NCERT MOST IMPORTANT QUESTIONS CLASS – 12 | MACROECONOMICS IMPORTANT QUESTIONS | GOVERNMENT BUDGET AND THE ECONOMY | EDUGROWN |

In This Post we are  providing GOVERNMENT BUDGET AND THE ECONOMY NCERT MOST IMPORTANT QUESTIONS for Class 12 which will be beneficial for students. These solutions are updated according to 2021-22 syllabus. These MCQS  can be really helpful in the preparation of Board exams and will provide you with a brief knowledge of the chapter

NCERT MOST IMPORTANT QUESTIONS ON GOVERNMENT BUDGET AND THE ECONOMY

Question 1.
What is meant by fiscal deficit? What are the implications of a large fiscal deficit?
Or
What is ‘fiscal deficit’? What are its implications?
Answer:
Fiscal deficit is the excess of total expenditure of the government over its total revenue and the capital receipts, excluding the borrowings and other liabilities of the government. Alternatively, fiscal deficit is an aggregate of the budgetary deficit plus government borrowings and the other liabilities. Fiscal Deficit = Total Expenditure – Total Receipts (excluding borrowings)
Or
Fiscal Deficit = Total Expenditure – (Total Revenue Receipts + Non-debt Capital Receipts)
Or
Fiscal Deficit = Budgetary Deficit + Borrowings and the other Liabilities Implications.

The important implications of fiscal deficit are:
(i) Large budgetary and fiscal deficit is an indication that the government has been spending beyond its means.

(ii) The mounting fiscal deficit implies that the increase in the tax revenue is not consistent with the revenue requirements of the government or that the tax collections are relatively sluggish. The implication may also follow that the tax system is relatively less elastic.

(iii) The increasing fiscal deficit implies that the government’s reliance over market and other borrowings has been rising. Moreover, it implies that the burden of debt seivice has been increasing.

Question 2.
Can there be a fiscal deficit in a government budget without a revenue deficit?
Answer:
Yes, there can be a fiscal deficit in the government budget without a revenue deficit.
Revenue deficit refers to a situation where revenue expenditure of the government exceeds its total revenue receipts. Fiscal deficit, on the other hand, refers to a situation where the total expenditure of the government exceeds sum total of its revenue receipts and non-debt capital receipts (total receipts excluding borrowings). Fiscal deficit is possible in a government budget even without revenue deficit ; in the situations when:

(i) the revenue budget is balanced and capital budget shows a deficit:
or
(ii) the deficit in the capital budget is greater than the surplus in the revenue budget

Question 3.
What are the implications of revenue deficit? State two measures of reduce this deficit. (C.B.S.E Outside Delhi 2011 Comp.)
Answer:
The excess of the government’s revenue expenditure over the revenue receipts is called the revenue deficit.
Given the same level of the fiscal deficit, a higher revenue deficit is worse than a lower one. High revenue deficit implies that the government should follow contractionary fiscal policy, that is, increase tax and/or reduce spending. In a less developed countries, it is difficult to force people to pay higher taxes or to cut expenditure on development activities.

Thus, the government usually finance its revenue deficit through borrowings. A revenue deficit implies a repayment burden in the future, not matched by any benefits via investment. It leads to rise in the prices and hampers the progress of the economy. Measures to reduce the revenue deficit are following:

• Framing suitable policies
• Proper utilisation of revenue receipts

Question 4.
What is a government budget? Discuss its objectives.
Answer:
The budget is a government’s annual statement of estimated receipts and payments over the fiscal year, which runs from April I to March 31.
The main objectives of government budget are:
(i) Reallocation of Resources: The government aims to reallocate resources in a way so that its economic (profit maximisation) and social objectives (public welfare) are fulfilled. The government can influence allocation of resources through implementation of appropriate fiscal policy.

(ii) Reducing Inequalities in Income and Wealth: Another important objective of the government is to reduce income inequalities through its policies. The government imposes higher taxes on the rich and spends the revenue on the welfare of the poor. This helps in reducing inequalities in the I distribution of income.

(iii) Economic Stability: The government budget plays a significant role in preventing business fluctuations due to inflation or deflation and hence, maintains economic stability.

(iv) Management of Public Enterprises: A large numbers of public sector industries have been established and managed for the welfare of the public. The government budget provides financial support to these enterprises.

(v) Economic Growth: The rate of saving and investment in an economy determine the rate of economic growth. The budgetary policy, therefore, aims to mobilise sufficient resources for investment in the public sector.

(vi) Reducing Regional Disparities: It is an important objective of the government budget to reduce regional disparities through taxation and expenditure policy. For this, government provides funds for the setting up of production units in economically backward regions.

Question 5.
Describe the importance of government budget.
Answer:
The importance of budget can be explained with the help of following points:
(i) Economic Stability: Government can achieve economic stability through budget. During inflation, government makes the surplus budget, whereas during depression, it makes deficit budget. Prices can be stabilised through budget.

(ii) Economic Control: Government controls the whole parliament and councils through budget. Revenue can be properly utilised through budget.

(iii) Economic and Social Development: Budget has a great importance in economic and social development Government encourages industries and agriculture by giving subsidies through its budget and encourages production. In the same way, government imposes high taxes through budget on rich class and redistributes the revenue collected by these taxes among the poorer sections of the society.

(iv) Administrative Efficiency: Government decides the limits of working areas of every official and employment through its budget.

(v) Instrument of Fiscal Policy: Budget is an important instrument of the fiscal policy of the country. Fiscal policy is the policy of fixing its revenue and expenditure in a way that economic fluctuations are minimised.

Question 6.
Explain the importance of public expenditure.
Answer:
Importance of public expenditure has been increased due to the following reasons: –
(i) Increase in the Activities of the State: In the modern age, the activities of the state have been increased many times. There has been an extensive and intensive increase in the activities of central, state and local governments.

Now a days, governments undertake various activities such as to run, encourage and regularise the economic activities, to maintain economic stability, to secure poor and backward classes and to increase the rate of economic development, etc. There is a great importance of public expenditure in the completion of these activities.

(ii) Economic Planning: Developing countries like India has adopted the path of economic planning for the removal of problems like poverty, unemployment and for the development of the country. As a result, the government has to incur expenditure on large scale. There is a great importance of public expenditure in economic planning.

(iii) Removing Unemployment, Poverty and Income Inequalities: Public expenditure has a great importance for the reduction of chronic problems like unemployment, poverty and income inequalities.

Question 7.
What is the meaning of revenue deficit? What problems does it create?
Answer:
The concept of revenue deficit is simple and straight. The revenue deficit is defined as the excess of revenue expenditure over revenue receipts. Mathematically
Revenue Deficit = Revenue Expenditure – Revenue Receipts
For example, according to the government of India, Budget for the year 2005-2006 states:
Total Revenue Receipts = ₹ 3,09,322 crores Total Revenue Expenditure = ₹ 3,85,493 crores

Revenue Deficit = ₹ 3,85,493 – 3,09,322 = ₹ 76,171 crores In other words, there should be revenue surplus, which should be used for building projects or building assets which yield return. In fact, revenue surplus represents government savings, which can be used for financing development.

Revenue deficit represents a critical situation in the economy. Revenue deficit indicates the amount of current expenditure which cannot be met by revenue receipts. It implies that government is spending beyond its means. The government should either increase its tax/non-tax receipts or should cut its expenditure.

In poor countries, in the initial stages of economic development, often the situation arises when the government has to incur large expenditure on administration and maintenance (particularly on defence, police and law and order) but it is difficult to compel the poor people to pay high taxes. In such situations, the government meets its revenue deficit either through borrowing or through disinvestment. Borrowing by the government, on the other hand, creates the problem of repayment of debt. Disinvestment reduces the asset of the government.

Question 8.
Explain the meaning of the following:
(i) Revenue Deficit
(ii) Fiscal Deficit
(iii) Primary Deficit
Ans.
(i) Revenue Deficit: Revenue deficit is the excess of current revenue expenditure over the current
revenue receipts.

Revenue Deficit = Current Revenue Expenditure – Current Revenue Receipts Current revenue expenditure includes both plan and non-plan expenditure of the government to be met through revenue receipts. Current revenue receipts include the net tax and non-tax revenue receipts of the central government.

Until the middle of 1970’s, the central government in India enjoyed revenue surplus as the revenue receipts of the central government exceeded the revenue expenditure. The phenomenon of revenue deficit made its appearance during the latter 1970’s.

(ii) Fiscal Deficit: Fiscal deficit is the difference between total expenditure of the government and its total revenue receipts and capital receipts excluding the borrowings and other liabilities of the government. Alternatively, fiscal deficit is the aggregate of budgetary deficit plus borrowings and other liabilities.

Fiscal Deficit can be calculated as below:
Fiscal Deficit = Total Expenditure – Total Revenue Receipts – Capital Receipts excluding borrowings.

(iii) Primary Deficit: Primary deficit is the difference between fiscal deficit and interest payments. It is the aggregate of budgetary deficit plus borrowings and other liabilities minus interest payments.
It can be calculated as:
Primary Deficit = Fiscal Deficit – Interest Payments Alternatively primary deficit can be evaluated as:
Primary Deficit = Budgetary Deficit + Borrowings and Other Liabilities – Interest Payments. The primary deficit in the central government budget in India was of the magnitude of? 19,502 crore in 2000-01 . which has increased to ? 31,317 crore in 2001 -2002.

Question 9.
Find budget deficit from the following data:
Answer:

Items	(₹ in Crore)
1. Revenue receipts	40,000
2. Revenue expenditure	30,000
3. Capital receipts	30,000
4. Capital expenditure	50,000

Budget Deficit = (Revenue Expenditure + Capital Expenditure) – (Revenue Receipts + Capital Receipts)
= (30,000 + 50,000) – (40,000 + 30,000)
= 80,000 – 70,000 = ₹ 10,000 crore

Question 10.
Is balanced budget an achievement for the government?
Answer:
Balanced budget is not always an achievement for the government. When the economy is in a state of depression, it is in fact suggested to increase government expenditure, even if it causes inflation in the economy.