. It will subsume some taxes such as Sales Tax and Entertainment Tax (unless it is levied by local bodies).
  • Revenue surplus for the next financial year is targeted at Rs 14,556 crore, or 2.3% of the Gross State Domestic Product (GSDP). Fiscal deficit is targeted at Rs 18,112 crore (2.9% of GSDP). Note that during 2016-17, fiscal deficit is estimated to be Rs 22,512 crore, which is 4.2% of GSDP. This is higher than the 3% limit recommended by the 14th Finance Commission

Deficits, Debts and FRBM Targets for 2017-18

  • The Fiscal Responsibility and Budget Management (FRBM) Act, 2006 of the state provides annual targets to progressively reduce the outstanding liabilities, revenue deficit and fiscal deficit of the state government.
  • Revenue deficit: It is the excess of revenue expenditure over revenue receipts. A revenue deficit implies that the government needs to borrow in order to finance its expenses which do not create capital assets. However, the budget estimates a revenue surplus of Rs 14,556 crore (or 2.3 % of GSDP) in 2017-18. This implies that revenue receipts are expected to be higher than the revenue expenditure, resulting in a surplus. The estimate indicates that the state is meeting the target of eliminating revenue deficit, as prescribed by the 14th Finance Commission.
  • Fiscal deficit: It is the excess of total expenditure over total receipts. This gap is filled by borrowings by the government, and leads to an increase in total liabilities of the government. A high fiscal deficit may imply a higher repayment obligation for the state in the future. In 2017-18, fiscal deficit is estimated to be Rs 18,112 crore, which is 2.9% of the GSDP. This is within the limit prescribed by the 14th Finance Commission.
  • Outstanding Liabilities: It is the accumulation of borrowings over the years. In 2017-18, the outstanding liabilities are expected at 19.78% of GSDP.
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