5.
Government Budget
1.Public Goods –National Defence, roads,
government administration.
2. Private Goods – Clothes, Cars and Food items.
Created by Seema Pradhan
Created by Seema Pradhan
Government
Budget
Budget Budget
Receipts Expenditure
Created by Seema Pradhan
Government Budget : Government budget is a statement showing estimated
government expenditure and receipts during a financial year.
Objectives of Government Budget
1. Reallocation of resources.
2. Reducing inequalities in income and wealth
3. Economic stability
4. Management of Public Enterprises.
5. Economic Growth
6. Reducing regional disparities
Created by Seema Pradhan
Reallocation of resources
• Government aims to reallocate resources according to economic and
social priorities through its budget policy.
• Government can encourage production of selected good and services by
providing tax concessions . For example electricity generation etc.
• Government can also give subsidies to enterprises who are willing to
undertake production in backward areas etc
• Government discourages the production of harmful consumption goods
(like liquor, cigarettes etc.) through heavy taxes and encourages the use
of ‘Khaki products’ by providing subsidies.government budget can be
used to influence allocation of resources
Created by Seema Pradhan
Reducing inequalities in income and wealth
Government aims to reduce such inequalities of income and wealth,
through its budgetary policy.
• Progression Taxation – Government can intervene to promote equity
and reduce inequality and poverty, through the tax and benefits system,
progressive tax system means more tax from those on higher levels of
income and use same money for welfare of poor people.
• Increasing Government Expenditure – Government increases its
expenditure by spending on development projects like on health and
education. By doing thins the government reduces the gap between rich
and poor
Created by Seema Pradhan
Economic stability
Stability in the economy means keeping fluctuation in the general price level within the limit.
When there is inflation government can reduce its own expenditure to bring down the price
level.
When there is deflation government can increase its own expenditure to fight it. Government
can also use taxes and subsidies to influence personal disposable income and bring in
economic stability in the country.
Created by Seema Pradhan
Management of Public Enterprises
• There are large numbers of public sector industries which are
established and managed for social welfare of the public.
Eg -Indian Council of Medical Research, ISRO, Hindustan antibiotic
• Budget is prepared with the objectives of making various provisions for
managing such enterprises and providing them financial help
Created by Seema Pradhan
Economic Growth
The growth rate of a country depends on rate of saving and investment for
this purpose budgetary policy aims to mobilize sufficient resources for
investment in the public sector. Therefore the government makes various
provision in the budget to raise overall rate of saving and investment in the
economy.
Reducing regional disparities
The government budget aims to reduce regional disparities through its
taxation and expenditure policy for encouraging setting up of production
units in economically backward regions
Created by Seema Pradhan
Government Budget
Budget Receipts Budget Expenditure
Revenue Capital Revenue
Capital Expenditure
Receipt Receipt Expenditure
Tax Non tax
Revenue Revenue
Created by Seema Pradhan
REVENUE ACCOUNT
1. Revenue receipt : Revenue receipts are receipts which do not create liability nor
lead to reduction of asset
Tax Revenue : Tax revenues consist of the proceeds of taxes and other duties levied
by the central government
a) Direct tax : refers to taxes that are imposed on property and income of individuals
and companies and are paid directly by them to the government. Burden cannot be
shifted. Eg – Income tax, Corporate tax, Interest tax, Wealth tax, Death duty, Capital
gains
b) Indirect tax: refers to those which affect the income and property of individuals
and companies through their consumption expenditure. Burden can be shifted. Eg –
Sales tax, Entertainment Tax, Excise Duty, Custom duty, GST
Created by Seema Pradhan
Direct tax Indirect tax
1. Refers to taxes that are imposed on 1. Refers to those which affect the income
property and income of individuals and property of individuals and
and companies companies through their consumption
expenditure.
2. Paid directly by them to the 2. Paid by end consumer to government
government indirectly
3. Burden cannot be shifted 3. Burden can be shifted
4. Eg – Income tax, Corporate tax, 4. Eg – Sales tax, Entertainment Tax,
Interest tax, Wealth tax, Death duty, Excise Duty, Custom duty, GST
Capital gains
Created by Seema Pradhan
Non Tax Revenue: Non-tax revenue of the central government mainly
consists of
• Interest receipts (on account of loans by the central government which
constitutes the single largest item of non-tax revenue)
• Dividends and profits on investments made by the government- Indian
Railways, LIC, BHEL
• Fees – Court fees,Registration fees, Import fees
• Other receipts- Fines and penalty
• Escheats
• Cash grants-in-aid from foreign countries and international organizations
are also included.
Created by Seema Pradhan
Capital Receipts:
• Refers to those receipt which either create a liability or cause a reduction in the assets of the
government
• Loans raised by the government from the public
• Borrowing by the government from the Reserve Bank and commercial banks and other financial
institutions through the sale of treasury bills,
• Loans received from foreign governments and international organisations,
• Recoveries of loans granted by the central government.
• Other items include small savings (Post-Office Savings Accounts, National Savings Certificates, etc),
provident funds and net receipts obtained from the sale of shares in Public Sector Undertakings (PSUs).
Created by Seema Pradhan
•
•
•
•
•
Created by Seema Pradhan
Measures of Government Deficit
1. Revenue Deficit: The revenue deficit refers to the excess of government’s revenue expenditure
over revenue receipts
Revenue deficit = Revenue expenditure – Revenue receipts
2. Fiscal Deficit: Fiscal deficit excess of total expenditure over total receipts excluding borrowing
Fiscal deficit = Total expenditure – Total receipts excluding borrowing
(Revenue Expenditure + Capital Expenditure ) – ( Revenue receipt +Capital receipt+ Non
debt creating capital receipt+ )
3. Primary Deficit: To obtain an estimate of borrowing on account of current expenditures
exceeding revenues, we need to calculate what has been called the primary deficit. It is simply the
fiscal deficit minus the interest payments
Primary deficit = Fiscal deficit – Interest Payment
Created by Seema Pradhan
Q.1 Primary deficit in a government budget is (Choose the correct alternative)
a) Revenue expenditure – Revenue receipt
b) Total Expenditure – Total receipt
c) Revenue deficit – Interest payments
d) Fiscal deficit – Interest payment
Q.2 Direct tax is called direct because it is collected from( choose the correct
alternative)
a) The producers on goods produced
b) The sellers on good sold
c) The buyers of goods
d) The income earners
Created by Seema Pradhan
Q.3 The non-tax revenue in the following is (choose the correct alternative)
a) Export duty
b) Import Duty
c) Dividends
d) Excise
Q.4 Borrowing in government is (choose the correct alternative)
a) Revenue deficit
b) Fiscal deficit
c) Primary deficit
d) Deficit in taxes
Created by Seema Pradhan
Q. Which of the following is not a revenue receipt ( choose the correct alternative)
a) Recovery of loan
b) Foreign grants
c) Profits of public enterprises
d) Wealth tax
Q Distinguish between revenue deficit and fiscal deficit
Ans Excess of revenue expenditure over revenue receipt is called revenue deficit.
Whereas the excess of total expenditure over total receipt excluding borrowing is called fiscal deficit
Created by Seema Pradhan
Q.3 The non-tax revenue in the following is (choose the correct alternative)
a) Export duty
b)Import Duty
c) Dividends
d)Excise
Q.4 Borrowing in government is (choose the correct alternative)
a) Revenue deficit
b) Fiscal deficit
c) Primary deficit
d) Deficit in taxes
Created by Seema Pradhan
Q. Which of the following is a non-tax
receipt?
(a) Gift tax
(b) sales tax
(c) donations
(d) Excise duty
Q. Progressive tax is a tax which is :
(a) Charged at a decreasing rate when income of the individual increases
(b) Charged at a increasing rate when income of the individual increases
(c) A fixed percentage of an individual income
(d) None of these
Created by Seema Pradhan
Q. A tax, the burden of which can be shifted to others, is called:
(a) Indirect tax (b) direct tax (c) wealth tax (d) none of these
Q. Which of the following is an indirect tax?
(a) Wealth tax (b) Excise tax (c) income tax (d) none of these
Q. Which of the following are capital receipts of the government?
(a) Recovery of loans
(b) Borrowings
(c) Disinvestment
(d) All of these
Created by Seema Pradhan
