GOVERNMENT

BUDGET
PART- 3
XII MACRO ECONOMICS
BOARD EXAM 2023

SUNIL PANDA- THE EDUCATOR

Situation in Government Budget

(i) Balanced budget / Equilibrium Budget: It is a situation when budgetary

expenditure is equal to budgetary receipts.
TR = TE
(ii) Surplus Budget: It is a situation when budgetary receipts are greater than
budgetary expenditure. In situation of inflation, surplus budget is prepared by
the government.
TR > TE
(iii) Deficit Budget: It is a situation when budgetary expenditures are greater
than budgetary receipt. In situation of deflation, deficit budget is prepared by
the government.
TE > TR
 Budgetary Deficit are Three types

Revenue Deficit Fiscal Deficit Primary Deficit

Budgetary Deficit = Total expenditure – Total receipts

(i) Revenue deficit: It is the excess of revenue expenditures over revenue receipts.
RD = RE – RR, Here (RE > RR)
IMPLICATIONS OF REVENUE DEFICIT
Since revenue receipts and revenue expenditures are related largely to recurring
expenses of the Government (as on administration & maintenance) High revenue
deficit gives a warning signal to the government either to cut its expenditure or
increase its tax/non tax receipts. In less developed countries like India, it is difficult to
force the poor people to pay high tax. In such situation, the Government is compelled
to cope with high revenue deficit through borrowings or disinvestment. Borrowings
creates liability of the Government whereas disinvestment cause reduction in assets
of the Government
(ii) Fiscal deficit: It is the excess of Total expenditure over Total receipts other
than borrowings.
i.e. Fiscal deficit is equal to borrowings of the Government Fiscal deficit =
TE – TR (excluding borrowings)
⇒ Fiscal deficit = Total expenditure – Revenue Receipts – Capital receipts
excluding Borrowings
⇒ Fiscal deficit = (RE + CE) – RR – Recovery of loan – Disinvestment
⇒ Fiscal deficit = Budgetary deficit + Borrowing & Other liabilities
IMPLICATIONS OF FISCAL DEFICIT
Greater fiscal deficit implies greater borrowings by the Government.
(a) It causes Inflation: Government borrowings includes borrowing from RBI.
It increases circulation of money in economy and cause inflation.
(b) Increase foreign dependence: Government also borrows from rest of the
world. It increases our dependence on other countries.
(c) It accumulates financial burden for future generation to repay the loan with
interest.
(d) Increase in fiscal deficit implies increase in borrowings i.e. ultimately leads
to increase in interest expenditure i.e. increase in revenue deficit also. It is also
called Debt Trap.
(iii) Primary Deficit: It is the difference between fiscal deficit and interest
payment
Primary Deficit = Fiscal deficit – Interest payment
While fiscal deficit shows borrowings requirement of the Government including
of interest payment on the accumulated national debt. Primary deficit shows
borrowing requirement of the Government exclusive of interest payment.
Tax Receipt = Direct Tax + Indirect Tax
Q.1. Find out (a) Fiscal deficit and (b) Primary deficit.
Particular ₹ In crore
Revenue receipts 80,000
Borrowing 45,000
Revenue expenditure 1,00,000
Interest payment is 25% of revenue deficit
Q.2) Calculate (i) Revenue deficit (ii) Fiscal deficit (iii) Primary deficit.
Particular ₹ In crore
Capital Receipt net of borrowings (excluding borrowings 95
Revenue expenditure 100
Interest payment 10
Revenue Receipts 80
Capital expenditure 110
Q.3) Calculate (i) Revenue deficit (ii) Fiscal deficit (iii) Primary deficit
Particular ₹ In crore
Tax Revenue 47
Capital Receipt 34
Non-tax revenue 10
Borrowings 32
Revenue expenditure 80
Interest payments 20
Q.4. If the budgetary deficit of the government is ₹25,000 crores and the
borrowings and other liabilities and ₹7000 crores, how much will be the fiscal
deficit?
Q.5. Find borrowings by the Government if payment of interest is estimated to
be of ₹15,000 crore which is 25% of primary deficit.
Q.6) Revenue deficit is estimated to be ₹20,000 crores, and borrowing is
estimated to be ₹15000 crore. If expenditure on interest payment is estimated
to be 50% of the revenue deficit find fiscal deficit and primary deficit
Q.7) Giving reasons categories the following into revenue and capital
expenditure:
(i) Grants given to state government
(ii) Repayment of loans.
(iii) Expenditure on construction of roads.
(iv) Interest payment on past loans.
(v) Payment of salaries to Government employees.
(vi) Taking over a private firm by the Government
(vii) Expenditure on subsidies.
(viii) Purchase of shares by the Government
Q.8. Classify the following into Revenue Receipts & Capital Receipts, give
reason.
(i) Loan from world bank
(ii) Corporation tax
(iii) Sale of shares held by Government of a PSU.
(iv) Dividend Received by Government from a company.
(v) Profit of LIC, a public enterprise.
(vi) Amount borrow from Japan for bullet train.
(vii) Goods & Service Tax collection
(viii) Recover amount of loan from Bhutan.
Q.9) Classify the following into debt creating and non-debt creating
capital receipt. Give reasons.
(i) Sale of public sector undertakings.
(ii) Borrowings from public
(iii) Recovery of loans
Q.10. How can the deficit in budget be financed?
(i) Deficit financing: This refers to borrowing by Government from RBI against
Treasury Bills. RBI purchase the Bill in Return of Cash, which the Government
uses to fund the deficit.
(ii) Borrowing from public.
(iii) Disinvestment
(iv) Government should reduces its expenditure and increase tax & non tax
revenue
Thank you
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