Government Budget & Economy (6 marks)

Q. Define Government Budget?

Ans.: It is the annual statement of estimated receipts & expenditure of

Government over fiscal year.

Q. Define Budget receipts?

Ans.: They are estimated receipts of government from various sources during
fiscal year.

Q. Differentiate between revenue & capital receipts?

Ans.: Revenue receipts

They are those receipts which don’t create liability nor reduce the assets of
government.

They are current income receipts. They are of two types:

1. Tax revenue like revenue from income tax, sales tax, excise duty etc.
2. Non-tax revenue like interest received, profits, dividends, fines etc.

Capital receipts

Those receipts which either create liability or reduce the asset of the
government. They are non-recurring / non-repetitive example: Borrowings,
disinvestment etc.

Q. Difference between tax revenue & non-tax revenue?

Ans.: Tax revenue

It includes receipts from all types of taxes like income tax, GST, profit tax etc. Tax
is legally compulsory payment imposed by government on people without any
benefit in return. Money collected form taxes is used by government to meet it’s
expenses.

Non-tax revenue

It includes revenue receipts from all sources other than tax example: interest
dividend, profit, fees, fines etc.

Q. What are components of non-tax revenue receipts?

Ans.: It includes

1. Interest received

Government receives interest on loans given to state government, local

government. Government of other countries, public sector undertaking etc.

2.: Profit & Dividends

Government gets profits and dividends from public sector undertaking like SAIL,
BHEL etc.

3.: Fees & fines

Government receives money in form of fees in government school, hospitals,

passport fees, license fees etc. Government also receive money by imposing fines
on law breakers.
4.: External aids & grants

It includes grants, aids, donation etc received from international organization and
government of other countries.

Q. What are the Components of Capital receipts.

Ans.:

1. Borrowings

Government raised money by borrowing from open market, central bank,

foreign govt., international organization etc. when government borrows it’s
liability increase and then borrowings are considered as Capital receipts.

2. Recovery of loans

Government receives money whenever loans paid by state govt., local govt.,
foreign government etc. when loans are recovered assets of government
decreases and thus recovery of loan is considered as Capital receipt.

3. Disinvestment

Government gets money by selling share of public sector enterprises which is

called disinvestment. Whenever government sells equity of public sector
enterprises it’s asset reduces and thus it is considered as Capital receipts.

4. Other receipts

Government also get money in form of small saving like provident fund, post
office deposit NSC’s etc. These savings are the liability of government and thus
are considered to be Capital receipts.
 Borrowings are known as Debt creating capital receipt and Disinvestment and
Recovery of loans are known as non-debt creating capital receipts.

Q. Define tax and give it’s main objectives?

Ans.: Tax is a legally compulsory payment imposed by government on the people

without any benefit in return.

It’s main objectives are:

(a) Taxes are most important source of income for government.

(b) Taxes can be used to reduce inequalities of income & wealth.
(c) Taxes can help in reducing wasteful expenditure.
(d) Foreign trade can be regulated with taxes.

Q. Difference between direct taxes & indirect taxes?

Ans.: Direct taxes

Taxes in which money burden of tax is on same person on whom tax is imposed
by government. Money burden of tax can’t be shifted to any other person.
Example: Income tax is imposed on income of person and he himself has to bear
money burden of tax.

Other example are: Profit tax, gift tax, inheritance tax etc.

Indirect taxes

Taxes in which tax is imposed on one person but money burden can be shifted to
some other person. They are imposed on production, sale, export- import of
goods and services. Example: GST is imposed on seller but the shifts the money
burden to buyers. Other example are-excise duty, VAT, entertainment tax etc.

Q. Define progressive, proportional and regressive tax?

Ans.: Progressive tax

Taxes in which rate of tax increases with the increase in income.

Regressive tax

Taxes in which rate of tax decreases with the increase in income.

Proportional tax

Taxes in which rate of tax remains same.

Q. What do you mean by budget expenditure?

Ans.: It is the estimated expenditure to be done by the government on different

items during a fiscal year.

Q. Differentiate between revenue expenditure & Capital expenditure?

Ans.: Revenue expenditure

It is that expenditure which neither reduces the liability of government nor

increases the assets of the government It is the current consumption expenditure
& is recurring & repetitive. For example:-Salaries to government employees,
interest payment, pension, subsidies grants to the state government etc.

Capital expenditure
It is that expenditure which either reduces the liability of the government or
increases the assets of the government. It is not recurring or repetitive. For
example: expenditure on construction of roads, dams, bridges etc., loans given by
central bank to state government, local government etc. It is repayment of loan
by the central govt.

Q. Discuss the two components of Government budget?

Ans.:

(1) Revenue Budget

It consists of Revenue receipts & Revenue expenditure.

Revenue receipts

They are those receipts which neither decreases the assest nor increases the
liabilities of the government These are the current income receipts of the
government. They are of two types.

(1).: Tax revenue: e.g.:-Income tax, GST.

(2).: Non-tax revenue: e.g.:-Interest received, profits & dividends

Revenue expenditure

It is that expenditure which neither creates assets nor reduces the liability of
the government This is the current consumption expenditure of the
government For example:-Interest payment, salaries, pensions, subsidies etc.
 (2) Capital Budget

It consists of Capital receipts & Capital expenditure.

Capital receipts

They are those receipts which either creates liabilities or reduces assets of the
Government For example: - borrowings, recovery of loan, disinvestment etc.

Capital expenditure

This is the expenditure which either creates assets or reduces liability or the
government For example: - expenditure on construction of roads, dams etc.,
repayment of loan, loans given etc.

Q. What is revenue deficit. How is it met. What is it’s impact?

Ans.: Revenue deficit is the excess of revenue expenditure over revenue

receipts.

Revenue Deficit = Revenue Expenditure-Revenue Receipts

It is met by drawing upon the Capital receipts i.e by borrowings.

Impact

A large revenue deficit means a large amount of borrowing for financing the
deficit. Large borrowing will result in increased Revenue expenditure due to
interest payments on loans & thus a larger revenue deficit So, revenue deficit
shows that government borrows and increases the future liability without any
benefit because borrowings will be used for consumption purpose & not for
investment.
Q. How can the government reduce revenue deficit?

Ans.: Government can reduce revenue deficit by:-

1. Reducing the revenue expenditure.

2. By raising the taxes.

Q. What is fiscal deficit. How it is met. What is it’s impact?

Ans.: Fiscal deficit is the excess of fiscal government expenditure over total
government receipts net of borrowings.

Fiscal Deficit = Total Government Expenditure- Total Government receipts net of

borrowings

Fiscal Deficit = (Rev. + Cap. Expenditure )- (Rev. Receipts + non deficit capital
receipts)

It shows the total borrowing requirement of the government.

It is met by internal & external borrowings.

Impact

Fiscal deficit increases the liability of the government in two ways:

1. In future government has to repay the loan

2. Government has to pay interest on the loan

When fiscal deficit becomes very large then Government may have to borrow
more money just to pay the interest of pervious loan.

Fiscal deficit may result in inflation

Q. What is primary deficit?

Ans.: It is the difference between fiscal deficit & interest payments.

Primary deficit = Fiscal deficit- Interest payment

It shows total borrowing requirement of government net of interest payment. It

shows how much of the government borrowings are to meet expenses other than
interest payment. A high primary deficit indicates fiscal irresponsibility of the
government i e. government is not conscious about the problems created by
borrowings – A low primary deficit indicates government is conscious about
future problems.

Q. Discuss the measures to reduces deficit in the budget?

Ans.: Deficit is the government budget can be reduced through following

measures

1. By reducing government expenditure whether to decrease revenue

expenditure., Capital expenditure depends on their flexibility. Revenue
expenditure is on the reuses items like salaries, pensions etc. Cost is
difficult to reduce it is the short period but it can be reduced over a longer
period of time. Capital expenditure can be reduced is the short period by
postponing some developmental project on by encouraging private sector
to overtake them.
2. Increasing taxes
Deficit can be reduced by raising the rests taxes or imposing new taxes but
while increasing the taxes capacity of the people to bean taxes was to be
kept in mind because may high taxes may lead to tax evasion.
Q. What are the objectives of government budget?

Ans.: following are the objectives:

1. Reducing inequalities of income & wealth.

Government can reduce inequalities by progressive taxation policy i.e.
imposing higher rate of taxes on rich people & also government can impose
higher rate of taxes on goods consumed by rich people. This will reduce the
disposable income of rich. Government on spend more money on providing
subsidies & free services to poor like education, medical treatment etc.
which will increase disposable income of the poor & will help is reducing
inequalities of income & wealth.
2. Reallocation of resources in the economy.
The government should take out resources from such goods and services
which it wants to discourage in the economy for eg alcohol by imposing
high taxes and putting the resources on production of those goods which it
wants to encourage like khadi by giving subsidies.
In every economy, there are some goods and services which private sector
is not willing to produce. Since profit margin is low an investment is high
but such goods are essential for the welfare of the society like sanitation of
roads, water supply. Government can take such services in public interest
and encourage private sector to undertake these goods and services by
giving them tax consessions and subsidies so that their profit margin can
increase
3. Bringing economic stability
 It means absence of wide fluctuation in prices & business activities such
fluctuation create uncertainties is the economy. Government can control
these fluctuations through taxes & It’s expenditure for e.g.: In Inflationary
situation government can reduce it’s expenditure & increase the taxes & in
the times of depression government can increase it’s expenditure &
encourage spending by people by giving tax concussions & subsidies.

Q. Can there be a fiscal deficit in the government budget without a revenue

deficit?

Ans.: Yes, there can be a fiscal deficit in the government budget without a
revenue deficit under following 2 conditions:

1. When revenue budget is balanced but there is a deficit is capital budget.

2. When revenue budget is surplus but deficit is the Capital budget is more
than the surplus is revenue budget.