CLASS XII

Government Budget Notes

Government Budget: is an annual statement,

showing item wise estimate of receipt and
expenditure during a fiscal year.
Budget of central government is known as "Union
Budget".

Objective of Government Budget:

1. Reallocation of Resources: Through the budgetry
policy, Government aims to reallocate resources
in accordance with economic(profit maximisation)
and social welfare of the country.
i) Tax concession or subsidies.
ii) Directly Producing Good and services.
2. Reducing inequalities in Income and Wealth:
Government aims to infulence distribution of income by
imposing tax on rich and spending more on the
welfare of people.
3. Economic Stability: Government Budget is used to
prevent business fluctuations of Infilation by reducing
expenditure or Deflation by increasing expenditure to
achieve the objective of economic stability.
4. Management of Public Enterprises: Government
allocates funds in union budget , For proper functioning
of Public Enterprises.
ex. Fund for education, Hospitals, PSUs.
5. Economic Growth: The Growth rate of a country
depends on rate of saving and investment for this
purpose budgetry policy aims to mobolise sufficient
resources for investment.

6. Reducing Regional Disparties: The gov. budget

aims to reduce regional disparties, through its taxation
and expenditure policy of encouraging setting up of
production units in economically backward regions.
Revenue Budget: is the estimated revenue receipts and
estimated revenue expenditue during a fiscal year.
Revenue Recepits: refers to those recepits which
neither create liabilities nor cause any reduction in the
assets of the Government.
a) Tax Revenue: Tax Revenue refers to sum total of
receipt from tax and other duties impose by government.
i) Direct Tax: are those tax whose burden cannot be
shifted on others.
ex. Income Tax, Wealth Tax, Corporate Tax.
ii) Indirect Tax: It is a tax levied on goods and services and
its final burden can be shifted on to others.
ex. excise tax, VAT, entertainment tax, GST.
Define Tax: A Tax is a compulsory payment imposed by
the government on the households and producers.
There are Three More Types of Taxes:

1. Progressive Tax: It is a Tax that causes relatively less

burden on the poor and more on the rich, i.e, tax rate
rises with rise in income.
2. Regressive Tax: It is a Tax that causes relatively more
burden on the poor and less on the rich, i.e, tax rate fall
with rise in income.
3. Proportional Tax: It is a Tax in which the rate of
taxation remains constant with increase or decrease in
income.
b) Non-Tax Revenue: refers to receipt of the
Government From All sources other than those of tax.
1.Interest
2.Profit and Dividend
3.Licence Fees
4.Fines and Penalties
5.Gift and Grants
6.Escheat
Revenue Expenditure:
 These are those expenditure which neither create any
asset nor reduce liabilties of the government.
 These expenditures are incurred for smooth functioning
of government departments and for day to day
expenses of the government.
 ex. Salaries, Pensions, Interest Payments, Subsidies,
grants, etc.
a) Plan Expenditure: It relates to central plans(The Five
Years Plan) and central assistance for state and union
territory plans.
ex. expenditure on education, health, law and order.
b) Non-Plan Expenditure: It covers a vast range of
general,economic and social services of the government.
ex. expenditure as a relief to earthquake victims, etc.
Capital Budget: is the statement of estimated capital
receipts and estimated capital expenditure during a fiscal
year.
It is an account of the assets as well as the liabilities of
the Central Government, which takes into consideration
changes in capital.
Capital Receipts: All those receipts of the government
which create liabilities or reduce assets, are termed as
capital receipts.
a) Borrowings: It create liability for the government.
Accordingly, borrowings are to be treated as capital
receipts. It is a debt creating capital receipts.
b) Disinvestment: It refers to withdrawal of exisiting
investment. e.g. the government of India is undertaking
disinvestment by selling its shares in, the Maruti Udyog.
It is a capital receipt of the government, as it reduces
assets of the government.

Capital Expenditure: those expenditure of the

government which result in creation of assets or
reduction in financial liabilities.
This includes expenditure on the acquistion of land,
building,loans and advances by central government to
state and union territory governments.

Types of Government Budgets:

There are Two Types of Budgets:
1. Balanced Budget
2. Unbalanced Budget

1. Balanced Budget: A balanced budget is that budget

in which government receipts are equal to government
expenditure. This budget has a neutral effect on the level
of economic activity.
Merits-
1. The government does not indulge in wasteful
expenditure.
2. A balance budget implies financial stability of the
economy.
Demerits-
1. It is not useful to solve the problem of unemployment
during depression.
2. Process of economic growth is very slow as less efforts
are done to grow the economy.
2. Unbalanced Budget: It is not necessary that the
government receipts and expenditure will always be
equal. The budget may be unbalanced. An unbalanced
budget is that budget in which receipts and expenditure
of the government are not equal. It may be:
1. Surplus Budget
2. Deficit Budget
1. Surplus Budget: It ia that budget in which
government receipts are greater than government
expenditure. When the government soaks out money
supply from the economy, it leads to contraction of
money. It reduce aggregate demand.
Merits-
1. It solve the problem of inflation,
2. Huge revenue collection by the government
3. Reduce Government expenditure which reduce supply
of money to correct inflation.
Demerits-
1. During Depression, a surplus budget may Lower the
level of Aggregate Demand to such an extent that causes
low level of output, and will generate less reveune.
2. Deficit Budget: It is that budget in which government
receipts are less than government expenditure. Here the
government injects more money supply which increase
the level of economic activity and increase aggreagate
demand.
Merits-
1. It solve the problem of deflation,
2. Low level of revenue collection which level people with
more purchasing power.
3. Huge Government expenditure which increase the
supply of money to correct deflation.
Demerits-
1. Deficit budget would lead to inflationary gap as here
government spend more and generates less revenue.

Measures of Government Deficit(Budgetary

Deficit):
Budgetary deficit is defined as the excess of total
estimated expenditure over total estimated revenue
including borrowings.
There are three measures of deficit:
1.Revenue Deficit
2.Fiscal Deficit
3.Primary Deficit
1. Revenue Deficit: refers to excess of revenue
expenditure over revenue receipts during the given fiscal
year.
Implications-
1.