QUESTION BANK ANSWERS

Unit 6: Government budget and Economics

Q.1. Explain meaning and features of Government Budget.

Ans.

Meaning

• It is a statement of the estimates of the government receipts and government expenditure during the
period of the financial (fiscal) year.

• Budget is an important instrument to describe the fiscal policy of the government.

• The budget unfolds: (i) the financial performance of the government last year, and (ii) the financial
programmes and policies of the government for the next one year.

• It has two aspects: (i) revenue aspect, and (ii) expenditure aspect.

Features

▪ It is an estimate and not an actual statement.

▪ It is prepared annually.

▪ It is a constitutional requirement to present budget before Parliament.

▪ Revenue and expenditure are planned according to government budget.

▪ Budget impacts the economy through aggregate fiscal discipline and resource allocation.

2. Explain the Objectives of Government budget.

Ans

Objectives of Govt. Budget

(i) Redistribution of Income & Wealth -

• The government uses fiscal instruments of taxation (govt. revenue) & subsidies (govt.
expenditure) to improve the distribution of income & wealth in the economy.
 • Higher taxes can be imposed by the government on income earned by the rich and also
on the goods consumed by them in order to reduce their personal disposable income

(ii)Reallocation of Resources-

• It refers to the change in the direction of resources from one use to the other.

• It is done with a view to balance the goals of profit maximization & social welfare.

• Production of goods which are injurious to health (like wine) is discouraged through heavy
taxation.

• On the other hand, production of ‘socially useful goods’ (like khadi), is encouraged through
subsidies.

• It is also known as allocation function.

(iii) Economic Stability

• Free interaction of market forces i.e., the forces of supply and demand are bound to generate
trade cycles, also called business cycles.

• Budget is used as an important policy instrument to combat the situations of deflation and
inflation.

• Economic stability increases the rate of growth and development.

• It is also known as stabilization function.

(iv) Managing Public Enterprises

• The government seeks to accelerate the pace of growth by establishing public sector
enterprises.

• The budgetary policy of the government targets to increase the rate of growth through public
enterprises.

• Often, public sector enterprises are encouraged in areas where private monopolies occur.

(v) GDP Growth

• GDP growth is the central objective of government budgetary policy.

• It is achieved in two ways:

 (i) by making public investment on infrastructure, and

(ii) by inducing private investment through tax rebates and subsidies.

3. Explain Non tax revenue receipts.

Ans

Non-tax Revenue Receipts - Non- tax receipts are those receipts which are received from the sources
other than the taxes.

● Fees – It is a revenue which is paid to the government for the special services rendered.

● Fines & Penalities - These are those payments which are made for breaking a law. Its actual aim is
to force the people to be law abiding.

● License & Permit – It is payment made to government to seek permission for something.

● Escheat – Under the right of escheat, the government may acquire the property, bank balances etc.
of the person who dies without having any legal heirs.

● Income from public enterprises - Many enterprises are owned by the government. Government earns
profit from public sector enterprises.

● Gifts and Grants - This is not a permanent source of revenue. This is generally received during
natural calamities.

4. Explain capital receipts.

Ans

Capital Receipts

● These receipts:

• create a corresponding liability for the government, e.g., borrowings,

• lead to reduction in assets of government e.g., disinvestment, recovery of loans.

(i) Borrowings and Other Liabilities - Borrowing create liability for the government. Accordingly,
borrowings are to be treated as capital receipts. It is a debt creating capital receipt.
(ii) Recovery of Loans – The debtors are assets for the government. Recovery of loans causes a
reduction in assets of the government. Hence, recovery of loans is a capital receipt. It is a non-
debt capital receipt.

(iii) Other Receipts – It includes proceeds from ‘disinvestment’. Disinvestment occurs when the
government sells off its shares of public sector enterprises to private sector. It is treated as capital
receipt because it causes reduction in assets of the government. It is a non-debt creating capital receipt.

5. Explain Revenue expenditure.

Ans

This expenditure: • does not create assets of the government, • does not cause a reduction in liabilities
of the govt. For example, old age pensions, salaries and scholarship etc.

(ii) Capital Expenditure

● This expenditure: • either create assets of the government or, • causes a reduction in liabilities of the
govt. For example, purchase of shares of MNC’s, repayment of loans etc.

(b) Plan Expenditure and Non-plan Expenditure

(i) Plan Expenditure ● It is incurred during the year in accordance with the central plan of the country.
● It is incurred on financing the objectives of central plans of different sectors of the economy. For
example, planned expenditure on health, education law and order etc.

(ii) Non- Plan Expenditure ● It Non- plan refers to all such government expenditures which are non-
planned. ● It is incurred on financing those projects which are not planned in the central plan. For
example, expenditure as a relief to the earthquake victims etc.

c) Development Expenditure and Nondevelopment Expenditure (i) Development Expenditure ● It is

incurred on economic and social development of the country. ● It relates to growth and development
projects of the country. For example, expenditure on development of agriculture, industries, health,
education etc.

(ii) Non- development Expenditure ● It is incurred on general services of the government which do
not usually promote economic development. ● It relates to non-developmental activities of the
government. For example, expenditure on administration, defence, justice etc.
6.Explain revenue deficits.

Ans

● This deficit occurs in revenue budget of the govt. Revenue deficit is concerned with the revenue
expenditure and revenue receipts of the government.

Revenue deficit = RE - RR

● In other words, government’s revenue is insufficient to meet the expenditure on normal functioning
of government departments and provisions for various services.

Implications of Revenue Deficit

(i) It indicates the inability of the govt. to meet the expenditure on routine functioning of the
economy.

(ii) Includes current income & expenditure of the government.

(iii) It implies dis-savings on government account.

(iv) Govt. has to finance it from capital receipts.

Measures to reduce Revenue Deficit

• Govt. should reduce its wasteful expenditure.

• By curtailing non-plan expenditure.

• Increase in existing tax rate and impose new taxes.

• Tax evasion should be controlled.

7. Explain fiscal deficit.

Ans

● Fiscal deficit refers to the excess of total expenditure over total receipts (excluding borrowings)
during a given fiscal year.

Fiscal Deficit = TE - TR (Excluding Borrowings)

Implications of Fiscal Deficit

 (a) Debt Trap – Fiscal deficit increases the future liability of the Govt. in the form of payment of
interest & repayment of loans. This may increase the revenue deficit. Therefore, the Govt. is
required to borrow more to pay interest & repay old loans. It is known as debt trap.

(b) Causes Inflation – Govt. generally borrows from RBI. RBI prints more currency to meet the fiscal
deficit. It increases the circulation of money supply in the economy & causes inflation. It is also
known as deficit financing.

(c) Increase in Foreign Dependence

(d) Financial Burden for Future Generations

8.Explain measures to finance fiscal deficit.

Ans

Following are the measures to finance fiscal deficit-

(a) Borrowings

(b) Deficit financing

Measures to reduce Revenue Deficit-

• Govt. should reduce its wasteful expenditure.

• By curtailing non-plan expenditure.

• Increase in existing tax rate and impose new taxes.

• Tax evasion should be controlled.

9.Explain primary deficit.

Ans

● Primary deficit refers to the difference between fiscal deficit of the current year and interest
payments on the previous borrowings.

Primary Deficit = FD - Interest Payments

● To calculate the amount of borrowings on account of current expenditure exceeding revenue, we

need to calculate the amount of the primary deficit. It is done by subtracting interest from fiscal deficit.

Implications of Primary Deficit

(i) It indicates how much govt. borrowings are required to meet its existing expenses other than
interest payments on public debt.

(ii) (ii) A zero primary deficit means that the govt. has to resort to borrowings only to meet its
interest payments on public debt.

Measures to Reduce Primary Deficit

(a) Efforts should be made to reduce fiscal deficit.

(b) To reduce fiscal deficit, interest payments should be reduced through repayment of loans as early
as possible.

10. Explain types of budget.

Ans

(A) Balanced Budget – A govt. Budget is said to be balanced budget in which government
estimated receipts are equal to government estimated expenditure. This budget has a neutral
effect on the level of economic activity.

(B) Unbalanced Budget - An unbalanced budget is\ that budget in which receipts and expenditure of
the government are not equal. It may be:

(i) Surplus Budget - Surplus budget is a budget in which the govt. Estimated receipts are greater
than govt. estimated expenditure. Here the govt. soaks money supply.

(ii) Deficit Budget - Deficit budget is the budget in which estimated govt. expenditure are greater than
govt. receipts. Here the govt. injects more money supply.