Class XII - Economics Government Budget and The Economy

Class XII – Economics
GOVERNMENT BUDGET AND THE ECONOMY
A government’s budget is a statement showing item wise estimated receipts and

expenditures of the government under various heads during a given year.
OBJECTIVES OF BUDGET
1) Reallocation of resources in the economy
2) Reducing the inequalities in income and wealth
3) Bringing economic stability
4) Management of public enterprises
1. REALLOCATION OF RESOURCES IN THE ECONOMY

The resources in the economy are scarce and they should be properly allocated in
compliance with the fulfillment of economic and social requirements. The economic
activities which are not undertaken by private sector due to lack of profits on huge
investments, are undertaken by the government in public interest such as water supply,
sanitation, etc.
2. REDUCING THE INEQUALITIES IN INCOME AND WEALTH

The income inequalities in the economy, that is the gap between the rich and the poor
can be reduced by taking two fiscal policy measures-
a) The rate of taxation can be increased on the income of the rich. This will reduce
the disposable income of the rich
b) The government can increase expenditure on providing free services to the poor
like education, medical treatments etc. This will raise the disposable income of the
poor.
3. BRINGING ECONOMIC STABILITY

Economic stability means absence of large scale fluctuations in prices.
These fluctuations create uncertainties in the economy, which can be controlled by the
government through taxes and expenditures.
4. Management of public enterprises

The government while preparing the budget also considers the expected amount of
receipts to be earned and the expected expenditure that requires to be incurred in the
coming fiscal year. The proper functioning and management of PSU’s is an important
objective of the government budget.
COMPONENTS OF A GOVERNMENT BUDGET
BUDGET RECEIPTS
A) REVENUE RECEIPTS
B) CAPITAL RECEIPTS
BUDGET EXPENDITURES
A) REVENUE EXPENDITURE
B) CAPITAL EXPENDITURE
BUDGET RECEIPTS
These are the funds planned to be raised from various resources. It is classified as-
REVENUE RECEIPTS: The receipts which neither create any liability nor lead to any
reduction in the assets are called revenue receipts. These are in the form of:
1. TAX RECEIPTS
A tax is a legally compulsory payment made to the government by the people of a nation,
for example: income tax, corporation tax, sales tax, custom duty.
Taxes are of two types:

DIRECT TAX
It is that form of taxation in which ‘liability to pay’ and ‘incidence’ of a tax lie on the same
person. Example: income tax, corporation tax, wealth tax.
INDIRECT TAX
It is a form of taxation in which ‘liability to pay’ and ‘incidence’ of a tax lie on a different
person. Example: VAT, sales tax, excise duty.
BASIS DIRECT TAX INDIRECT TAX

1) SUBJECT MATTER 1) Direct tax is imposed 1)Indirect tax is imposed on
on a person commodities
2) SHIFTING OF 2) Direct tax is paid by 2) Indirect tax is paid by the

BURDEN the person on whom it is consumers, that is, it is
imposed. Hence, imposed. Thus, shifting of
shifting burden is not burden is possible.
possible
3) NATURE 3) Direct tax is generally 3) Indirect tax is generally

progressive that is, rate proportional that is, rate of
of tax increases with the tax remains constant
increase in income increase or decrease in
income
4) EXAMPLES 4) Examples of direct 4) Examples of indirect tax

tax: A) Sales tax
A) Income tax B) Excise tax
B) Wealth tax
2. NON TAX RECEIPTS

Income receipts from sources other than the tax is classified as non tax revenue receipts.
The main sources are - interest, dividends, profits and external grants. The non tax
revenue receipts are in the form of :
A) FEES, LICENSE AND PERMITS

FEES- A fee is a payment to the government for the services rendered by them.
Examples : passport fees
LICENSE AND PERMIT- It refers to the changes by the government to perform a given
activity.
B) ESCHEAT
It refers to that income of the state which arises out of the property that comes to it for
want of a legal heir. When a property has no claimant, State alone has the legal right over
it.
C) FINES AND PENALTIES

These are those payments that are made by law breakers to the government by loans of
economic punishment.
D) GIFTS AND GRANTS
These are voluntary contributions from private individuals or international agencies for
specific purposes such as relief fund etc.
E) INCOME FROM PUBLIC ENTERPRISES

The profit earned from the sales proceeds of the products of public enterprises that are
owned by the government are also a source of non tax revenue receipts
CAPITAL RECEIPTS:
These are those receipts that either cause reduction in the assets or create liabilities for
the government. These are classified as:
1) RECOVERY OF LOANS
The central government grants loans to state governments, union territory governments
and other parties. When government recovers these loans, the debtors(assets) decreases
and is thus treated as a capital receipt.
2) BORROWINGS AND OTHER LIABILITIES

Government borrows from the public, Central bank and foreign governments. Borrowings
lead to increase in liabilities of the government and therefore it is a capital receipt.
3) OTHER CAPITAL RECEIPTS

It includes other capital receipts like disinvestments.
Disinvestments- It is considered as a capital receipt as the government raises funds by
selling its equity holdings which lead to reduction in assets.
BASIS REVENUE RECEIPTS CAPITAL RECEIPTS
1.NATURE 1) Revenue receipts are 1) Capital receipts are

receipts of recurring receipts of non recurring
nature nature
2.CONTENTS 2) It includes both tax and 2) It includes only non tax

non tax receipts receipts
3.PURPOSE 3)There is neither 3)It either causes

reduction in assets nor reduction in assets or
creation of liabilities creation of liability
4)EXAMPLE 4) Income tax, fees, fines 4)Borrowings,

etc. disinvestments etc.
BUDGET EXPENDITURE
It refers to the expenditure(estimated) under various heads. It is classified as-
1)REVENUE EXPENDITURE
2)CAPITAL EXPENDITURE
REVENUE EXPENDITURE
It is the expenditure which does not lead to any creation of assets or any reduction in
liabilities. Example : Expenditure on salaries, subsidies, etc.
CAPITAL EXPENDITURE
It is the expenditure which leads to creation of assets or reduction in liabilities. Example :
Expenditure on land, purchase of shares, loans to state government, etc.
BALANCED BUDGET
It means a budget in which the estimated government revenue raised by the government
is equal to the estimated government expenditure. It ensures financial stability and
restricts the freedom of the government to spend.
SURPLUS BUDGET
It means a budget in which estimated government revenue raised by the government
exceeds government expenditure. It does not allow a government to concentrate on
growth and welfare schemes of the people.
DEFICIT BUDGET
It means that the estimated government expenditure is higher than the estimated receipts.
It is of three types-
a) REVENUE DEFICIT
It refers to the excess of total revenue expenditure over total revenue receipts.
revenue deficit = total revenue
expenditure – total revenue receipt
Implications (Only for Reference)

Revenue deficit means that the government’s receipts are not sufficient to meet the
government’s expenditure. It’s implications are as follows:
1) Reduction of assets
It indicates dissavings on government account since the government has to make up the
uncovered gap by drawing upon capital receipts either through borrowings on sale of
assets( disinvestment ).
2) Inflationary Pressure
Revenue deficit leads to inflationary situations in the economy since borrowed
funds are used to meet consumption expenditure. Thus revenue deficit either results in
increasing government liability ot teduction in government assets. Hence, revenue deficits
leads to a repayment burdenon the government.
3) Debt Burden
Large borrowings made by the government to meet the excess expenditure leads to an
increase in the debt burden on the government.
b) FISCAL DEFICIT
It refers to the excess of total expenditure over the sum of revenue receipts and
non debt capital receipts.
fiscal deficit = total budget expenditure – revenue receipts
OR
fiscal deficit = total budget expenditure – total budget non debt receipts
Implications(Only for Reference)
Fiscal deficit indicates borrowing requirements of the government during the budget year.
It means that the government resorts to borrowing to meet a large portion of its
expenditure. It’s implications are as follows :
1) Debt Trap
Fiscal deficit i.e. borrowing creates problems of repayment of loan and payment
of interest. As the government borrowing increases its liability to repay along
with the payment of interest. Payment of interest increases revenue
expenditure leading to revenue deficit. Therefore, government may be
compelled to borrow more loans to finance even the interest payments. This
leads to a debt trap.
2) Inflationary Pressure
As government borrows from RBI, the latter meets the demand by producing
more currency notes ( called deficit financing ). Increased money supply in the
economy leads to rise in demand resulting in rise in price ( inflation ).
3) Wasteful expenditure
High fiscal deficit generally leads to wasteful and unnecessary expenditure by the
government adding to inflation problems.
c) PRIMARY DEFICIT
It is the difference between fiscal deficit and interest payments.
primary deficit = fiscal deficit – interest payment

Class XII - Economics Government Budget and The Economy

Uploaded by

Copyright:

Available Formats

Class XII - Economics Government Budget and The Economy

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Class XII - Economics Government Budget and The Economy

Uploaded by

Copyright:

Available Formats

Class XII – Economics

GOVERNMENT BUDGET AND THE ECONOMY

A government’s budget is a statement showing item wise estimated receipts and

1. REALLOCATION OF RESOURCES IN THE ECONOMY

2. REDUCING THE INEQUALITIES IN INCOME AND WEALTH

3. BRINGING ECONOMIC STABILITY

4. Management of public enterprises

COMPONENTS OF A GOVERNMENT BUDGET

Taxes are of two types:

BASIS DIRECT TAX INDIRECT TAX

2) SHIFTING OF 2) Direct tax is paid by 2) Indirect tax is paid by the

3) NATURE 3) Direct tax is generally 3) Indirect tax is generally

4) EXAMPLES 4) Examples of direct 4) Examples of indirect tax

2. NON TAX RECEIPTS

A) FEES, LICENSE AND PERMITS

C) FINES AND PENALTIES

E) INCOME FROM PUBLIC ENTERPRISES

2) BORROWINGS AND OTHER LIABILITIES

3) OTHER CAPITAL RECEIPTS

BASIS REVENUE RECEIPTS CAPITAL RECEIPTS

1.NATURE 1) Revenue receipts are 1) Capital receipts are

2.CONTENTS 2) It includes both tax and 2) It includes only non tax

3.PURPOSE 3)There is neither 3)It either causes

4)EXAMPLE 4) Income tax, fees, fines 4)Borrowings,

Implications (Only for Reference)

Implications(Only for Reference)

primary deficit = fiscal deficit – interest payment

You might also like

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.