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Easy Economics for Class XII
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Government Budget and Economy
Government Budget and t he Economy
Contents of the Chapter:-
• Government Budget – Meaning, Objective
• Components of Government Budget
• Classif ication of receipts – Capital and revenue
• Classif ication of expenditure
- Capital and revenue
• Balanced budget surplus budget, def icit budget
- meaning and implication
• Revenue deficit, Fiscal deficit, primary deficit
- Meaning and implication.
Meaning of Government Budget :-
A government budget is an annual st atement of the estimat ed receipt s and est imated expenditure of
t he government during a fiscal year.
Objective of t he Government Budget
The objective that are pursued by the government through the budget are-
I. Reallocation of resources -:It means managed and proper distribution of resources. As private
sector can not provide all t he goods and services t he government has to provide these goods.
II. To reduce inequalities in income and wealth-: Through budget government tries to reduce the gap
between Rich and poor. This is achieved through taxing t he rich and subsidizing t he needs of poor
people. Taxing t he income of rich people reduces t heir purchasing power and subsidies to poor people
increases real income of poor people.
III. To achieve economic stability -: There may be inflat ion or depression in the economy. Inflation is
t he situation of rise in price level whereas depression is lack of demand. Both the situations are
undesirable. During depression government reduces rat e of tax and borrowing and increases public
expenditure. During inflation government increases the rate of tax and borrowing and decreases
public expenditure.
IV. Management of Public Enterprises
V. To achieve economic growth
Components of Government Budget:-
1. Budget Receipts
2. Budget Expenditure
Classification of Budget Receipts:-
1. Capital Receipts: - Capital Receipts ref er to t hose receipts of t he government which i) t end t o create
a liability or ii) Causes reduction in its assets. All the Capital receipts are broadly classified into three
categories.
1) Recovery of loans : - These are Capital receipt s because they reduce financial assets of the
government
2) Borrowings: - Funds raised by t he government f orm t he borrowing are treated as capital receipts
such receipts creates liabilit y.
3) Other Receipts: - Funds raised t hrough disinvestment are included in this category. By this
government assets are reduced.
2. Revenue Receipts:-
Any receipts which do not either create a liability or lead to reduct ion in assets is called revenue
receipts. Revenue receipts consist of 1) Tax Revenue and 2) Non-Tax Revenue.
1) Tax Revenue: - A tax is a legal compulsory payment imposed by the government on the people. All
t axes are broadly classified int o i) Direct Tax and ii) Indirect Tax.

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Easy Economics for Class XII: Government Budget and Economy http://ecoarun.blogspot.in/p/government-budget-and-economy.html
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When the liabilit y t o pay a tax and the burden of that tax falls on the same person, the tax is called
direct tax. e.g. Income tax, corporation tax, Gif t tax etc.
When the liabilit y t o pay a tax falls on one person and burden of t hat tax falls on some other person,
t he tax is called an Indirect t ax. e.g. Sales tax, Custom duties, Service tax etc.
2) Non-Tax Revenue: - Non tax revenue consists of all revenue receipts other than taxes. For eg.:-
i) Int erest
ii) Profit and dividend
iii) Fees and f ines
iv) External grant-in-aid
Meaning of Budget Expenditure:-
Budget expenditure refers to the estimated expenditure t o be incurred by the government under
diff erent heads in a year.
Revenue Expendit ure:-
An expendit ure which do not creates assets or reduces liabilit y is called Revenue Expendit ure.
Examples are – Salaries of government employees, interest payment on loan taken by the government,
pension, subsidies, grants etc.
Capital Expenditure:-
It ref ers to t he expenditure which leads t o creation of asset s and reduction in liabilities eg.
Expenditure incurred on construct ion of building, roads, bridges et c.
Balanced Budget:-
A Government budget is said to be a balanced in which government receipts are shown equal to
government expenditure
Surplus Budget :-
When government receipts are more than government expendit ure in the budget , the budget is called
a surplus budget .
Budget Deficit
Deficit Budget:-
When government expenditure exceeds government receipts in the budget is said t o be a def icit
budget .
Types:-
Revenue Deficit:-
Revenue deficit refers t o the excess of revenue expenditure of the government over its revenue
receipts.
Revenue deficit = Total revenue expenditure – Total revenue receipts.
Importance: - Since it is largely related with t he recurring expenditure. Therefore, high revenue deficit
gives a warning to t he government either to cut expenditure or to increase revenue receipt s. It also
implies requirement burden in future.
Fiscal Deficit:-
Fiscal deficit is defined as excess of tot al expenditure over tot al receipts excluding borrowings.
Fiscal Deficit = Total budget expenditure - Total budget receipts net of borrowings.
Importance: - Fiscal deficit is a measure of total borrowings required by the government. Greater f iscal
deficit implies, greater borrowings by the government. This creates a large burden of interst payments
in the f uture that leads to increase in revenue expenditure, causing an increase in revenue deficit.
Thus a vicious circle set s in. In the present , a large fiscal def icit may also lead to inflationary
pressures.
Primary Deficit:-
Primary deficit is def ined as fiscal deficit minus interest payment. It is equal to f iscal def icit reduced by
interest payment.
Primary deficit = Fiscal deficit – interest payment.
Importance: - Primary deficit signifies borrowing requirements of the government. A low or zero
primary deficit means that while government ’s int erest requirement on earlier loans have compelled
t he government t o borrow but it is aware of the need to tight er it s belt.
Government Budget and t he Economy
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Easy Economics for Class XII: Government Budget and Economy http://ecoarun.blogspot.in/p/government-budget-and-economy.html
2 of 5 10/26/2013 5:17 PM
Q1. Give the meaning of budget.
Ans. A budget is an annual statement of the estimated receipts and
Expenditure of the government over the fiscal year.
Q2. Name the two component s of budget.
Ans. 1) Budget Receipts 2) Budget Expenditure.
Q3. Why is borrowings considered as Capital receipt?
Ans. It increases the liabilit y of the government, so it is considered as
Capital receipt .
Q4. Define t ax
Ans. Tax is legal compulsory payment imposed by the government on
t he people.
Q5. Give two example of direct t ax.
Ans. 1) Income tax 2) Gift tax
Q6. Give two example of indirect tax.
Ans. 1) Sales t ax 2) Cust om duty
Q7. Give two example of non-tax revenue.
Ans. 1) dividend 2) Fees and fines
Q8. When Budget is normally presented in the Parliament?
Ans. On 28th February.
Q9. Why is t ax not a Capital receipt?
Ans. Tax neither creat es liabilit y nor reduces asset s, so it is not
Considered as capital receipt.
Q10. Give two example of revenue expendit ure.
Ans. 1) Payment of Salaries 2) Interest payment
Q11. Give two example of Capital expenditure.
Ans. 1) Loan to public 2) Acquiring land, building, machine and
invest ment in shares et c.
Q12. What is balanced budget?
Ans. A Government budget is said to be a balanced in which government
receipts are shown equal to government expendit ure
Q13. What is Surplus budget?
Ans. When government receipts are more than government expenditure
in the budget , the budget is called a surplus budget.
Q14. What is deficit budget?
Ans. When government expenditure exceeds government receipts in the
budget is said to be a deficit budget.
Q15. Give the formula to calculate ‘ revenue deficit’ .
Ans. Revenue deficit = Total revenue expenditure – Total revenue
receipts.
Q16. Give the formula to calculate ‘ fiscal deficit’ .
Ans. Fiscal Deficit = Total budget expenditure = Total budget receipts
net of borrowings.
Q17. Give the formula to calculate ‘ primary deficit’ .
Ans. Primary deficit = Fiscal deficit – interest payment.
Q18. Define Capital receipts.
Ans. Capital Receipts refer t o those receipt s of the government which i)
t end t o create a liabilit y or ii) Causes reduction in its asset s.
Q19. Define revenue receipts.
Ans. A revenue receipts are those receipts which neither create a liabilit y
nor reduce asset s of the government. eg. Tax and non-t ax receipts.
Q20. Define revenue expenditure.
Ans. It does not result in creation of assets or reduct ion in liabilities
eg. Payment of salaries.
Q21. Define Capital expenditure.
Ans. It ref ers to t he expenditure which leads t o creation of asset s and
reduction in liabilities eg. Expenditure incurred on construction of
building, roads, bridges etc.
Q22. Give two sources of Capital receipts.
Ans. 1) Recovery of loans 2) Borrowings.
Q23. Give one objective of budget.
Ans. To reduce inequalities of income and wealth.
Q24. Define direct tax.
Ans. These taxes are those tax in which liability to pay and burden of tax
f alls on same person.
Q25. Define indirect tax.
Ans. Liability to pay and burden of indirect tax falls on diff erent persons.
Short Answer Question (3/4 Mark)
Q1. Write any three objective of government Budget.
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Easy Economics for Class XII: Government Budget and Economy http://ecoarun.blogspot.in/p/government-budget-and-economy.html
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Ans. The objective that are pursued by the government through the
budget are-
i) To achieve economic growth.
ii) To reduce in equalit ies in income and wealth.
iii) To achieve economic stability.
Q2. Explain the basis of classifying government receipts into revenue
receipts and capital receipt s.
Ans. Revenue Receipts :-A government revenue receipts are those
receipts i) which neither create liability ii) nor reduce assets of the
government eg. Dividend.
Capital Receipts :- Capital Receipts refer t o those receipt s of the
government which i) tend to create a liability or ii) Causes
reduction in its assets of the government. eg. Borrowings
Q3. Distinguish between direct tax and indirect tax
Ans.
Direct Tax Indirect Tax
1. Liability to pay and burden of
direct tax falls on same person.
2. Levied on income and property
of person.
3. eg. Income tax 1. Liability to pay and burden
of direct t ax f alls on some
other person.
2. Levied on goods and
services on their sale,
production, import and export.
3. eg. Sales tax
Q4. Define revenue receipts. Write the groups in which they are
classified.
Ans. Any receipts which does not either create a liability or lead to
Reduction in assets is called revenue receipts. Revenue receipt s
consist of
1) Tax Revenue and 2) Non-Tax Revenue.
Q5. Distinguish between Revenue and Capital expenditure.
Ans.
Revenue Expendit ure Capital Expenditure
1. It does not result in creation of
assets
2. It is for short period and
recurring in nature
3. eg. Expenditure on salaries of
employees 1. It result in creation of assets
2. It for long period and non-
recurring in nature
3. eg. Expenditure on acquisition
of assets like land, building etc.
Primary Deficit is the diff erence between Fiscal deficit and interest payments. It det ermines whether
t he fiscal deficit in government budget has arisen due to int erest payment or any other activity of the
government.
A large primary deficit indicates that the difference between fiscal def icit and interest payment is more.
It means government is spending more than its receipt on other activities. The government may be
spendthrift.
A zero primary deficit indicates that interest payment s and fiscal def icit is equal. The fiscal def icit has
arisen due t o interest payment .
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