- Allocation function: Government provides public goods (defence, roads) which are non-rival and non-excludable.
- Public provision vs production: Goods are financed by government, but may be produced by public or private sector.
- Redistribution function: Government uses taxes and transfers to reduce income inequality.
- Stabilisation function: Government controls inflation and unemployment by managing aggregate demand.
Definitions [4]
Define of the following concept.
Balanced budget
A balanced budget occurs when the government’s total expenditure equals its total revenue during a financial year.
Balanced Budget = Total Expenditure = Total Revenue
Define the following concept:
Budget
According to Prof. Johnson, “A state budget is a statement of the states estimated income and expenditure in a commencing period usually one year.”
According to Prof. Dimock, “Balanced estimate of expenditure and receipt for the given period of time.”
Define fiscal deficit.
The fiscal deficit is the excess of total expenditure, i.e. revenue and capital expenditure, over total receipts. This measure reflects total borrowings of the government during the financial year.
Fiscal deficit refers to the excess of total expenditure over total receipts, excluding borrowings, during the given fiscal year.
Definitions: Fiscal Policy
- "Fiscal Policy is the policy concerning the revenue, expenditure and debt of the government for achieving definite objectives." -Prof. Dalton
- "Fiscal policy involves alterations in government expenditures for goods and services or the level of tax rates. Unlike monetary policy, these measures involve direct government entrance into the market for goods and services (in case of expenditure) and a direct impact on private demand (in the case of taxes)." – Prof. Gardner Ackley
- "We define fiscal policy to include any design to change the price level, composition or timing of government expenditure or to vary the burden, structure or frequency of tax payment." – G.K. Shaw
- Fiscal policy includes those "Changes in government expenditure and taxation designed to influence the pattern and level of activity." – Harvey and Johnson
- Fiscal Policy includes those "Changes in taxes and expenditure which aim at short run goals of full employment, price level and stability." – Otto Eckstein
Formulae [3]
Revenue Deficit
|
Revenue Deficit = Revenue Expenditure |
Where, Revenue Expenditure (RE)
= Interest Payments + Non-interest Expenditure or Plan Expenditure + Non-plan Expenditure. Revenue Receipts (RR) = Tax Revenue + Non-tax Revenue.
Fiscal Deficit
|
Fiscal Deficit = Total Budget Expenditure - Total Budget Receipts |
Primary Deficit
Primary Deficit = Fiscal Deficit - Interest Payments.
Key Points
Key Points: Government Budget
Government budget = annual financial plan of the government showing estimated receipts and proposed expenditure for the coming financial year (1 April–31 March in India).
- It is an official financial statement of how the government plans to raise money (taxes, borrowings, other receipts) and how it will spend it (on defence, welfare, development, etc.).
- It is a constitutional requirement (Article 112) and is presented every year in Parliament as the central government’s budget.
Key Points: Objectives of Government Budget
Key Points: Components (Structure) of the Government Budget
- Revenue Budget: Regular income & daily expenses (no asset creation).
- Capital Budget: Loans, investments & asset creation.
Key Points: Classification of Receipts
- Revenue receipts: Do not create liability; include tax and non-tax revenues.
- Tax revenue: Direct taxes (income tax, corporation tax) and indirect taxes (excise, customs, GST).
- Non-tax revenue: Interest, dividends, fees, profits, grants.
- Capital receipts: Create liability or reduce assets (loans, PSU disinvestment).
- Finance Bill explains tax changes; GST introduced in 2017.
Key Points: Classification of Expenditure
- Revenue expenditure: No asset creation; includes salaries, pensions, subsidies, defence, interest payments.
- Non-plan revenue expenditure forms the major part (interest, defence, subsidies).
- Capital expenditure: Leads to asset creation or reduction of liabilities (infrastructure, loans, investments).
- Expenditure is classified into plan and non-plan in budget documents.
- Budget is also a policy document guided by FRBM Act, 2003.
Key Points: Types of Budget
- Balanced budget: Government receipts = government expenditure.
- Surplus budget: Receipts > expenditure; mainly used to control inflation.
- Deficit budget: Receipts < expenditure; used to raise spending, jobs and growth, common in developing countries.
Key Points: Changes in Taxes
- Tax cut increases disposable income, raising consumption and output.
- Tax multiplier = −c / (1 − c) (negative and smaller than G multiplier).
- Government spending multiplier = 1 / (1 − c) (larger effect).
- Balanced budget multiplier = 1 (equal rise in G and T raises income by same amount).
- Proportional taxes reduce multiplier and act as automatic stabilisers.
Key Points: Debt
- Government debt arises when budget deficits are financed through borrowing.
- Deficits are a flow; debt is a stock that accumulates over time.
- Debt may burden future generations due to higher future taxes.
- Ricardian equivalence: People save more today expecting higher future taxes.
- Debt is less harmful if it finances growth and not owed to foreigners.
Important Questions [38]
- Government Raises Its Expenditure on Producing Public Goods. Which Economic Value Does It Reflect? Explain.
- Explain how government budget can be used to influence distribution of income?
- Explain the Role of Government Budget in Fighting Inflationary and Deflationary Tendencies.
- Explain How Government Budget Can Be Helpful in Bringing Economic Stabilization in The Economy.
- Explain How the Government Can Use the Budgetary Policy in Reducing Inequalities In Incomes.
- Explain How Government Budget Can Used to Bring in Price Stability in the Economy.
- Explain the ‘Redistribution of Income’ Objective of Government Budget.
- Explain Any One Objective of Government Budget.
- Explain the Concept of ‘Fiscal Deficit’ in a Government Budget. What Does It Indicate?
- Explain the economic stability as objectives of government budget.
- In order to tackle the problem of rising general price in an economy, government may come up with a surplus budget to achieve the budget objective of ______.
- Explain the Role of Government Budget in Bringing Stability in the Economy.
- Which one of these is a revenue expenditure?
- Is the Following Revenue Expenditure Or Capital Expenditure in the Context of Government Budget? Give Reason. Expenditure on a Collection of Taxes.
- Distinguish Between Revenue Expenditure and Capital Expenditure in Government Budget. Give an Example of Each.
- Explain How Taxes and Government Expenditure Can Be Used to Influence Revenue Expenditure and Capital Expenditure?
- What is Capital Expenditure?
- What is Revenue Expenditure?
- Is the Following Revenue Expenditure Or Capital Expenditure in the Context of Government Budget? Give Reason. Expenditure on Purchasing Computers
- Calculate Investment Expenditure from the Following Date About an Economy Which is in Equilibrium : National Income = 1000 Marginal Propensity to Save = 0.20 Autonomous Consumption Expenditure = 100
- Calculate Autonomous Consumption Expenditure from the Following Data About an Economy Which is in Equilibrium: National Income = 500 Marginal Propensity to Save = 0.30 Investment Expenditure = 100
- Giving Reason, State Whether the Following is a Revenue Expenditure Or a Capital Expenditure in a Government Budget: Expenditure on Scholarships
- Giving Reason, State Whether the Following is a Revenue Expenditure Or a Capital Expenditure in a Government Budget: Expenditure of Building a Bridge.
- Government Has Started Spending More on Providing Free Services like Education and Health to the Poor. Explain the Economic Value It Reflects.
- What is the Difference Between Revenue Expenditure and Capital Expenditure? Explain How Taxes and Government Expenditure Can Be Used to Influence.
- How Are Capital Expenditure Different from Revenue Expenditure? Discuss Briefly.
- Give Equation of Budget Line.
- Define "Trade Surplus" and "Trade Deficit".
- Explain the Meaning of Budget Set
- Explain the major components of government budget.
- Distinguish between revenue deficit and fiscal deficit.
- Answer the Following Question. in the Given Figure, What Does the Gap 'Kt' Represent? State Any Two Fiscal Measures to Correct the Situation.
- Classify the Following Statements into Positive Economics Or Normative Economics, with Suitable Reasons: Government Should Try to Control the Rising Fiscal Deficit.
- Fiscal Deficit Equals
- Suppose You Are a Member of the "Advisory Committee to the Finance Minister of India". the Finance Minister is Concerned About the Rising Revenue Deficit in the Budget.
- Define fiscal deficit.
- Define Revenue
- Explain 'Revenue Deficit in a Government budget? What does it indicate?
