Public Finance: Fiscal Consolidation

Definition: Fiscal consolidation refers to policies aimed at reducing government deficits and debt accumulation to ensure long-term economic stability.
Objectives:
- Reduce fiscal deficits.
- Maintain sustainable public debt levels.
- Enhance macroeconomic stability.
Methods:
- Reducing Expenditure: Cutting non-essential government spending, subsidies, and wasteful expenditures.
- Increasing Revenue: Enhancing tax collection, introducing new taxes, or broadening the tax base.
- Improving Efficiency: Promoting transparency, reducing corruption, and optimizing public sector operations.

Objective: Ensure fiscal discipline and reduce fiscal and revenue deficits to promote macroeconomic stability.
Fiscal Targets:
- Fiscal deficit: Reduce to 3% of GDP.
- Revenue deficit: Eliminate (later replaced with debt-to-GDP targets).
Transparency: Mandates the government to present a medium-term fiscal policy, strategy, and risk disclosures to Parliament.
Borrowing Limits: Restricts government borrowing to ensure sustainable debt levels.
Escape Clause: Allows temporary deviation from targets during national emergencies, severe economic shocks, or natural disasters.
Amendments (2018):
- Set debt-to-GDP targets:
  - Central government: 40% by 2024-25.
  - General government: 60% by 2024-25.
- Flexibility of 0.5% in fiscal deficit under special circumstances.
Importance: Promotes fiscal responsibility, controls public debt, and builds investor confidence.