Every country wants to control its economic and financing conditions. To control financing and economic conditions, every country uses two types of policies: monetary policy and fiscal policy. Monetary policy is controlled by the central bank of the country like: Reserve Federal Bank of United States. and Reserve Bank of India. Fiscal policy is controlled by the central government of the country. Monetary policy controls the bank’s interest rates, supply of money, distribution of money between individuals, and growth in the level of investments in the country. Fiscal policy controls the government’s income and expenditure. It also controls the stages or (slabs) of tax rates of the government and the distribution of money in projects of the government.
Monetary policy:
Monetary policy estimates the total supply of money in the economy, which is controlled by the central banks for the rational distribution of money in the economy. It mainly regulates the interest and credit rates in the economy.
Fiscal policy:
Fiscal policy estimates the total revenue and expenditure of the government during a fiscal year. It provides better estimation to the government to frame future policies for future investments. It is mainly controlled by the central government.
Also read: MICROECONOMICS vs MACROECONOMICS
Components of Monetary Policy:
Monetary policy components are (SLR) Statutory Liquidity Reserve Ratio, (CRR) Cash Reserve Ratio, Bank Rate, and Repo Rate. These instruments are controlled by the central bank. These instruments are important to study to understand the concept of monetary policy.
1. Bank Rate: The bank rates are rates, which are provided by the central bank as loans to commercial banks on some specified interest rates. This is done for the control of the supply of money in the country. As the bank rates increase, the demand for loans will decrease. This is done to reduce (excess demand). If bank rates decrease, then demand will rise, which helps in an increase in investment, where the public increases their expenses in the market, which leads to the flow of money in the market.
2. (SLR): Statutory Liquidity Ratio is concerned with maintaining the minimum assets of commercial banks with the Central Bank. It can be of any type and may be fixed or liquid. It is maintained to compensate for any Financial deficiency. It can control demand and supply of money in the economy. It controls the asset liquidity of banks.
3. (CRR): Cash Reserve Ratio is concerned with maintaining the minimum cash of commercial banks with the central bank. It is to control the money supply in the economy. If the (CRR) ratio increases, it will lead to a decrease (excess demand) in the economy. In a vice-versa situation, it will lead to (an increase in the demand) in the economy.
4. Marginal Requirements: Marginal requirements determine the gap or margin between market value of security and loan value, which is granted by the commercial bank to individuals. For example: For a loan of (1 lakh rupees), the bank grants only (80 thousand rupees) loan, the rest( 20 thousand) will be kept as a security. So, banks could earn a margin.
5. Repo Rate: Repo rate is set by the central bank. When the central bank provides loans to commercial banks, here the central bank charges some collateral security from commercial banks with some interest rate. This is due to the control of cash liquidity and the flow of money in the economy and market.
Components of the Fiscal policy:
Fiscal policy components are: Government Receipts, Government Expenditures, Public debt. and bonds. It is mainly controlled by the government of the country. It provides estimation to the government for future policies. This instruments are also important for understanding the fiscal policies:
1. Government Receipts: Fiscal policy shows the receipts of the government during an accounting year, like: taxes, fines, sale of assets etc. Basically it is of two types: Revenue receipts (RR) and Capital receipts(CR). The government uses that money for the development projects in the country like infrastructure developments, advances grants to the public etc. It is done on an annual basis.
2. Government Expenditure: Fiscal policy shows the total expenditure of the government during the financial year, like borrowing of debt. from other countries, purchase of the asset,which generally increases the expenses of the government, developments projects etc. It is also of two types: Revenue Expenditure (RE) and Capital Expenditure. The fiscal policy states that the liability of the government should not grow rapidly.
3. Public Debt.: Public debt. and bonds are the securities raised by the central government as it is the other source of generating funds for the government at cheaper rates. Here the government raises funds from the public as loans and bonds. It is the responsibility of the government to return the money to the public.
Difference between Monetary policy vs Fiscal policy
| Basis | Monetary policy | Fiscal policy |
| Control | It is controlled by the central bank like: Federal bank of U.S.A, Central bank of India, Central bank of U.K etc. | It is controlled by the ministry of finance and central governmentLike: U.S.A, INDIA, U.K etc. |
| Features | 1. Economics stability: monetary policy aim is to provide stability in the economy by raising demand of the public for investments. 2. Money control: Its primary aim is to control the money supply in the country. The central bank has power to restrict the flow of money. 3. Investment creation: Central banks also increase the rate of investment in the country. By increasing the flow of money in the market, it will increase the power of people to invest in the market. 4. Advisors to government: It is also an advisory consultant to the government. To control their money expenditures and rest of borrowing from other countries. 5. Country borrowing: It affects the country borrowing. If a country is in a deficit situation, then the central bank can control the situation by increasing interest rates which leads to an income source for country banks. This leads to low external borrowing. | 1.Economics welfare: Fiscal policy concerns economic welfare, where the government reduces the tax slabs, increase the subsidies to generate the investments by the public. 2.Money control of government:Fiscal policy mainly focuses on the money control of the government. It provides total estimation of income and expenditure of the government. So, it could easily frame policies to control money. 3.Inflation control: Fiscal policy controls the inflation (increasing of demand) in the market. When the government decreases its overall expenditure. It will lead to low supply of money in the general public. 4.Employment generation: Taking help from fiscal policy, the government builds the public sector and provides rebates to the private sector and foreign investment. Which leads to employment generation. 5.Economic growth: Fiscal policy leads to economic growth, when government develop the infrastructure Country which include: roads, telecommunication, transportation, electricity generation etc. |
| Instruments | 1. (CRR): Cash reserve ratio, this leads to safety measure source of the baking system. Where they reserve cash in a specified ratio provided by central bank. 2. (SLR): Statutory Liquidity Ratio, this ratio is also taken for safety of bank liquid assets or money. So that banks do not suffer through heavy losses. 3. Bank Rate: Bank rates are set by the central bank, which can increase or decrease the rate, as per situation. It does not involve collateral security. And it is generally high from repo rate. 4. Repo rate: Repo rate are set by the central bank as cash lended to commercial banks. It involve collateral security. It is generally low from the bank rate. | 1. Revenue receipts: Revenue receipts are (non creating asset) for the government. It shows regular or operational receipts of the government during the fiscal year. 2. Capital receipts: Capital receipts are generally long term receipts for the government. It shows asset sales by the government. 3. Revenue expenditure: It shows total expenditure of the government during the fiscal year. It does not affect the assets of the government. 4. Capital expenditure: It shows huge expenses of the government like purchase of assets etc. It affects the assets and liabilities of the government. |
| Focus area | It focuses on Economics Stabilising. | It focuses on Economic Growth. |
| Targets | It target to control inflation in the economy. | It target to social and public welfare. |
| Accounting Period | It has no specified period. It can change any time as per situation., | It has a specified period of 1 year. |
Conclusion:
In this we get knowledge about two different policies, which can control financial conditions as per situation prevail in the economy. These policies help in budget making. But they are totally different from each other as per their function, tasks and focus area. We get to know about the difference between monetary policy vs fiscal policy.