What is Fiscal Consolidation?
Historical Background
Key Points
7 points- 1.
Revenue Enhancement: Increasing tax collection (direct and indirect), improving tax compliance, disinvestments, and optimizing non-tax revenue.
- 2.
Expenditure Rationalization: Reducing non-essential government spending, rationalizing subsidies, improving efficiency of public expenditure, and prioritizing capital expenditure over revenue expenditure.
- 3.
Debt Management: Reducing reliance on government borrowing and managing interest payments on public debt.
- 4.
Aims to achieve a sustainable level of fiscal deficit, often targeted as a percentage of GDP (e.g., 3% of GDP as per FRBM recommendations).
- 5.
Leads to lower interest rates, reduced inflation, and higher private investment by freeing up resources.
- 6.
Improves the government's creditworthiness and fosters overall macroeconomic stability.
- 7.
Can be achieved through pro-cyclical (during boom) or counter-cyclical (during recession) measures, though counter-cyclical is often preferred.
Visual Insights
Understanding Fiscal Consolidation
Key aspects of fiscal consolidation, including its objectives, methods, and impact, relevant for UPSC preparation.
Fiscal Consolidation
- ●Objectives
- ●Methods
- ●Impact
- ●Legal Framework
Recent Developments
4 developmentsFRBM targets were relaxed during the COVID-19 pandemic (2020-2022) to allow for increased government spending to support the economy.
The Union Budget 2024-25 aims to reduce the fiscal deficit to 4.5% of GDP by 2025-26.
Increased focus on capital expenditure-led growth as a strategy for fiscal consolidation, ensuring productive use of borrowed funds.
Debate continues on the quality of fiscal consolidation, emphasizing the need to cut unproductive revenue expenditure rather than essential capital spending.