Government Budget and the Economy NCERT SOLUTION CLASS 12TH MACRO ECONOMICS | EDUGROWN NOTES

Textbook Question And Answer:

Q.1Explain why public goods must be provided by the government? [3-4 Marks]
ANSWER:

1. Public goods are those goods and services for which consumption by some individuals does not reduce the amount available to others.
2. For example parks,roads,water,bridges,national defense etc..
3. these goods are non-rival and non-excludable ones.
4. people receives benefits from public goods but do not pay for them.Such a goods can only prepared by government.

Q.2 Distinguish between revenvu expenditure and capital expenditure .
State the basis of classifying government expenditure into revenue and capital expenditure. Give an example of each.
ANSWER:

Q.3 The fiscal deficit gives the borrowing requirement of the government Elucidate. [3-4 Marks]
ANSWER:

1. Fiscal deficit is defined as excess of total expenditure over total receipts (revenue and capital receipts) excluding borrowing. In the form of an equation:
   Fiscal Deficit = Total Budget Expenditure – Total Budget Receipts (Net of borrowing)
   = Total Expenditure (Revenue
   Expenditure + Capital Expenditure) – Revenue Receipts (Tax Revenue + Non-Tax Revenue) – Non-Debt Capital Receipts (Recovery of Loans + Dis-investment Proceeds)
   = Revenue Deficit + Capital Deficit (excluding Borrowing)- Borrowing
   = Net borrowing at home + Borrowing from RBI + Borrowing from abroad
2. Fiscal deficit shows total borrowing requirements of the government from all sources.
3. As the government borrowing increases, its liability in future to repay loan with interest also increases leading to a higher revenue deficit. Therefore, fiscal deficit should be as low as possible.

Q.4 Give the relationship between revenue deficit and fiscal deficit. [3-4 Marks]
ANSWER:

1. Fiscal deficit is always a wider concept than revenue deficit.
2.  Revenue deficit is defined as the excess of government’s revenue expenditure over revenue receipts. In terms of formula:
   Revenue Deficit = Revenue Expenditures (RE) – Revenue Receipts (RR)
3.  In short, there will be revenue deficit in a government budget when revenue expenditure exceeds revenue receipts.
4. Fiscal deficit is defined as the excess for all expenditure over total receipts net of borrowings.
5. Initially, Fiscal deficit does not take into account all types of receipts. It does not take into account borrowings. But finally they have to depend on borrowing to met fiscal deficit.
   Fiscal Deficit = Revenue Deficit + Capital Deficit (Excluding Borrowing)- Borrowing
   = Net borrowing at home + Borrowing from RBI + Borrowing from abroad

Q.5 Does public (government) debt impose a burden? Explain. [3-4 Marks]
ANSWER:   Public debt is not always a blessing. Excessive use of it creates a lot of crisis in an economy; such as,

1. Hampers Economic Development of a Country: Loans are easily borrowed but it is very difficult to repay them.Generally, government imposes more taxes. It brings instability and is an obstacle in the economic development of a country.
2. Poses Threat to Political Freedom: Foreign loans and assistance lead to deep conflict among countries. The friction among countries challenges the political freedom.
3. Proves a Burden on Common Man: Loans taken for unproductive purposes, like war and armaments, are a burden on common man in the form of higher taxes.
4. Leads to Extravagant Spending: Public debt leads to unplanned spending. This provides incentive to the government to implement the schemes that require excessive expenditure.
5. Results in Drain of National Wealth: Repayment of foreign loans results in drain of wealth out of the country.

Q.6 Are fiscal deficits necessarily inflationary? [3-4 Marks]
Or
“Governments across nations are too much worried about the term fiscal deficit”. Do you think that fiscal deficit is necessarily inflationary in nature? Support your answer with valid reasons.
ANSWER:

1. Fiscal deficits are not necessarily inflationary.
2. As we know fiscal deficit shows borrowing requirement of the government.
3. If we borrow when there is a situation of underemployment in an economy i.e., in a situation of deficient demand, then it is not inflationary because in a situation of deficient demand output is held back because of lack of demand.
4. A high fiscal deficit (borrowing) is accompanied by higher demand and greater output which is not inflationary.
5. On the other hand, if we borrow at the full employment level, then it is inflationary in nature.
6. A high fiscal deficit (borrowing) is accompanied by higher prices because aggregate demand is greater than aggregate supply at the full employment level which is always inflationary.

Q.7 Discuss the issue of deficit reduction.[3-4 Marks]
ANSWER: The deficit in a government budget can be reduced by the following steps:

1. Taxes should be increased. Government can make a plan for rising direct taxes to increase its receipts can also be raised by increasing rates of taxes or by imposing new taxes.
2. Reduction in Government Expenditures: It can be done through making government activities more efficient through better planning of programmes and better administration.
3.  The government can raise Receipts through the sale of shares in PSUs (Public Sector Undertaking).
4. Changing the scope and role of government by withdrawing from same areas where it operated before.

Very Short Answer Type Questions :

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Q.1 Define government budget.
  ANSWER:  A government budget is an annual financial statement showing itemwise estimates of expected revenue and anticipated expenditure during a fiscal year.

Q.2 State any one obj ective of a government budget.
ANSWER:  Activities to secure a reallocation of resources

Q.3 Define a tax.
ANSWER:  A tax is a legally compulsory payment imposed by the government on income and profit of persons and companies without reference to any benefit. Tax is of two types: Direct tax and Indirect tax.

Q.4 Why is service tax an indirect tax?
ANSWER: Its impact and incidence lie on different persons.

Q.5 State any two sources of non-tax revenue receipts.
ANSWER:

1. Commercial revenue (profit and interest)
2. Administrative revenueffees, fines and penalties, escheats etc)

Q.6 Is borrowing by the government a revenue receipt?
ANSWER:  No, it is not so because it creates a liability (for the government) of repayment.

Q.7 Why is tax not a capital receipt?
ANSWER:  Tax is not a capital receipt because it leads neither to creation of liability nor to reduction in assets.

Q.8 Why is interest termed as a revenue receipt?
ANSWER:  Interest is a revenue receipt because it creates neither any liability nor causes a reduction in the assets of the government.

Q.9 Why are borrowings a capital receipt?
ANSWER:  They create a liability (in terms of repayment).

Q.10 Why are subsidies treated as revenue expenditure?
ANSWER: Subsidies are treated as revenue expenditure because they create neither any asset nor cause a reduction in any liability of the government.

Q.11 Why is repayment of loan a capital expenditure?
ANSWER: It reduces the liabilities of the government.

Q.12 Why is recovery of loans treated as a capital receipt?[CBSE All India 2005]
ANSWER: Recovery of loans is treated as a capital receipt because it reduces assets of the government.

Q.13 Why are receipts from taxes categorised as revenue receipts?
ANSWER: Receipts from taxes are categorised as revenue receipts because they create neither any liability nor cause a reduction in the assets of the government.

Q.14 What is meant by revenue deficit?
ANSWER: Revenue deficit refers to the excess of revenue expenditure of the government over its revenue receipts. Revenue Deficit = Revenue Expenditure- Revenue Receipts

Q.15 If the revenue receipts are Rs. 1,000 crore and revenue expenditure is Rs. 1,200 crore, how much will be the revenue deficit?
ANSWER:  Revenue Deficit = Revenue Expenditure – Revenue Receipts = 1,200 – 1,000 = Rs. 200 crore.

Q.16Define fiscal deficit.
ANSWER:  Fiscal deficit is defined as excess of total expenditure over total receipts (revenue and capital receipts) excluding borrowing.

Q.17 What is the meaning of primary deficit?
ANSWER:  Primary deficit refers to the difference between fiscal deficit of the current year and interest payments on the previous borrowings.

Q.18 How is primary deficit calculated?
ANSWER: Primary Deficit = Fiscal Deficit – Interest Payments

Q.19 What does zero primary deficit mean?
ANSWER:  If primary deficit is zero, fiscal deficit= interest payments. It means the government has to borrow only for its interest commitments on earlier loans.

Short Answer Type Questions : 

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Q.1 Explain objective of stability of prices of government budget. [CBSE, (F) 2010] Or
Explain the ‘economic stability’ objective of a government budget. [CBSE, AI2011] Or
Explain stabilising activities function of budget.
ANSWER:

1. Free play of market forces (or the forces of supply and demand) are bound to generate trade cycles, also called business cycles.
2. These refer to the phases of recession, depression, recovery and boom in the economy.
3. The government of a country is always committed to save the economy from business cycles. Budget is used as an important policy instrument to combat(solve) the situations of deflation and inflation.
4.  By doing it the government tries to achieve the state of economic stability.
5. Economic stability leads to more investment and increases the rate of growth and development.

Q.2 Name two sources each of non-tax revenue receipts. [CBSE 2004]
ANSWER:  Non-tax revenue refers to government revenue from all sources other than taxes called non-tax revenue. These are incomes, which the government gets by way of sale of goods and services rendered by different government departments. Its two sources are:

1. Commercial Revenue (Profit and interest): It is the revenue received by the government by selling the goods and services produced by the government agencies. For example, profit of public sector undertakings like Railways, BHEL, LIC etc. Government gives loan to State Government, union territories, private enterprises and to general public and earns interest receipts from these loans. It also includes interest and dividends on investments made by the government.
2. Administrative Revenue: The revenue that arises on account of the administrative function of the government. This includes:
   (i) Fee: Fee refers to a payment made to the government for the services that it renders to the citizens. Such services are generally in public interest and fees are paid by those, who receive such services. For example, passport fees, court fees, school fees in government schools,
   (ii) License Fee: License fee is a payment to grant a permission by a government authority. For example, registration fee for an automobile.

Q.3 Distinguish between: Revenue receipts and capital receipts. [CBSE 2005, 10]
Or
Distinguish between ‘revenue receipt’ and ‘capital receipt’ and give two examples of each. [CBSE 2007]
ANSWER:

Q.4 Distinguish between Direct tax and indirect tax.
ANSWER:

Q.5 Differentiate between Revenue Budget and Capital Budget.
ANSWER:

Q.6 Differentiate between Developmental and Non-Developmental Expenditure.
ANSWER:

Q.7 What are the implications of a large revenue deficit? Give two measures to reduce this deficit. [CBSE Sample Paper 2010]
ANSWER:

1. Revenue deficit indicates dis¬savings on government account because the government has to make up uncovered gap.
2. Revenue deficit implies that the government has to cover’this uncovered gap by drawing upon capital receipts either through borrowing or through sale of its assets.
3. Since government is using capital receipts to meet generally consumption expenditure of the government which leads to an inflationary situation in the economy.

Two measures to reduced revenue deficit are :

1. Government should reduce its unproductive or unnecessary expenditure.
2. Government should increase its receipts from various sources of tax and non-tax revenue.

Q.8 What are implications of fiscal deficit? [A/2005; CBSE 06C, 07]
ANSWER:

1. Causes Inflation: An important component of government borrowing includes borrowing from the Reserve Bank of India. This invariably implies deficit financing or meeting deficit requirements of the government by way of printing more notes. This is a dangerous practice, though very convenient for the government. It increases circulation of money and causes inflation.
2. Increase in Foreign Dependence:Government also borrows from rest of the world. It increases our dependence on other countries. Foreign borrowing is often associated with economic and political interference by the lender countries. It increases our economic slavery.
3. Financial Burden for Future Generation: Borrowing implies accumulation of financial burdens for the future generations. It is for future generations to repay loans as well as the mounting interest thereon.
4. Deficits Multiply Borrowings:Payments of interest increases revenue expenditure of the government, causing an increase in its revenue deficit. Thus, a vicious circle set wherein deficits multiply borrowings.

Long Answer Type Question:

Q.1 Explain the role the government can play through the budget in influencing allocation of resources. [CBSE 2015] OR .
Explain the ‘allocation of resources’ objective of government budget.[CBSE 2011] OR
Explain the allocation function of agovernment budget. [CBSE AI2010]OR
Explain how government can influence allocation of resources through government budget.
ANSWER:

1. Private enterprises always desire to allocate resources to those areas of production where profits are high.
2. However, it is possible that such areas of production (like production of alcohol) may not promote social welfare.
3. 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.
4. Production of goods which are injurious to health (like cigarettes and whisky) is discouraged through heavy taxation.
5. On the other hand, production of “socially useful goods” (like electricity, ‘Khadij is encouraged through subsidies.
6.  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.

Q.2 Explain how the government can use the budgetary policy in reducing inequalities of incomes. [AI 2015] OR
How can a government budget help in reducing inequalities of income? Explain. [CBSE 2009]OR
How can a government budget be helpful in altering distribution of income in an economy? Explain.[CBSE 2010] OR
Explain ‘redistribution of income’ objective of government budget. [CBSE2011, A/2011] OR
Reduction in income inequalities raises welfare of the people. How can government help, through government budget, in this regard? Explain? [A/2013, C (Set /)]
ANSWER:

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 will reduce income of the rich and raises the living standard of the poor, thus, leads to equitable distribution of income.
5. Expenditure on special anti poverty and employment schemes will be increased to bring more people above poverty line.
6. Public distribution system should be inferred so that only the poor could get foodgrains and other essential items at subsidised prices.
7. Equitable distribution of income and wealth is a sign of social justice which is as the principal objective of any welfare state in India.

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