Chapter 10 Government Budget class 12th Commerce

Introduction Government buget is an annual statement showing its item wise estimated of receipts and expenditures during a fiscal year.

Concept Objectives of government budget

1. Reallocation of resources
2. Reducing inequalities of income and wealth
3. Economic stability
4. Management of public enterprises
5. Economic growth
6. Reducing regional disparities

 

1. Reallocation of resources

Dictation
Through its budgetary policy the government of a country directs the allocation of resources in a manner such that there is a balance between the goals of profit maximisation and social welfare.

 

1. Production of goods which are injurious to health (like cigarettes and whisky) is discouraged through heavy taxation.
2. On the other hand, production of “socially useful goods” (like electricity, ‘Khadi’) is encouraged through subsidies.
3. So, finally government has to reallocate resources in accordance to social and economic considerations in case the free market fails to do or does so inefficiently

 

2. Reducing inequalities of income and wealth

Dictation

1. Budget of a government shows its comprehensive exercise on the taxation and subsidies.
2. A government uses fiscal instruments of taxation and subsidies with a view of improving the distribution of income and wealth in the economy.
3. A government reduces the inequality in the distribution of income and wealth by imposing taxes on the rich and giving subsidies to the poor, or spending more on welfare of the poor
4. It reduces income of the rich and raises the living standard of the poor, thus, leads to quit able distribution of income.
5. So finally, Equitable distribution of income and wealth is a sign of social justice which is the principal objective of any welfare state in India.

 

3. Economic stability

Economic stability means absence of large-scale fluctuation in price.

1. Inflationary tendencies emerges when aggregate demand is higher than the aggregate supply. government can bring down aggregate demand by reducing its own expenditure.
2. During deflation, government increase their expenditure and give taxes concession and subsidies.

Hence, during inflation and deficient budget during deflation help to maintain stability of price in the economy.

 

4.     Management of public enterprises

There are large number of private industries which are established and managed for social swelfare of public buget is prepared with the objectives of making various provisions for managing such enterprise and providing them financial helps….

 

5.      Economic growth

Economic growth implies a sustainable increase in the real GDP of an economy i.e. an increase in volume of goods and services produced in an economy.

However, before palnning such expenditure, rebates and subsidies, government should check the rate of inflation and tax rates. Also, there may be the risk of debt trap if loans are too high to finance the expenditure …

 

6.     Reducing Regional Disparities:

The government budget aims to reduce regional disparities through its taxation and expenditure policy for encouraging setting up of production units is economically backward regions………

 

Concept Budget Receipts

 

1. Revenue receipt

They neither create any liabilities nor reduce any assets of the government.

 

1. Tax revenue
2. Non-tax revenue

 

1. Tax rvenue

Tax revenue refers to the sum total of receipt from taxes another duties imposed by the government.

 

Direct tax

 

Direct taxes: refetrs to those taxes which are paid by the individual and campany directly to the government.

1. They are imposed on individual and campany.
2. They directly affect the income level and purchasing power of the people andhelp to chnge the level of aggregate demand in the economy.
3. eg: coporate tax, income tax. Interetest tax …etc…

 

Indirect tax

Indirect taxes: those taxes which affect the income and property of individual and campanies through their consumption expenditure.

1. They are imposed on goods and servies.
2. The liability to pay the tax (i.eimpact) and the actua burden of the tax (i.eincidence) lie on the different person i.e its burden can be shifted on others.

 

2. NON-TAX REVENUE

It refers to receipts of the government from all the sources other than of tax receipts.

1. Interest
2. Fees
3. Fines and Penalities
4. Escheats
5. Special Assessments

 

1. Interest

Government receives interest on loan given by it to state government, union territories, private enterprise and general public. Interest receipt from these loans is an important source of non- tax revenue.

Fees

Fees refer to the change imposed by the government to grant permission for something.

 

2. Fines and Penalties  

They refers to those payments which are imposed on law breakers.

 

3. Escheats

It refers to claim of the government on the property of a person who dies without leaving behind any legal will.

 

4. Special Assessment

Refers to the payments made by the owners of those properties whose value has appreciated due to development activities of the government.

 

Capital Receipt

Capital receipt are those receipt which either create liability or cause a reduction in the assets of government.

 

SOURCES OF CAPITAL RECEIPTS

1. borrowing
2. recovery of loans
3. other recipts

 

1. Borrowings  
2. Dictation

Borrowings are the funds raised my government to meet expenditure. Governmnet borrow these funds from: reserve bank of India, world bank etc….

 

2. Recovery of Loans
3. Dictation

Government grants loans to the state government or the union territory……. recovery of such loans is a capital receipt as it reduces the assets of the government.

 

3. Other Receipts

1. disinvestment
2. small savings

 

1. Disinvestment
2. Small saving

Other Deposit: These Include:

1. Disinvestment: it refers to the act of selling a part or the whole of shares of selected public sector undertaking held by the government. they are termed as capital receipt as they reduces the assets of the government.
2. Small savings: it refers to the funds raised from the public in the form of post office deposits, national saving certificate. they are treated as capital recipt as they lead to an increase in liability.

 

 

1. Loan from the world bank.

It is a capital receipt as it creates liability for the government.

2. Foreign aids against earthquake victims.

It is revenue receipt as it neither create any liability nor reduce any assets of the government.

3. Dividends on investments made by the government.

It is a revenue receipt as it neither create any liability nor reduce any assets of the governments.

4. Recovery of loans

It is a capital recipt as it reduces the assets of the government.

 

Concept Budget Expenditure

 

Revenue Expenditure

• It refers to the expenditure which neither create any asset nor cause any reduction in nay liability of government.
• It is recurring in nature.
• Eg: pensions, interest, health services, etc

 

Capital Expenditure

• Capital expenditure refers to the expenditure which either creates an assets or cause a reduction in the liabilities of the government.
• It is non-recurring in nature.
• Eg: repayments of borrowing, flyovers etc…

 

1. Subsidies

It is revenue expenditure as it neither create any assets nor reduce any liability of the government.

2. Repayments of loan

It is a capital expenditure as it reduces the liability of the government.

3. Amount borrowed from USA repaid

It is a capital expenditure as it reduces the liability of the government.

4. Payments of salaries to staff of government hospital

It is a revenue expenditure as it neither create any assets nor reduce any liability of the government.

 

Concept Measurement of government deficit

It means the excess of total estimated expenditure over total estimated revenue

 

That means budget is balanced so we can say

Balanced budget: budget receipts = budget expenditure

Deficit budget: budget receipts < budget>

1. Revenue deficit
2. Fiscal deficit
3. Primary deficit

 

Revenue Deficit

Revenue deficit ka mtlb hai govt ka revenue expenditure and revenue receipts

It refers to excess of revenue expenditure over revenue receipt during a given fiscal year.

 

Revenue deficit = revenue expenditure – revenue receipt

 

Implications

Revenue deifict singnifies that government owns revenue is insufficient to meet the expenditures on normal functionaing of government dpeartmenrs and provisions for various services.

 

Revenue deficit = Revenue expenditure – Revenue receipts

1. The government is complled to cut its expenditure even when it causes loss of social welfare.

2. The government is complled to borrow even to fulfill its consumption needs.

3.  The government is complled to undertake disinvestment- selling its ownership of public enterprise.

 

Fiscal Deficit

Yaani revenue expenditure and revenue recepits

And capital expenditure and capital receipts

So fiscal deficit = total expenditure (revenue expenditure + capital expenditure) – Total receipts (revenue receipts + capital receipts) other than borrowings

Other than borrowings

 

Its refers to the excess of total expenditure over total recipt (excluding borrowings) during a given fiscal year.

 

Implication

1. Hamper Furture Growth

Borrowings increase the financial burden for future generation. It adversely affects growth and development prospect of the country.

 

2. Foreign Dependence

Government also borrow from rest of world which raises its dependence on other countries.

 

3. Inflation

Government borrow from RBI to meet its fiscal deficit. RBI prints new currency to meet the deficit requirements. it increases the money supply in the economy and creates inflationary pressure.

 

4. Debt Trap

Borrowing not only involve repayments of principal amount, but also require payment of interest. Interest payments increases the revenue expenditure, which leads to revenue deficit....by which it creates a various cycle of fiscal deficit and revenue deficit, wherein government take more loan to repay the earlier loan. As a result, country is caught in a debt trap.

 

Sources of Financing Fiscal Deficit

Government has to look out for different options to finance the fiscal deficit.

Borrowings and Deficit Financing yaani Printing of new currency

 

Fiscal deficit can be met by borrowings from the internal sources (public, commercial banks etc.) or the external sources (foreign governments, international organisations etc.).

 

Deficit Financing (Printing of new currency):

Government may borrow from RBI against its securities to meet the fiscal deficit. RBI issues new currency for this purpose. This process is known as deficit financing. Borrowings are considered a better source as they do not increase the money supply which is regarded as the main cause of inflation. On the other hand, deficit financing may lead to inflationary trends in the economy due to more money supply.

 

Primary Deficit

Primary deficit refers to the difference between the fiscal deficit of the current year and interest payments on the previous borrowings.

 

Primary deficit = fiscal deficit – interest payments

 

Primary deficit is the root cause of fiscal deficit

 

Formulas:

1. Revenue deficit =revenue expenditure -revenue receipts

2. Fiscal deficit =total expenditure -total receipt excluding borrowings

                                                                                OR

Fiscal deficit =revenue deficit+ (capital expenditure -capital receipts excluding borrowings)

                                                                                OR

Fiscal deficit = revenue deficit+ (capital expenditure -non debt creating capital receipts)

{if only the total borrowing is given, the fiscal deficit =total borrowings}

 

3. Primary deficit =fiscal deficit -interest payments