Revision: Public Finance Economics ISC (Commerce) Class 12 CISCE

1. According to Hugh Dalton: “Public finance is one of those subjects which are on the borderline between economics and politics. It is concerned with the income and expenditure of public authorities and with the adjustment of one with the other.” Since we study the activities of the governments in political science too, public finance also constitutes a part of the study of political science.
2. According to Prof. Findlay Shirras: “Public finance is the study of the principles underlying the spending and raising of funds by public authorities.”

• "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
• Fiscal Policy is defined as the policy under which the government uses the instruments of taxation, public spending and public borrowing to achieve various objectives of economic policy.

1. "It is a document containing a preliminary approved plan of public revenue and expenditure." – Prof. Rene Stourn
2. "The budget has come to mean the financial arrangements of a given period, with the usual implication that they have been submitted to the legislature for approval." – Prof. Bastable
3. "A Govt. budget is a financial plan concluding outlay and receipt of the Govt." – Richard Good

"A Government Budget is a statement of estimated receipts and expenditures of the government for a financial year."

A balanced budget occurs when the government’s total expenditure equals its total revenue during a financial year.

Balanced Budget = Total Expenditure = Total Revenue

Receipts which do not create a liability for the government or do not lead to reduction in assets, are known as revenue receipts.

• When the government raises funds either by incurring a liability or by disposing of/reducing assets, it is called a capital receipt.
• All those receipts of the government which create liabilities or reduce financial assets, are termed as capital receipts.

• According to Prof. Findlay Shirras, "National Debt is a debt which a state owes to its subjects or to the nationals of other countries."
• Prof. P.E. Taylor defines, "The debt is the form of promises by the Treasury to pay to the holders of these promises a principal sum and in most instances interest on that principal. Borrowings is resorted to in order to provide funds for financing a current deficit."
• According to Prof. Carl S. Shoup, public debt or government borrowings are, "The receipts from the sale of financial instruments by the government to individuals or firms in the private sector to induce the private sector to release manpower and real resources and to finance the purchases of those resources or to make welfare payments or subsidies."

\[Y^*=\frac{1}{1-c}\left(\overline{C}- cT+c\overline{TR}+I+G\right)\]

\[C=\overline{C}+cYD=\overline{C}+c(Y-T+\overline{TR})\]

where,

\[Y_D=Y-T+\overline{TR}\]

\[AD=\overline{C}+c(Y-T+\overline{TR})+I+G\]

\[Y=AD\]

or

\[Y=\overline{C}+c(Y-T+\overline{TR})+I+G\]

\[\Delta Y=\frac{1}{1-c}\Delta G\]

or

\[\frac{\Delta Y}{\Delta G}=\frac{1}{1-c}\]

Revenue Deficit = Revenue Expenditure − Revenue Receipts

Fiscal Deficit = Total Expenditure − (Revenue Receipts + Non-Debt Capital Receipts)

Primary Deficit = Fiscal Deficit − Interest Payments

• An indirect tax is charged on goods and services, not directly on income.
• It is paid when a product or service is produced, sold or purchased (e.g. GST in India).
• Producers and sellers can shift the burden to consumers through higher prices, so the person who pays it to the government is not the one who finally bears it.

• A direct tax is paid directly on a person’s income or property, and its burden cannot be shifted to someone else (e.g. income tax, wealth tax).​
• Proportionate tax: Same fixed rate on all income levels.
• Progressive tax: Tax rate increases as income increases.
• Regressive tax: Rich pay a smaller proportion of their income than the poor.

• Proportional Tax: Same tax rate for all income levels (e.g., 20% for everyone).
• Progressive Tax: Tax rate increases as income increases; rich pay a higher percentage.
• Regressive Tax: Tax rate decreases as income increases; poor bear heavier burden.
• Degressive Tax: Tax rate rises up to a limit, then becomes constant (mix of progressive + proportional).

• Public expenditure is government spending by central, state and local bodies for public welfare and development.​
• It includes spending on defence, administration, health, education, roads and social welfare schemes.​
• Revenue expenditure covers day‑to‑day running costs like salaries, pensions and routine services.​
• Capital expenditure creates assets and development, e.g. infrastructure projects and loans.​
• Developmental expenditure is productive and raises employment, output and welfare (health, education, industry, R&D).​
• Non‑developmental expenditure is mainly compulsory and less productive, such as defence and general administration.​
• Public expenditure is rising due to more government welfare functions, population growth, urbanisation and higher defence and administration costs.​

• Boosts production & investment: Improves infrastructure, human skills, confidence of investors, and supports key industries.
• Promotes growth & development: Develops agriculture, industry, education, health, and infrastructure for long-term growth.
• Ensures social justice: Reduces income and regional inequalities through welfare schemes and subsidies.
• Maintains economic stability: Acts as an anti-cyclical tool—raises spending in depression, cuts spending in inflation.

Public debt is government borrowing when its spending is more than its income.

• Fiscal policy involves government expenditure, public revenue, and public debt (public borrowing).
• Its primary goal is to influence income, production, employment, and stabilise economic activity using the Keynesian approach.
• A budget can be surplus, deficit, or balanced depending on government revenue and government expenditure.
• Key instruments include government expenditure, taxation, public debt (public borrowing), and deficit financing.
• Fiscal policy corrects deficient demand (by increasing government expenditure or reducing taxes) and excess demand (by reducing government expenditure or increasing taxes).
• Government spending creates a multiplier effect on equilibrium income.

• Taxes are compulsory payments made by people to the government to meet public expenditure.
• Main features of taxes: compulsory in nature, personal obligation, meant for general welfare.
• No quid pro quo: taxpayers do not receive any direct or equal return for taxes paid.
• Role in fiscal policy: taxation helps raise revenue, reduce inequality, control inflation, and promote economic stability.

• During Inflation: Cut public spending, raise taxes, increase borrowing, run surplus budget.
• During Deflation: Increase public spending, cut taxes, use deficit financing and pump priming.
• Exchange Stability: Promote exports, restrict imports, encourage import substitution.

• Lack of Accurate Forecasting: Difficult to predict booms or depressions correctly.
• Time Lag: Decisions and effects of fiscal policy take time due to legislative delays.
• Public–Private Sector Conflict: Increased public spending may discourage private investment.
• Full Employment Issues: Leads to wage–price rise and fails to remove structural unemployment.
• Debt Burden: Heavy use of fiscal measures increases public debt problems.
• Problems of Deficit Financing: Excessive deficit financing causes inflation and slows development.
• Conflict of Objectives: Social goals may clash with economic objectives.
• Adverse Psychological Effects: Large deficits create fear of instability and capital flight.

• A government budget is a statement of estimated receipts and expenditures of the government for a financial year.
• The term "Budget" comes from the French word "Bougette" (leather bag).
• A financial year in India runs from 1st April to 31st March.
• It is constitutionally mandated - Article 112 (Union Budget) and Article 202 (State Budget).
• The budget has two parts: Revenue Budget and Capital Budget.
• It covers different types of budget deficits and government debt in a mixed economy.
• The Union Budget is presented and discussed in Parliament every financial year.

• Planning: Estimates income & expenditure for smooth governance
• Fiscal Integration: Coordinates tax, spending & borrowing decisions
• Economic Impact: Influences production, investment & income distribution
• Policy Tool: Promotes growth, stability, equity & BOP balance
• Performance Indicator: Reflects efficiency and priorities of government
• Public Accountability: Ensures control & transparency via Parliament
• Resource Allocation: Directs resources as per social & economic goals

• The government budget has three core functions: Allocation, Distribution, and Stabilisation.
• Public goods are non-rivalrous and non-excludable — the private sector will not supply them due to the free rider problem.
• Redistribution is achieved through progressive taxes and transfer payments to alter personal disposable income.
• The stabilisation function manages aggregate demand to counter inflation and recession.
• Employment generation includes promoting labour-intensive technology and funding public works.
• The budget also controls PSU finances (revenues and expenditures) to manage public enterprises.

Economic & Functional Budget

• Economic Budget: Classifies expenditure by nature (wages, salaries, borrowing, investment).
• Functional Budget: Classifies expenditure by functions (defence, education, health, transport).

Planning & Programme Budgeting System (PPBS)

• Links long-term planning with budgeting.
• Uses cost–benefit and systems analysis to relate inputs with outputs.

Performance Budget

• Focuses on functions, activities, and projects.
• Shows results and achievements, not just spending.

Adoption in India

• Introduced in 1987 by the Central Government
• Applied to development & non-development expenditure
• Aim: Control wasteful public spending

Requirements for Success

• Review of all programmes
• Expert support & staff training
• Better MIS and awareness

Problems in India

• Bureaucratic resistance
• Complex decision-making
• Poor communication systems
• Corruption & lack of professional approach

Result

• Effective if properly planned; helps cut unproductive expenditure

• Budget receipts = Revenue Receipts + Capital Receipts.
• Revenue receipts → neither create liabilities nor reduce assets.
• Capital receipts → create liabilities or reduce financial assets.
• Tax revenue = Direct (income tax, corporation tax) + Indirect (customs, excise, GST, service tax).
• Non-tax revenue includes PSU profits (BHEL, LIC) and commercial receipts (Doordarshan).
• Disinvestment is classified as capital receipt because it reduces government's financial assets.
• Borrowings = capital receipt because they create liabilities for the government.

• Budget Deficit: Total Expenditure > Total Receipts
• Revenue Deficit: Revenue Expenditure > Revenue Receipts
• Fiscal Deficit: Total Expenditure − (Receipts excluding borrowings)
• Primary Deficit: Fiscal Deficit − Interest Payment

• Developmental Expenditure: Spending that promotes economic and social development.
  Examples: agriculture, industry, education, health, and development grants/loans to states.
• Non-Developmental Expenditure: Spending on general administrative and essential services.
  Examples: defence, administration, interest payments, pensions, and non-development loans/grants.