GOVERNMENT BUDGET NOTES FOR CLASS 12 CBSE
Government Budget and Economy
Government Budget and the Economy
Contents of the Chapter:-
• Government Budget – Meaning, Objective
• Components of Government Budget
• Classification of receipts – Capital and revenue
• Classification of expenditure
- Capital and revenue
• Balanced budget surplus budget, deficit budget
- meaning and implication
• Revenue deficit, Fiscal deficit, primary deficit
- Meaning and implication.
Meaning of Government Budget:-
A government budget is an annual statement of the estimated receipts and estimated expenditure of the government during a fiscal year.
Objective of the Government Budget
The objective that are pursued by the government through the budget are-
I. Reallocation of resources -:It means managed and proper distribution of resources. As private sector can not provide all the goods and services the government has to provide these goods.
II. To reduce inequalities in income and wealth-: Through budget government tries to reduce the gap between Rich and poor. This is achieved through taxing the rich and subsidizing the needs of poor people. Taxing the income of rich people reduces their purchasing power and subsidies to poor people increases real income of poor people.
III. To achieve economic stability -: There may be inflation or depression in the economy. Inflation is the situation of rise in price level whereas depression is lack of demand. Both the situations are undesirable. During depression government reduces rate of tax and borrowing and increases public expenditure. During inflation government increases the rate of tax and borrowing and decreases public expenditure.
IV. Management of Public Enterprises
V. To achieve economic growth
Components of Government Budget:-
1. Budget Receipts
2. Budget Expenditure
Classification of Budget Receipts:-
1. Capital Receipts: - Capital Receipts refer to those receipts of the government which i) tend to create a liability or ii) Causes reduction in its assets. All the Capital receipts are broadly classified into three categories.
1) Recovery of loans :- These are Capital receipts because they reduce financial assets of the government
2) Borrowings: - Funds raised by the government form the borrowing are treated as capital receipts such receipts creates liability.
3) Other Receipts: - Funds raised through disinvestment are included in this category. By this government assets are reduced.
2. Revenue Receipts:-
Any receipts which do not either create a liability or lead to reduction in assets is called revenue receipts. Revenue receipts consist of 1) Tax Revenue and 2) Non-Tax Revenue.
1) Tax Revenue: - A tax is a legal compulsory payment imposed by the government on the people. All taxes are broadly classified into i) Direct Tax and ii) Indirect Tax.
When the liability to pay a tax and the burden of that tax falls on the same person, the tax is called direct tax. e.g. Income tax, corporation tax, Gift tax etc.
When the liability to pay a tax falls on one person and burden of that tax falls on some other person, the tax is called an Indirect tax. e.g. Sales tax, Custom duties, Service tax etc.
2) Non-Tax Revenue: - Non tax revenue consists of all revenue receipts other than taxes. For eg.:-
i) Interest
ii) Profit and dividend
iii) Fees and fines
iv) External grant-in-aid
Meaning of Budget Expenditure:-
Budget expenditure refers to the estimated expenditure to be incurred by the government under different heads in a year.
Revenue Expenditure:-
An expenditure which do not creates assets or reduces liability is called Revenue Expenditure.
Examples are – Salaries of government employees, interest payment on loan taken by the government, pension, subsidies, grants etc.
Capital Expenditure:-
It refers to the expenditure which leads to creation of assets and reduction in liabilities eg. Expenditure incurred on construction of building, roads, bridges etc.
Balanced Budget:-
A Government budget is said to be a balanced in which government receipts are shown equal to government expenditure
Surplus Budget:-
When government receipts are more than government expenditure in the budget, the budget is called a surplus budget.
Budget Deficit
Deficit Budget:-
When government expenditure exceeds government receipts in the budget is said to be a deficit budget.
Types:-
Revenue Deficit:-
Revenue deficit refers to the excess of revenue expenditure of the government over its revenue receipts.
Revenue deficit = Total revenue expenditure – Total revenue receipts.
Importance: - Since it is largely related with the recurring expenditure. Therefore, high revenue deficit gives a warning to the government either to cut expenditure or to increase revenue receipts. It also implies requirement burden in future.
Fiscal Deficit:-
Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowings.
Fiscal Deficit = Total budget expenditure - Total budget receipts net of borrowings.
Importance: - Fiscal deficit is a measure of total borrowings required by the government. Greater fiscal deficit implies, greater borrowings by the government. This creates a large burden of interst payments in the future that leads to increase in revenue expenditure, causing an increase in revenue deficit. Thus a vicious circle sets in. In the present, a large fiscal deficit may also lead to inflationary pressures.
Primary Deficit:-
Primary deficit is defined as fiscal deficit minus interest payment. It is equal to fiscal deficit reduced by interest payment.
Primary deficit = Fiscal deficit – interest payment.
Importance: - Primary deficit signifies borrowing requirements of the government. A low or zero primary deficit means that while government’s interest requirement on earlier loans have compelled the government to borrow but it is aware of the need to tighter its belt.
Government Budget and the Economy
Very Short Answer Question ( 1 Mark)
Q1. Give the meaning of budget.
Ans. A budget is an annual statement of the estimated receipts and
Expenditure of the government over the fiscal year.
Q2. Name the two components of budget.
Ans. 1) Budget Receipts 2) Budget Expenditure.
Q3. Why is borrowings considered as Capital receipt?
Ans. It increases the liability of the government, so it is considered as
Capital receipt.
Q4. Define tax
Ans. Tax is legal compulsory payment imposed by the government on
the people.
Q5. Give two example of direct tax.
Ans. 1) Income tax 2) Gift tax
Q6. Give two example of indirect tax.
Ans. 1) Sales tax 2) Custom duty
Q7. Give two example of non-tax revenue.
Ans. 1) dividend 2) Fees and fines
Q8. When Budget is normally presented in the Parliament?
Ans. On 28th February.
Q9. Why is tax not a Capital receipt?
Ans. Tax neither creates liability nor reduces assets, so it is not
Considered as capital receipt.
Q10. Give two example of revenue expenditure.
Ans. 1) Payment of Salaries 2) Interest payment
Q11. Give two example of Capital expenditure.
Ans. 1) Loan to public 2) Acquiring land, building, machine and
investment in shares etc.
Q12. What is balanced budget?
Ans. A Government budget is said to be a balanced in which government
receipts are shown equal to government expenditure
Q13. What is Surplus budget?
Ans. When government receipts are more than government expenditure
in the budget, the budget is called a surplus budget.
Q14. What is deficit budget?
Ans. When government expenditure exceeds government receipts in the
budget is said to be a deficit budget.
Q15. Give the formula to calculate ‘ revenue deficit’.
Ans. Revenue deficit = Total revenue expenditure – Total revenue
receipts.
Q16. Give the formula to calculate ‘ fiscal deficit’.
Ans. Fiscal Deficit = Total budget expenditure = Total budget receipts
net of borrowings.
Q17. Give the formula to calculate ‘ primary deficit’.
Ans. Primary deficit = Fiscal deficit – interest payment.
Q18. Define Capital receipts.
Ans. Capital Receipts refer to those receipts of the government which i)
tend to create a liability or ii) Causes reduction in its assets.
Q19. Define revenue receipts.
Ans. A revenue receipts are those receipts which neither create a liability
nor reduce assets of the government. eg. Tax and non-tax receipts.
Q20. Define revenue expenditure.
Ans. It does not result in creation of assets or reduction in liabilities
eg. Payment of salaries.
Q21. Define Capital expenditure.
Ans. It refers to the expenditure which leads to creation of assets and
reduction in liabilities eg. Expenditure incurred on construction of
building, roads, bridges etc.
Q22. Give two sources of Capital receipts.
Ans. 1) Recovery of loans 2) Borrowings.
Q23. Give one objective of budget.
Ans. To reduce inequalities of income and wealth.
Q24. Define direct tax.
Ans. These taxes are those tax in which liability to pay and burden of tax
falls on same person.
Q25. Define indirect tax.
Ans. Liability to pay and burden of indirect tax falls on different persons.
Short Answer Question (3/4 Mark)
Q1. Write any three objective of government Budget.
Ans. The objective that are pursued by the government through the
budget are-
i) To achieve economic growth.
ii) To reduce in equalities in income and wealth.
iii) To achieve economic stability.
Q2. Explain the basis of classifying government receipts into revenue
receipts and capital receipts.
Ans. Revenue Receipts :-A government revenue receipts are those
receipts i) which neither create liability ii) nor reduce assets of the
government eg. Dividend.
Capital Receipts :- Capital Receipts refer to those receipts of the
government which i) tend to create a liability or ii) Causes
reduction in its assets of the government. eg. Borrowings
Q3. Distinguish between direct tax and indirect tax
Ans.
Direct Tax Indirect Tax
1. Liability to pay and burden of
direct tax falls on same person.
2. Levied on income and property
of person.
3. eg. Income tax 1. Liability to pay and burden
of direct tax falls on some
other person.
2. Levied on goods and
services on their sale,
production, import and export.
3. eg. Sales tax
Q4. Define revenue receipts. Write the groups in which they are
classified.
Ans. Any receipts which does not either create a liability or lead to
Reduction in assets is called revenue receipts. Revenue receipts
consist of
1) Tax Revenue and 2) Non-Tax Revenue.
Q5. Distinguish between Revenue and Capital expenditure.
Ans.
Revenue Expenditure Capital Expenditure
1. It does not result in creation of
assets
2. It is for short period and
recurring in nature
3. eg. Expenditure on salaries of
employees 1. It result in creation of assets
2. It for long period and non-
recurring in nature
3. eg. Expenditure on acquisition
of assets like land, building etc.
Primary Deficit is the difference between Fiscal deficit and interest payments. It determines whether the fiscal deficit in government budget has arisen due to interest payment or any other activity of the government.
A large primary deficit indicates that the difference between fiscal deficit and interest payment is more. It means government is spending more than its receipt on other activities. The government may be spendthrift.
A zero primary deficit indicates that interest payments and fiscal deficit is equal. The fiscal deficit has arisen due to interest payment.
Contents of the Chapter:-
• Government Budget – Meaning, Objective
• Components of Government Budget
• Classification of receipts – Capital and revenue
• Classification of expenditure
- Capital and revenue
• Balanced budget surplus budget, deficit budget
- meaning and implication
• Revenue deficit, Fiscal deficit, primary deficit
- Meaning and implication.
Meaning of Government Budget:-
A government budget is an annual statement of the estimated receipts and estimated expenditure of the government during a fiscal year.
Objective of the Government Budget
The objective that are pursued by the government through the budget are-
I. Reallocation of resources -:It means managed and proper distribution of resources. As private sector can not provide all the goods and services the government has to provide these goods.
II. To reduce inequalities in income and wealth-: Through budget government tries to reduce the gap between Rich and poor. This is achieved through taxing the rich and subsidizing the needs of poor people. Taxing the income of rich people reduces their purchasing power and subsidies to poor people increases real income of poor people.
III. To achieve economic stability -: There may be inflation or depression in the economy. Inflation is the situation of rise in price level whereas depression is lack of demand. Both the situations are undesirable. During depression government reduces rate of tax and borrowing and increases public expenditure. During inflation government increases the rate of tax and borrowing and decreases public expenditure.
IV. Management of Public Enterprises
V. To achieve economic growth
Components of Government Budget:-
1. Budget Receipts
2. Budget Expenditure
Classification of Budget Receipts:-
1. Capital Receipts: - Capital Receipts refer to those receipts of the government which i) tend to create a liability or ii) Causes reduction in its assets. All the Capital receipts are broadly classified into three categories.
1) Recovery of loans :- These are Capital receipts because they reduce financial assets of the government
2) Borrowings: - Funds raised by the government form the borrowing are treated as capital receipts such receipts creates liability.
3) Other Receipts: - Funds raised through disinvestment are included in this category. By this government assets are reduced.
2. Revenue Receipts:-
Any receipts which do not either create a liability or lead to reduction in assets is called revenue receipts. Revenue receipts consist of 1) Tax Revenue and 2) Non-Tax Revenue.
1) Tax Revenue: - A tax is a legal compulsory payment imposed by the government on the people. All taxes are broadly classified into i) Direct Tax and ii) Indirect Tax.
When the liability to pay a tax and the burden of that tax falls on the same person, the tax is called direct tax. e.g. Income tax, corporation tax, Gift tax etc.
When the liability to pay a tax falls on one person and burden of that tax falls on some other person, the tax is called an Indirect tax. e.g. Sales tax, Custom duties, Service tax etc.
2) Non-Tax Revenue: - Non tax revenue consists of all revenue receipts other than taxes. For eg.:-
i) Interest
ii) Profit and dividend
iii) Fees and fines
iv) External grant-in-aid
Meaning of Budget Expenditure:-
Budget expenditure refers to the estimated expenditure to be incurred by the government under different heads in a year.
Revenue Expenditure:-
An expenditure which do not creates assets or reduces liability is called Revenue Expenditure.
Examples are – Salaries of government employees, interest payment on loan taken by the government, pension, subsidies, grants etc.
Capital Expenditure:-
It refers to the expenditure which leads to creation of assets and reduction in liabilities eg. Expenditure incurred on construction of building, roads, bridges etc.
Balanced Budget:-
A Government budget is said to be a balanced in which government receipts are shown equal to government expenditure
Surplus Budget:-
When government receipts are more than government expenditure in the budget, the budget is called a surplus budget.
Budget Deficit
Deficit Budget:-
When government expenditure exceeds government receipts in the budget is said to be a deficit budget.
Types:-
Revenue Deficit:-
Revenue deficit refers to the excess of revenue expenditure of the government over its revenue receipts.
Revenue deficit = Total revenue expenditure – Total revenue receipts.
Importance: - Since it is largely related with the recurring expenditure. Therefore, high revenue deficit gives a warning to the government either to cut expenditure or to increase revenue receipts. It also implies requirement burden in future.
Fiscal Deficit:-
Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowings.
Fiscal Deficit = Total budget expenditure - Total budget receipts net of borrowings.
Importance: - Fiscal deficit is a measure of total borrowings required by the government. Greater fiscal deficit implies, greater borrowings by the government. This creates a large burden of interst payments in the future that leads to increase in revenue expenditure, causing an increase in revenue deficit. Thus a vicious circle sets in. In the present, a large fiscal deficit may also lead to inflationary pressures.
Primary Deficit:-
Primary deficit is defined as fiscal deficit minus interest payment. It is equal to fiscal deficit reduced by interest payment.
Primary deficit = Fiscal deficit – interest payment.
Importance: - Primary deficit signifies borrowing requirements of the government. A low or zero primary deficit means that while government’s interest requirement on earlier loans have compelled the government to borrow but it is aware of the need to tighter its belt.
Government Budget and the Economy
Very Short Answer Question ( 1 Mark)
Q1. Give the meaning of budget.
Ans. A budget is an annual statement of the estimated receipts and
Expenditure of the government over the fiscal year.
Q2. Name the two components of budget.
Ans. 1) Budget Receipts 2) Budget Expenditure.
Q3. Why is borrowings considered as Capital receipt?
Ans. It increases the liability of the government, so it is considered as
Capital receipt.
Q4. Define tax
Ans. Tax is legal compulsory payment imposed by the government on
the people.
Q5. Give two example of direct tax.
Ans. 1) Income tax 2) Gift tax
Q6. Give two example of indirect tax.
Ans. 1) Sales tax 2) Custom duty
Q7. Give two example of non-tax revenue.
Ans. 1) dividend 2) Fees and fines
Q8. When Budget is normally presented in the Parliament?
Ans. On 28th February.
Q9. Why is tax not a Capital receipt?
Ans. Tax neither creates liability nor reduces assets, so it is not
Considered as capital receipt.
Q10. Give two example of revenue expenditure.
Ans. 1) Payment of Salaries 2) Interest payment
Q11. Give two example of Capital expenditure.
Ans. 1) Loan to public 2) Acquiring land, building, machine and
investment in shares etc.
Q12. What is balanced budget?
Ans. A Government budget is said to be a balanced in which government
receipts are shown equal to government expenditure
Q13. What is Surplus budget?
Ans. When government receipts are more than government expenditure
in the budget, the budget is called a surplus budget.
Q14. What is deficit budget?
Ans. When government expenditure exceeds government receipts in the
budget is said to be a deficit budget.
Q15. Give the formula to calculate ‘ revenue deficit’.
Ans. Revenue deficit = Total revenue expenditure – Total revenue
receipts.
Q16. Give the formula to calculate ‘ fiscal deficit’.
Ans. Fiscal Deficit = Total budget expenditure = Total budget receipts
net of borrowings.
Q17. Give the formula to calculate ‘ primary deficit’.
Ans. Primary deficit = Fiscal deficit – interest payment.
Q18. Define Capital receipts.
Ans. Capital Receipts refer to those receipts of the government which i)
tend to create a liability or ii) Causes reduction in its assets.
Q19. Define revenue receipts.
Ans. A revenue receipts are those receipts which neither create a liability
nor reduce assets of the government. eg. Tax and non-tax receipts.
Q20. Define revenue expenditure.
Ans. It does not result in creation of assets or reduction in liabilities
eg. Payment of salaries.
Q21. Define Capital expenditure.
Ans. It refers to the expenditure which leads to creation of assets and
reduction in liabilities eg. Expenditure incurred on construction of
building, roads, bridges etc.
Q22. Give two sources of Capital receipts.
Ans. 1) Recovery of loans 2) Borrowings.
Q23. Give one objective of budget.
Ans. To reduce inequalities of income and wealth.
Q24. Define direct tax.
Ans. These taxes are those tax in which liability to pay and burden of tax
falls on same person.
Q25. Define indirect tax.
Ans. Liability to pay and burden of indirect tax falls on different persons.
Short Answer Question (3/4 Mark)
Q1. Write any three objective of government Budget.
Ans. The objective that are pursued by the government through the
budget are-
i) To achieve economic growth.
ii) To reduce in equalities in income and wealth.
iii) To achieve economic stability.
Q2. Explain the basis of classifying government receipts into revenue
receipts and capital receipts.
Ans. Revenue Receipts :-A government revenue receipts are those
receipts i) which neither create liability ii) nor reduce assets of the
government eg. Dividend.
Capital Receipts :- Capital Receipts refer to those receipts of the
government which i) tend to create a liability or ii) Causes
reduction in its assets of the government. eg. Borrowings
Q3. Distinguish between direct tax and indirect tax
Ans.
Direct Tax Indirect Tax
1. Liability to pay and burden of
direct tax falls on same person.
2. Levied on income and property
of person.
3. eg. Income tax 1. Liability to pay and burden
of direct tax falls on some
other person.
2. Levied on goods and
services on their sale,
production, import and export.
3. eg. Sales tax
Q4. Define revenue receipts. Write the groups in which they are
classified.
Ans. Any receipts which does not either create a liability or lead to
Reduction in assets is called revenue receipts. Revenue receipts
consist of
1) Tax Revenue and 2) Non-Tax Revenue.
Q5. Distinguish between Revenue and Capital expenditure.
Ans.
Revenue Expenditure Capital Expenditure
1. It does not result in creation of
assets
2. It is for short period and
recurring in nature
3. eg. Expenditure on salaries of
employees 1. It result in creation of assets
2. It for long period and non-
recurring in nature
3. eg. Expenditure on acquisition
of assets like land, building etc.
Primary Deficit is the difference between Fiscal deficit and interest payments. It determines whether the fiscal deficit in government budget has arisen due to interest payment or any other activity of the government.
A large primary deficit indicates that the difference between fiscal deficit and interest payment is more. It means government is spending more than its receipt on other activities. The government may be spendthrift.
A zero primary deficit indicates that interest payments and fiscal deficit is equal. The fiscal deficit has arisen due to interest payment.
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