Tamil Nadu Public Finance and fiscal Policy

Tamil Nadu Public Finance and fiscal Policy

Basic Understanding of Public Finance

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

as a practical activity of all components of public administration and
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:

Procuring public goods (production and provision);
arranging and funding various transfers (particularly in the social area);
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:

The allocation of resources is not efficient,
The economy in the area of macroeconomics indicators oscillates around the desired values and
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).

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.
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 Policy

To maintain and achieve full employment.
To stabilise the price level.
To stabilise the growth rate of the economy
To maintain equilibrium in the balance of payments.
To promote the economic development of underdeveloped countries

Revenue Receipt

Tax Revenue Comprises taxes collected and retained by the State and State’s share of union taxes under Article 280(3) of the Constitution.
Non-Tax Revenue Includes interest receipts, dividends, profits etc. Grants in Aid and Contributions
Grants-in-aid represent central assistance to the State Government from the Union Government. Includes ‘External Grant Assistance’ and ‘Aid, Material & Equipment’ received from Foreign Governments and channelised through the Union Government. In turn, the State Government also gives Grants-in-aid to Panchayati Raj Institutions, Autonomous Bodies etc.

Expenditure

Expenditure is classified as Revenue Expenditure (which is used to meet the day-to-day running of the Government), and Capital Expenditure (which is used to create permanent assets, or to enhance the utility of such assets or to reduce permanent liabilities). Expenditure is further classified under Plan and Non-plan across different services viz., General services, Social services and Economic Services.

General Services Includes Justice, Police, Jail, PWD, Pension etc.
Social Services Includes Education, Health & Family Welfare, Water Supply , Welfare of SC-ST etc.
Economic Services Includes Agriculture, Rural Development, Irrigation, Cooperation, Energy, Industries, Transport etc.

Tamil Nadu Budget Target as Fiscal Policy

The five priority missions formulated by the Government namely, water resource management, poverty reduction, housing for the poor, skill building and clean Tamil Nadu campaign along with eleven focus areas of development will continue to form the bedrock of this Government’s strategy for development.
Keeping these priorities in mind, this Budget has been formulated for the overall development of the State and the welfare of the people.
Altogether, 164 electoral promises have been implemented already and action is underway on 55 promises. Immediately upon assuming charge, the Hon’ble Chief Minister has also issued Government orders to fulfill five more electoral promises, namely,

Enhancing the maternity assistance for pregnant women from Rs.12,000 to Rs.18,000;
Closing 500 more TASMAC retail outlets;
Distributing one lakh two wheelers to working women at 50 percent subsidy, not exceeding Rs.20,000;
Doubling the financial assistance to the unemployed youth;
Constructing 5,000 houses for fishermen.

Fiscal Indicators for Tamil Nadu

The Total Revenue Receipts (TRR) of the State have been projected at Rs.1,59,363 crore in the BE 2017-2018, the Revenue Expenditure is estimated at Rs.1,75,293 crore, leaving the Revenue Deficit at Rs.15,930 crore.
Despite an increase in Revenue Expenditure due to the additional commitment of the Government towards interest payments under the UDAY scheme and cooperative loan waiver scheme, the Revenue Deficit in 2017-2018 will be contained at the previous year level.
In 2016-2017, the Government has taken over the debt of TANGEDCO to the tune of Rs.22,815 crore, which has increased the Fiscal Deficit beyond the Tamil Nadu Fiscal Responsibility Act norm of 3 percent of GSDP.
However, Government of India has given specific authorization to exceed the limit to the extent of debt takeover from TANGEDCO and allowed the State to borrow beyond three percent to absorb the burden of this debt.
A bill to amend the Tamil Nadu Fiscal Responsibility Act, 2003 will be introduced in this august House in this session.
In 2016-2017, the Fiscal Deficit will be Rs.61,341 crore which is 4.58 percent of the Gross State Domestic Product.
If the debt taken over from TANGEDCO by Government is excluded, the Fiscal Deficit in 2016-2017 will be Rs.38,526 crore, which will be 2.88 percent of the Gross State Domestic Product.
The Capital Expenditure has been estimated at Rs.27,789 crore in the BE 2017-2018.
The Fiscal Deficit has been projected at Rs.41,977 crore, which is about 2.79 percent of GSDP in the BE 2017- 2018. This will be within the norms prescribed.
It is estimated that Rs.41,965 crore would be raised as net borrowings, as against the permissible limit of Rs.45,119 crore.
The net outstanding debt at the end of 31st March, 2018 will be Rs.3,14,366 crore including the debt taken over from TANGEDCO and the DebtGSDP ratio will be 20.90 percent which is well below the DebtGSDP norm of 25 percent.

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