Chapter 10 Government Budget And The Economy
Government Budget
Meaning: It is an annual financial statement showing item wise estimates of revenue and expenditure during a fiscal year
Objectives of Govt. Budget
(1). Economic Growth: The govt. seeks to accelerate the peace of growth through investment in efficient enterprises and disinvestment in inefficient in enterprise. This is to accelerate the GDP.(2). Redistribution of income and wealth: Through budget the government redistributes income and wealth to reduce inequalities in two ways. The budget should aim to impose high taxes on income of the rich and goods consumed by the rich. It will reduce disposable income of the rich. Budget should aim to spend more on the schemes which benefits the poor. This will raise disposable income of the poor. This will raise disposable income of the poor. In this way, Gap between rich and poor will reduce.
(3). Eradication of poverty, unemployment, illiteracy: Govt. budget also aims at the removal of evils in the economy, like poverty, illiteracy. This is done by running poverty eradication programs, rozgar yognas etc.
(4). Economic stability: Government budget can help to bring stability in economy. In inflationary situation government reduces its own expenditure and increases taxes, During deflation government try to increase the spending and cut down the taxation.
(5).Allocation Of Resources: Govt. ensures proper allocation of resources in the economy. Through its budgetary policy, the govt. makes sufficient provision for the supply of public goods. It also issues environmental issues by offering subsidies on the use of cleaner energy (LPG).
(6). Management of public enterprises: These are some industries and enterprises which effects the growth and development of economy. These enterprises are controlled and regulated by government . The decision about investment and disinvestment, about changes in wages and salaries of government employees and changes regarding retirement pension i also taken under budget.
*Please learn each & every objective, separate Questions can be asked on any objective.
Difference Between Revenue Budget And Capital Budget
Budget receiptsMeaning: It refers to the estimated receipts of the government from all the sources during a financial year.
Capital Receipts
Meaning: Govt. receipts which either creates liability or reduces assets are called as capital receipts.(1). Borrowings: Borrowings done by government creates a liability on govt. Therefore it is a capital receipts.
(2). Disinvestment / sale of shares of public enterprise: When govt. receives money by selling shares that it reduces the govt. assets. Therefore it is a capital receipt. e.g- Indian Airlines shares given to private firms.
(3). Recovery of loan: When govt. lends money, it creates asset for govt. but when this loan is recovered, then it leads to reduction in the asset of the nation.
(4). Small savings in post offices: Small savings by general public in post officers etc. are received by govt. but it is liable to repay, when asked by general public, so it is a capital receipt for the govt.
Difference between Revenue Receipts And Capital Receipts
Tax Revenue: It consists of proceeds of taxes & other duties levied by the govt.
Tax: It is legally compulsory payment, imposed by govt. on income & profits of individuals and organisations.
Difference Between Direct Taxes And Indirect Taxes
Non-Tax Revenue Receipts
Meaning: Income from sources other than taxes is called as non-tax revenue receipts.
(1). Profits: Profits earned by govt. companies like BHEL, GAIL, SAIL are also non-tax revenue. As they neither create a liability on govt. to repay, nor do they reduce the asset.
(2). Dividends: Dividends received by govt. investments done, neither creates liability nor reduces assets.
(3). Interest: Interest received on govt. of India on loans given, does not create any liability nor does it reduce the assets.
(4).Fees & Fines: All the types of fees like OPD fees, school fees etc. and fines like Callan does not create any liability nor does it reduce any asset.
(5). Special Assessment: When govt. undertakes any development activity, the property & the rental value of the near by areas goes up. Govt. charges a special assessment in proportion to the benefit accrued, this neither creates a liability nor reduce the assets.
(6). External Grants in AID: During the times of calamities & crisis, govt receives aids & assistance from other nations. This neither creates liability nor reduces the assets.
Budget Expenditure
Meaning: Refers to the estimated expenditure to be incurred by the govt. under different heads in an year.
Objectives of Budget Expenditure
1. For smooth functioning of the govt.
2. For social & economic welfare.
3. For removing regional disparities.
4. For economic growth.
Different Between Revenue Expenditure And Capital Expenditure
Types of Budget
1. Balanced Budget
Meaning: It refers to the govt. budget is balanced when its estimated receipts are equal to its estimated expenditure.
Balanced Budget = (Estimated Budget Receipts = Estimated Budget Expenditure)
Merits
1. Ensures financial stability.
2. Avoids wasteful expenditure.
Demerits
1. Economic growth hindered.
2. Scope of undertaking welfare activities is restricted.
2. Surplus Budget
Meaning: When govt. estimated receipts are greater than the estimated expenditure.
Surplus Budget = ( Estimated govt. receipts > Estimated govt. expenditure)
Surplus budget is a cure for inflation
Surplus budget is a cause for deflation.
3. Deficit Budget
Meaning: When govt. estimated receipts are less than govt. estimated expenditure.
Deficit Budget = ( Estimated govt. receipts < estimated govt. expenditure)
Merits
1.Accelerates economic growth.
2. Enables to undertake welfare programs
Demerits
1.Encourages wasteful expenditure.
2. Financial & political instability.
Deficit Budget is a cure for deflation.
Deficit Budget is a cause for inflation.
Types Of Budget Deficit
1. Revenue Deficit
Meaning: It refers to a situation where the govt. revenue expenditure exceeds revenue receipts.
Revenue Deficit = Revenue expenditure - Revenue receipts
Remedies
1. govt must raise the rates of takes specially on rich people.
2. govt must try to reduce expenditure & avoid unnecessary expenses.
Implications/ Impact/ Consequences of Revenue Deficit
1. Increase in Borrowings requirements and Debt trap: To fulfill the expenditures, if govt. borrows money and then it is not capable enough to repay, then it might force the govt. to take a fresh loan, this would bring the govt. under debt trap.
2. Reduction in Assets: Again to meet up the financial obligations, the govt might end up and selling assets to cover up.
3. Inflationary pressure: Since the borrowed funds are largely used to find the consumption expenditure, this may create inflationary pressure.
4. Wasteful expenditure: Deficit also shows that govt. might be doing wasteful expenditure.
2. Fiscal Deficit
Meaning: When govt. total budget expenditure is greater than the total budget receipts excluding borrowings.
Fiscal Deficit = Total Expenditure - Total Receipts excluding borrowings
Implications of Fiscal Deficit
1. Increase in Borrowings requirements and Debt trap: To fulfill the expenditures, if govt. borrows money and then it is not capable enough to repay, then it might force the govt. to take a fresh loan, this would bring the govt. under debt trap.
2. Reduction in Assets: Again to meet up the financial obligations, the govt might end up and selling assets to cover up.
3. Inflationary pressure: Since the borrowed funds are largely used to find the consumption expenditure, this may create inflationary pressure.
4. Wasteful expenditure: Deficit also shows that govt. might be doing wasteful expenditure.
3. Primary Deficit
Meaning: It is defined as fiscal deficit less then interest payments on previous borrowings.
Primary Deficit = Fiscal Deficit - Interest payments
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