Class 12 Economics Chapter 4 Government Budget And The Economy

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Class 12 Economics Chapter 4 Government Budget And The Economy

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Government Budget And The Economy

Chapter: 4

PART – (A) INTRODUCTORY MACROECONOMICS

(A) Very Short Types Question & Answers:

1. State one example of non-tax revenue.

Ans: Fees.

2. State one example of capital expenditure.

Ans: Loan to union Territories.

3. When does a government incur budget deficit?

Ans: When, Expenditure is more than Revenue.

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4. What is revenue deficit?

Ans: Revenue deficit is the excess of total revenue expenditure over the total revenue receipts.

5. What is fiscal deficit?

Ans: Excess of total expenditure over revenue receipt and capital receipts excluding borrowing is called fiscal deficit.

6. What is primary deficit?

Ans: Fiscal deficit minus interest payment is primary deficit.

7. What is a government budget?

Ans: Budget is an annual financial statement containing estimates of anticipated expenditure and revenue of the government for the coming financial year.

8. What is fiscal policy.

Ans: By fiscal discipline, we mean the central over public expenditure, given the quantum of revenue.

9. State one example of tax revenue.

Ans: Excise duty.

10. Fill in the blank:

(a) The excess of revenue expenditure over revenue receipt is called revenue __________.

Ans: Revenue deficit.

(b) Post office savings account is and example of _________. (Capital receipt/Capital expenditure)

Ans: Capital receipt.

11. Write true or false:

(i) (a) Sale tax is a direct tax.

Ans: False.

(b) Entertainment tax is an indirect tax.

Ans: True.

(ii) Income tax is an indirect tax.

Ans: False.

12. Give one example of public goods.

Ans: Public Bank.

13. What type of budget should the government prepare during inflation?

Ans: The government should prepare Surplus budget during inflation.

14. Define budget deficit and trade deficit.

Ans: When a government spends more than it collects by way of revenue, it incurs budget deficit. Again, trade deficit means, when import is more than export.

15. What is GST?

Ans: GST stands for Goods and Services Tax. It is a consumption-based tax levied on the supply of goods and services in a country. GST is designed to replace multiple indirect taxes, such as sales tax, service tax, excise duty, and value-added tax, with a unified tax system.

16. State how government deficit can be reduced?

Ans: Government deficit can be reduced by monetary expansion. Borrowing, disinvestment or fiscal discipline.

17. What is the classification of receipts in government budget?

Ans: Receipts in the government budget are classified into two categories: revenue receipts and capital receipts.

18. What is the classification of expenditure in government budget?

Ans: Expenditure in the government budget is classified into two categories: revenue expenditure and capital expenditure.

19. What is a government deficit?

Ans: A government deficit refers to the amount by which a government’s total expenditure exceeds its total revenue in a given period. It represents the shortfall in funds and indicates that the government is spending more than it is generating in revenue.

20. Net indirect taxes are estimated as–

(a) Indirect taxes + Subsidies

(b) Subsidies – Indirect taxes

(d) Both (b) and (c) (Choose the correct option)

Ans: (c) Indirect taxes – Subsidies

(B) Short Type Questions & Answers:

1. Suppose the total government spending G = 150 and tax revenue T = 0.20 Y. Now, if the level of national income (Y) is 2000, what is the condition of government budget?

Ans: Given,

G =150

T = 0.20 Y

= 0.20(2000) I ∵ Y = 2000, given

∴ T = 400

∴ Govt. Budget = Govt Receipt (T) – Gout. Expt (G)

= 400-150 = 250, i.e, surplus budget.

2. Distinguish between public goods and private goods.

Ans: Public goods are free to lie individual for consumption some-times without paying money. Public goods are enjoyed by all the people of the society.

Private goods are not free to every individual and the consumer has to pay money for it. Private goods are enjoyed by some individuals only.

3. What is allocation function of the government.

Ans: Through its budgetary policy, the government of a country directs the allocation of resources in such a manner that there is a balance between the goods of profit maximisation and social welfare. Production of goods which are injurious to health, is discouraged through heavy taxation. On the other hand, production of socially useful goods is encouraged through subsidies.

4. What is revenue expenditure?

Ans: Revenue expenditure refers to the government’s regular expenses incurred on day-to-day operations, maintenance, and provision of public services. It includes items such as salaries and wages of government employees, interest payments on loans, subsidies, grants, pensions, and other routine expenditures.

5. What is a budget surplus?

Ans: A budget surplus occurs when a government’s revenue exceeds its expenditures during a specific period, typically a fiscal year. It means that the government has collected more money than it has spent, resulting in a positive balance.

6. What is capital expenditure?

Ans: Capital expenditure refers to the government’s spending on acquiring or creating assets that have a long-term or strategic significance. It includes investments in infrastructure projects, construction of buildings, purchase of machinery and equipment, research and development activities, and loans or grants provided to other entities for capital purposes.

7. What is fiscal responsibility?

Ans: Fiscal responsibility refers to the prudent and accountable management of government finances, including revenue generation, expenditure control, and debt management. It involves ensuring sustainable fiscal policies that promote economic stability, efficient resource allocation, and long-term fiscal health.

8. Why is fiscal responsibility important for governments?

Ans: Fiscal responsibility is important for governments for several reasons. It helps maintain economic stability by avoiding excessive budget deficits, high levels of public debt, and inflationary pressures. It promotes confidence in the economy, attracts investment, and supports sustainable economic growth. Fiscal responsibility also ensures that public funds are efficiently and effectively used to meet the needs of citizens, improve public services, and support long-term development goals.

9. How can governments demonstrate fiscal responsibility?

Ans: Governments can demonstrate fiscal responsibility through various actions. This includes setting realistic and achievable budget targets, adhering to fiscal rules and targets, implementing effective revenue collection measures, controlling unnecessary expenditure, conducting regular fiscal audits, and publishing transparent and comprehensive financial reports. Governments should also prioritise long-term fiscal sustainability, invest in productive sectors, and manage public debt responsibly.

10. How does GST impact government revenue?

Ans: GST has the potential to increase government revenue by widening the tax base, reducing tax evasion, and improving tax compliance. With a streamlined and transparent tax system, GST provides a more efficient mechanism for revenue collection. However, the impact on government revenue can vary depending on the specific tax rates, exemptions, and the overall economic activity in the country.

11. How is GST administered and enforced?

Ans: The administration and enforcement of GST typically involve a dedicated government authority or department responsible for tax administration. This authority is responsible for registration of taxpayers, collection of taxes, processing returns, conducting audits, and ensuring compliance with GST regulations. It may also provide guidance, issue clarifications, and resolve disputes related to GST implementation.

12. What do these measures of government deficit indicate?

Ans: These measures of government deficit provide valuable information about the fiscal position and financial management of the government. The fiscal deficit reflects the overall fiscal imbalance and the government’s reliance on borrowing. The primary deficit indicates the extent of borrowing required to finance non-interest expenses. The revenue deficit highlights the shortfall in revenue generation for meeting regular operational expenses.

13. What are the implications of a budget surplus?

Ans: A budget surplus indicates fiscal strength and financial stability. It allows the government to reduce public debt, invest in infrastructure and public services, save for future contingencies, implement tax cuts, or allocate funds for other priority areas. Surpluses can contribute to economic stability and increase confidence in the government’s financial management.

14. What is a budget deficit?

Ans: A budget deficit occurs when a government’s expenditures exceed its revenue during a specific period, resulting in a negative balance. It means that the government is spending more money than it is collecting through taxes and other sources of revenue.

15. What are the causes of a budget deficit?

Ans: Budget deficits can arise due to various factors, including economic downturns, reduced tax revenues, increased government spending, fiscal stimulus measures, subsidies, welfare programs, debt servicing costs, or inadequate revenue collection.

16. What are the implications of a budget deficit?

Ans: Budget deficits indicate that a government is borrowing to finance its spending. It can lead to increased public debt, higher interest payments, potential inflationary pressures, reduced fiscal flexibility, and concerns about long-term sustainability. Deficits may necessitate borrowing from domestic or international sources, which can have implications for the government’s financial position and economic stability.

17. What is revenue receipt? How it is different from capital receipt?

Ans: The money received by a business through normal business operations is known as revenue receipts.

Revenue receipts is different from capital receipts because it affects the profit or loss of business.

18. Why is measuring government deficit important?

Ans: Measuring government deficit is important as it provides insights into the financial health and sustainability of the government’s fiscal position. It helps assess the extent of reliance on borrowing or other financing methods to cover expenditure, and it indicates the level of fiscal imbalance that may have implications for debt accumulation, interest payments, and overall economic stability.

19. What is the fiscal deficit?

Ans: The fiscal deficit is the excess of total government expenditure over total revenue, including both revenue receipts (taxes, non-tax revenue) and capital receipts (borrowings, disinvestment proceeds). It reflects the overall shortfall in meeting government expenditure from its own resources and indicates the extent of government borrowing to cover the deficit.

20. Give two examples of capital expenditure of the government budget.

Ans: The two examples of capital expenditure of the government budget are:

(a) Expenditure on the purchase of land by the government.

(b) Loans granted by the central government to state governments.

21. Mention three items of capital expenditure.

Ans: Three items of capital expenditure are:

(i) Expenditure on acquisition of assets like land, buildings, equipment.

(ii) Loans and advances granted by the central government to state and union territory governments.

(iii) Government companies, corporations and other parties.

22. Explain the concepts of revenue deficit, fiscal and primary deficit in regards to a government budge.

Ans: Revenue deficit is the excess of total revenue expenditure over the total revenue receipts.

Excess of total expenditure over revenue receipt and capital receipts excluding burrowing is called fiscal deficit.

Fiscal deficit minus interest payment is primary deficit.

23. Write two differences between revenue expenditure and capital expenditure.

Ans: The following are the two differences between revenue expenditure and capital expenditure:

(a) Revenue expenditures are charged to expense in the current period or shortly thereafter. On the other hand, capital expenditures are charged to expense gradually via depreciation and over a long period of time.

(b) A revenue expenditure is assumed to be consumed within a very short period of time. While, a capital expenditure is assumed to be consumed over the useful life of the related fixed asset.

24. How does the Budget Management Act 2003 promote fiscal discipline?

Ans: The Budget Management Act 2003 promotes fiscal discipline by imposing rules and procedures that limit excessive spending and ensure the government operates within its means. It may include provisions for balanced budgets, deficit limits, debt management regulations, and mechanisms for monitoring and enforcing fiscal targets. The act encourages responsible financial management and discourages reckless fiscal practices.

25. What are the benefits of implementing the Budget Management Act 2003?

Ans: Implementing the Budget Management Act 2003 brings several benefits, including improved fiscal discipline, enhanced transparency and accountability, better budget planning and execution, increased efficiency in resource allocation, and strengthened financial management practices. It helps in promoting economic stability, public trust, and effective utilisation of public resources.

26. How does GST work?

Ans: GST operates on the principle of value addition at each stage of the supply chain. Businesses collect GST on their sales and can claim a credit for the GST paid on their purchases. The tax is ultimately borne by the final consumer who purchases the goods or services. GST is levied at different rates, such as zero-rated, exempted, or at varying percentages, depending on the nature of the goods or services.

27. What are capital receipts?

Ans: Capital receipts are the funds received by the government that either create a liability or result in a reduction in assets. They are associated with transactions that involve the creation or acquisition of assets or the repayment of liabilities. Examples of capital receipts include loans raised by the government, proceeds from the sale of assets, recovery of loans granted by the government, and borrowings from foreign governments or international financial institutions.

28. How does the classification of expenditure help in budget analysis?

Ans: The classification of expenditure into revenue and capital categories allows for a better understanding of how government funds are allocated and utilised. It helps in assessing the government’s spending priorities, identifying areas of focus, and evaluating the impact of budgetary decisions on short-term operations and long-term development. This classification aids policymakers, analysts, and citizens in analysing the fiscal policies, resource allocation, and the overall financial health of the government.

29. What are the factors that can lead to changes in government expenditure?

Ans: Changes in government expenditure can be influenced by various factors, including economic conditions, policy priorities, demographic shifts, political changes, emergencies or crises, revenue fluctuations, and evolving societal needs.

30. How can a decrease in government expenditure impact public services and welfare programs?

Ans: A decrease in government expenditure can result in reduced funding for public services and welfare programs. This may lead to cuts in areas such as healthcare, education, social assistance, and infrastructure development. Reduced expenditure can limit the availability and quality of these services, potentially affecting vulnerable populations and hindering socio-economic progress.

31. What role does government expenditure play in addressing societal needs and public priorities?

Ans: Government expenditure plays a crucial role in addressing societal needs and public priorities. It allows governments to allocate resources to critical sectors such as healthcare, education, infrastructure, social welfare, and public safety. By adjusting expenditure, governments can respond to emerging challenges, support development goals, and address the evolving needs and expectations of their citizens.

32. Is government debt a burden? — Explain.

Ans: Public debt is burdensome if it reduces future growth in output. It has after been argued that ‘debt does not matter because we owe it to ourselves.’ This is because although there is a transfer of resources between generations purchasing power remains within the nation. However, any debt that is owed to foreigners involves a burden since we have to send goods abroad corresponding to the interest payments.

(C) Long Type Questions & Answers:

1. Define surplus budget, deficit budget and balanced budget.

Ans: (i) A surplus budget is one, where the estimated revenues are greater than he estimated expenditures. It will lower the level of aggregate demand in the economy, which is considered good way to check inflation that arises due to the situation of excess demand.

(ii) A balanced budget is one, where the estimated revenue equals the estimated expenditure. It shows that government is not doing wasteful expenditure. It reflects financial stability in the country. Since the amount of additional tax and additional expenditure are equal, there will be net increase in aggregate demand.

A deficit budget is one, where the estimated revenue is less than estimated expenditure. This means that the tax is less than the expenditure. The reduction in increase in aggregate demand is by an amount equal to the expenditure. The net effect of this will be to increase aggregate demand. The deficit budget is therefore a good policy to combat recession, where the economy is in an under employment equilibrium due to deficit demand.

Merits of deficit budget are:

(i) It is most desirable, when the level of aggregate demand is low in the economy.

(ii) It accelerates growth.

(iii) It would be needed for the monetization of the economy.

Demerits of deficit budget are:

(i) It is not desired during the period of inflation as it adds to the supply of money.

(ii) It would lead to wasteful and unnecessary expenditure on the part of the government.

2. What are the components of government budget?

Ans: In simple word, budget is a document, which contains estimates of the government revenue and expenditure. A budget shows the planned revenue and planned expenditure.

The main components of budget are:

(a) Revenue budget. and

(b) Capital budget.

(a) Revenue budget: The revenue budget shows the current receipts of the government and the expenditure that can be met from these receipts. Revenue receipts and revenue expenditure of the government are shown in revenue account. Revenue receipts are divided into tax and non-tax revenue. Tax revenues consist of the proceeds of taxes and other duties levied by the government. Tax revenue comprise of direct taxes which fall directly on individuals and firms. Examples-personal income tax, corporation tax. And indirect taxes are excise duty, custom duty, service tax etc. Non tax revenue of the government includes receipts from sources other than tax. It includes receipts in the form of commercial revenue e.g., revenue in form of prices paid for government supplied commodities, interest and dividend on government investment, administrative revenue etc.

Revenue expenditure refers to all those expenditures of the government, which do not result in creation of physical or financial assets. It relates to those expenses incurred for the normal functioning of the government departments and provision of various services, interest payments on debt incurred by the government. Revenue expenditure is classified into plan and non-plan expenditure. Plan expenditure relates to central plans and central assistance for state and union territory plans. Non-plan expenditure covers a vast range of general, economic and social services of the government. The main items of non-plan expenditure are — interest payments, defence services, subsidies, salaries and pensions.

(b) Capital budget: Capital budget is an account of the assets as well as liabilities of the government. It consist of capital receipts and capital expenditure. Capital receipts are defined as any receipt of the government, which either creates a liability or leads to reduction in assets. Capital receipts includes three items, recovery of loans, other receipts (mainly through disinvestment) and borrowings and other liabilities (e.g. small savings deposits in post offices etc.). Capital receipts may be debt creating or non-debt creating. Net borrowing by government at home, loans received from foreign governments, borrowing from RBI are examples of debt creating capital receipts, whereas recovery of loans, proceeds from sale of public enterprises etc. are example of non-debt creating capital receipts.

Again, an expenditure, which either creates an assets or reduces liability is called capital expenditure. Capital expenditure consists mainly of expenditure on acquisition of assets like land, building, machinery, equipment, investment in shares etc. and loans and advances granted by the central government to state and union territory government companies, corporation and other parties. Capital expenditure is again classified into plan capital expenditure and non-plan capital expenditure. Plan capital expenditure refers to that expenditures, which is provided in the budget to be incurred by the government to fulfil its planned development programmes. These include both consumption as well as investment expenditure by the government, expenditure on agriculture, power, communication, industry, transport, health and education etc.

Non-plan expenditure is the all government expenditure, which are provided in the budget on routine functioning of the government. These include both consumption as well as investment expenditure of the government other than plan expenditure.

3. What are the components of capital receipt of government budget.

Ans: Capital budget is an account of the assets as well as liabilities of the government. It consist of capital receipts and capital expenditure. Capital receipts are defined as any receipt of the government, which either creates a liability or leads to reduction in assets. Capital receipts includes three items, recovery of loans, other receipts (mainly through disinvestment) and borrowings and other liabilities (e.g. small savings deposits in post offices etc.). Capital receipts may be debt creating or non-debt creating. Net borrowing by government at home, loans received from foreign governments, borrowing from RBI are examples of debt creating capital receipts, whereas recovery of loans, proceeds from sale of public enterprises etc. are example of non-debt creating capital receipts. Again, an expenditure, which either creates an assets or reduces liability is called capital expenditure. Capital expenditure consists mainly of expenditure on acquisition of assets like land, building, machinery, equipment, investment in shares etc. and loans and advances granted by the central government to state and union territory government companies, corporation and other parties. Capital expenditure is again classified into plan capital expenditure and non-plan capital expenditure. Plan capital expenditure refers to that expenditures, which is provided in the budget to be incurred by the government to fulfil its planned development programmes. These include both consumption as well as investment expenditure by the government, expenditure on agriculture, power,.communication, industry, transport, health and education etc.

4. Mention three main items of non-plan expenditure of a government budget.

Ans: The three non-plan expenditure items of a government budget are:

(a) Expenditure on police.

(b) Expenditure on general administrative.

5. What does the revenue account of a government budget contain?

Ans: The revenue account of a government budget contains the revenue receipts and revenue expenditures of the government. Here’s what is typically included in the revenue account:

(i) Revenue Receipts: This category includes all the income or revenue generated by the government during a specific period. Revenue receipts primarily consist of:

(a) Tax Revenue: This includes proceeds from various taxes levied by the government, such as income tax, corporate tax, goods and services tax (GST), excise duty, customs duty, sales tax, and other similar taxes.

(b) Non-Tax Revenue: Non-tax revenue comprises receipts from sources other than taxes. It includes income from fees, fines, penalties, licences, permits, dividends from government-owned enterprises, interest on loans and advances, grants, donations, and other miscellaneous sources.

(ii) Revenue Expenditures: Revenue expenditures refer to the expenses incurred by the government during a specific period. These expenditures are of a recurring nature and are not related to capital investments. Revenue expenditures generally include:

(a) Administrative Expenses: These expenses cover the day-to-day functioning of the government, such as salaries and wages of government employees, office maintenance costs, and other administrative expenses.

(b) Subsidies and Grants: Subsidies are provided by the government to support specific sectors or groups, such as agricultural subsidies, food subsidies, fuel subsidies, and welfare benefits. Grants are transfers made by the government to other entities, such as states, local bodies, and other organisations.

(c) Interest Payments: This includes the interest paid by the government on its borrowings, such as interest on loans, bonds, and other forms of debt.

(d) Pensions and Social Security Payments: This category includes payments made by the government for pensions, retirement benefits, social security schemes, and other social welfare programs.

(e) Maintenance and Operation Expenses: These expenses cover the maintenance and operation of government assets, infrastructure, public services, defence, law and order, education, healthcare, and other essential services.

6. Distinguish between plan and non-plan expenditure.

Ans: Development expenditure is the expenditure on activities which are directly related to economic and social development of the country. This includes expenditure on education, health, agricultural and industrial development, rural development, social welfare, scientific research etc. Expenditure incurred on departmental enterprises under the plans and extra budgetary expenditure of non developmental enterprises of the government is also considered as development at expenditure. But non-development expenditure is expenditures incurred on essential general services of the government such expenditure is essential from administrative paint of view. Expenditure on police, judiciary, defence, general administrative, interest payment, tax collection, subsidies on food etc. fall under this category. Although non-developmental expenditure does not contribute directly to national product, it does help indirectly in the process of economic development of a country.

7. What are the sources of government revenue? State briefly.

Ans: The main sources of govt revenue are:

(a) Tax Revenue.

(b) Non-Tax Revenue.

The tax revenue are:

direct tax and indirect tax Again, the non-tax revenue are -fees, fines Gifts, grants etc.

Direct taxes are normally imposed on income, wealth and property, whereas indirect taxes are levied on goods and services which people consume. Direct taxes are compulsory and can not be escaped, while a person can avoid paying indirect tax by refraining from entering into the particular transaction.

The basis of classifying taxes into direct tax and indirect tax is whether the burden of the tax is shiftable to others or not. If it is not shiftable, it is an indirect tax.

Primary deficit is defined as fiscal deficit minus interest payment on previous borrowings

Primary deficit = Fiscal deficit—interest payments.

Primary deficit shows the borrowing requirements of the government for meeting expenditure exclusive of interest payment. If primary deficit is zero, then final deficit is equal to interest payment. It thus indicates how much government borrowing is going to finance expenses other than interest payments. It is generally used as basic measure of fiscal responsibility.

8. Distinguish between tax-revenue and non-tax revenue.

Ans: (i) Tax revenue is the income of the government from taxes. Tax payer can not expect any service or benefit from the government in return. Non tax revenue is the income of the government from sources other than taxes. It is in return for any services or benefit from the government.

(ii) Tax revenue is a major part of government income. Non- tax revenue’s share in government revenue is very small.

(iii) The main sources of tax revenue are income tax, corporate taxes, excess duty and sales tax. And non-tax revenue includes fees, fines, dividend, gifts and grants etc.

9. What are the basic objectives of a government budget? — Explain briefly.

Ans: (i) Reallocation of resources: Private sector does not undertake many economic activities due to low profitability and huge investment. As a result, government has to intervene. Through the budgetary policy, government aims to reallocate resources in accordance with the economic and social priorities of the country. For example, government discourages the production of harmful consumption goods through heavy taxes and encourages the use of ‘Khadi products’ by providing subsidies.

(ii) Redistribution Activities: Economic inequality is an inherent part of every economic system. Government aims to reduce such inequalities of income and wealth through its budgetary policy. Fiscal instruments like taxation, subsidies and expenditure on social security, public works etc. are used by the government to achieve this objective.

(iii) Management of public enterprises: There are large numbers of public sector industries, which are established and managed for social welfare of the public. Budget is prepared with the objective of making various provisions for managing such enterprises and providing them financial help.

(iv) Stabilising Economic activities: Government budget is used to prevent business fluctuations of inflation or deflation and to maintain economic stability. The government aims to control the different phases of business fluctuations through its budgetary policy. Policies of surplus budget during inflation and deficit budget during deflation are adopted to achieve stability in the economy.

(v) Economic growth: Economic growth has been the main objective of every economic at all times. The growth rate of a country depends on rate of saving and investment. For this purpose, budgetary policy aims to mobilise sufficient resources for investment in the public sector. Therefore, the government makes various provisions in the budget to raise overall rate of savings and investments in the economy.

10. Explain the importance of stabilisation requirements of an economy.

Ans: The government budget is used to present economic fluctuations. Economic fluctuations refer to the situations of inflation or deflation. The government of a country is always committed to save the economy from periods of inflation or deflation Budgetary policy measures are needed to raise the level of aggregate demand in times when expenditures exceed the available output price stability increase growth and development.

11. What is meant by revenue deficit? Explain three implications of revenue deficit.

Ans: Revenue deficit is when the net amount received (revenues less expenditures) falls short of the projected net amount to be received. This occurs when the actual amount of revenue received and/or the actual amount of expenditures do not correspond with predicted revenue and expenditure figures.

Implications of Revenue Deficit:

(a) It indicates the inability of the government to meet its regular and recurring expenditure in the proposed budget.

(b) It implies that government is dissaving, i.e. government is using up savings of other sectors of the economy to finance its consumption expenditure.

(c) It also implies that the government has to make up this deficit from capital receipts, i.e. through borrowings or disinvestments. It means, revenue deficit either leads to an increase in liability in the form of borrowings or reduces the assets through disinvestment.

12. Briefly explain the components of a government budget.

Ans: In simple word, budget is a document, which contains estimates of the government revenue and expenditure. A budget shows the planned revenue and planned expenditure.

The main components of budget are:

(a) Revenue budget. and

(b) Capital budget.

Revenue expenditure refers to all those expenditures of the government, which do not result in creation of physical or financial assets. It relates to those expenses incurred for the normal functioning of the government departments and provision of various services, interest payments on debt incurred by the government. Revenue expenditure is classified into plan and non-plan expenditure. Plan expenditure relates to central plans and central assistance for state and union territory plans. Non-plan expenditure covers a vast range of general, economic and social services of the government. The main items of non-plan expenditure are-interest payments, defence services, subsidies, salaries and pensions.

13. The consumption function in an economy is given as C = 300 + 0.75Y, investment expenditure (I) 250 and government spending is 200. Find out

(i) What is the equilibrium level of income?

(ii) If the government expenditure is increased by 100, what will be the change in the equilibrium.

Ans: Given, C = 300 + 0.75Y I = 250 G = 200

(i) ∴ Equilibrium Income (Y) = C + I + G = 300 + 0.75Y + 250 + 200

⇒ Y— 0.75Y = 300 + 250 + 200 ⇒ Y (1-0.75) = 750

⇒ y = 750/1 – 0.75 = 3000

(ii) Given, government spending increase by 100.

∴ DY = 1/1—C • ΔG = 1/1— 0.75 × 100 = 400

∴ New equilibrium income = 3000 + 400 = 3400

14. Suppose in a particular economy the consumption function is C = 150 + 0.6 Y, investment is equal to 150, government purchases are 120 and net taxes (i.e. lump-sum taxes minus transfer) is 100. Now,

(i) What is the equilibrium level of income?

(ii) Calculate the value of government expenditure multiplier and tax multiplier

(iii) If the government expenditure is increased by 100, find the change in equilibrium income.

Ans: Given, C = 150 + 0.6Y I = 150 G = 120 T = 100

(i) ∴ Equilibrium Income (y) = 150 + 0.6Y + 150 + 120 ⇒ Y = 1050.

When net taxes imposed ______

Y = Y + T = 1050 + 100 = 1150, ie, new equilibrium income.

(ii) We know that,

Govt. expenditure multiplier = ΔΥ/ΔG = 1/1—C = 1/1—0.6 = 2.5

Again, Tax multiplier = ΔY/ΔT = —C/1—C = — 0.6/1—0.6 = -1.5

(iii) Given, Govt. expenditure increased by 100.

∴ ΔΥ = 1/1—C × ΔG ⇒ ΔY= 1/1—0.6 × 100 = 250

∴ New equilibrium income = 1150 + 250

∴ Y= 1400

15. Suppose, the consumption function C = 80 + 0.9 Y, government expenditure (a) = 120 and the total tax revenue function T = 0.10 Y.

From the above information,

(i) Find out the equilibrium level of income.

(ii) What is the tax revenue (T) at the equilibrium level of income.

(iii) Does the government have a balanced budget?

Ans: Given, C = 80 + 0.9Y g = 120 T = 0.10Y

(i) ∴ Equilibrium income (Y) = C + G

⇒ y = 80 + 0.9y + 120 ⇒ Y = 2000

Again, T = 0.10Y = 0.10(2000) = 200

(ii) At equilibrium level of income tax revenue is, T = 200.

(iii) The government budget is balanced, because the government expenditure (G = 120) is less then the tax revenue (T = 200)

16. What is a government budget? Explain the concept of revenue budget and capital budget.

Ans: Government budget is a constitutional obligation in India. Budget is a document which contains estimates of the government revenue and expenditure for the coming year. According to the Indian Constitution, “Budget means the annual financial statement containing an estimate of all anticipated revenue and expenditure of the government for the coming financial year”

Revenue budget and capital budget are the two components of Revenue budget.

Revenue budget includes revenue receipts and revenue expenditure of the government. Revenue receipts refer to those receipts of the government which neither create a liability nor tend to reduction in assets. Revenue receipts are divided into tax and non tax revenue. Tax revenue consists of the proceeds of taxes and other duties levied by the government tax revenue an important component of revenue receipts. Comprise of direct taxes which fall directly on individuals and firms and indirect taxes like excise taxes, custom duties and service tax, non tax revenue of the government includes receipts from sources other then tax, non tax revenue does not create a liability for the government. It includes receipts in the form of commercial revenues e.g. revenue in form of interest and divided on government investment, administrative revenues license fees, registration fees, fines and penalties.

Revenue expenditure refers to all those expenditure of the government which do not result in creation of physical or financial assets. It relates to those expenses incurred for the normal functioning of the government departments and provision of various services, interest payments on debt incurred by the government. Revenue expenditure again classified into plan and non plan expenditure. Plan expenditure relates to central plans and central assistance for state and union territory plans. Non plan expenditure covers a vast range of general, economic and social services of the government. The main items of non plan expenditure are interest payments, defence services, subsidies, salaries and pensions.

Capital budget is an account of the assets as well as liabilities of the government. It consist of capital receipts and capital expenditure. Capital receipts are defined as any receipts of the government which either creates a liability or leads to reduction in assets. Capital receipts include three items recovery of loans, other receipts and borrowing and other liabilities. Capital expenditure consists mainly of expenditure on acquisition of assets like land, building, machinery, equipment, investment in shares etc. and loans and advanced granted by the central government to state and union territory governments, government companies, corporations and other parties.

17. Explain two functions operated through government revenue and expenditure measures.

Ans: Revenue: Revenue from fiscal monopolies (liquor and gaming profits) are now considered taxes. They were previously classified under investment income.

The category “Privileges, licences and permits” was deleted: Items such as business licences, motor vehicle licences and all local government licences and permits are treated as taxes while most personal paid licences are classified as sales of goods and services.

Grants in lieu of taxes, which were treated as transfers are now classi-fied under property and related taxes.

The category “Natural resource revenue” was deleted. Natural resource royalties are now considered investment income while mining and logging taxes are now allocated to the income taxes category.

The tax category “Health and social insurance levies” has been split into two new non-tax categories, namely: “Health insurance premiums” and “Contributions to social insurance plans.”

Expenditures: The function “Transfers to own enterprises” was deleted. Services previously classified under that heading are now assigned to other functions, as appropriate.

A new recreation and culture sub-function called “Broadcasting” was created to include cultural services of the Canadian Broadcasting Corporation (CBC).

Evolution in the field of social services has necessitated new sub-group-ings of services assigned to the function “Social services.”

Employer contributions to employee benefit plans (the Supplementary Labour Income (SLI)), the operation and maintenance of government buildings and provision of computer services to various ministries and crown corporations are now assigned to the function to which they relate rather than being totally assigned to the function “General services” per the previous edition of the manual.

Grants in lieu of taxes are now functionalized. They were previously con-sidered general purpose transfers.

18. Write about the objectives of government budget.

Ans: Some common objectives can be identified:

(a) Fiscal discipline: One of the primary objectives of a government budget is to ensure fiscal discipline by maintaining a balance between government revenues and expenditures. This objective aims to control budget deficits and reduce the accumulation of public debt, promoting long-term economic stability.

(b) Economic stability: Governments aim to achieve economic stability through their budgetary policies. This objective involves managing inflation, promoting sustainable economic growth, and maintaining a stable macroeconomic environment. The budget may include measures to control inflation, stimulate investment, and stabilise prices to create favourable conditions for businesses and households.

(c) Resource allocation: The budget plays a crucial role in allocating resources efficiently and effectively. Governments use the budget to prioritise and allocate funds to different sectors based on their importance, such as education, healthcare, infrastructure, defence, and social welfare. Resource allocation ensures that public funds are utilised to address the needs and demands of the society in a balanced and equitable manner.

Public service delivery: The budget aims to improve the delivery of public services by allocating adequate funds to sectors like healthcare, education, transportation, and public safety. The objective is to enhance the quality and accessibility of essential services, ensuring that citizens receive the necessary support and benefits from the government.

(d) Redistribution of income and wealth: Governments often use the budget as a tool for redistributing income and wealth within society. Through taxation and social welfare programs, the budget aims to reduce income inequality, alleviate poverty, and provide assistance to vulnerable populations. This objective promotes social justice and inclusivity.

19. What are revenue receipts?

Ans: Revenue receipts refer to the funds that a government receives from various sources as part of its regular operations and activities. These receipts are categorised as revenue because they do not create any liability or lead to a reduction in assets for the government. Revenue receipts are typically recurring in nature and contribute to the government’s revenue generation.

Common examples of revenue receipts include:

(a) Taxes: Revenue generated from direct and indirect taxes, such as income tax, sales tax, value-added tax (VAT), excise duty, customs duty, and other levies imposed on individuals and businesses.

(b) Non-tax Revenue: Receipts generated from non-tax sources, such as fees, fines, penalties, licences, permits, user charges, and royalties. This can include fees for government services, revenue from state-owned enterprises, and income from natural resource extraction.

(c) Grants: Financial assistance provided by other governments, international organisations, or donor agencies for specific purposes or projects. These grants may be in the form of developmental aid, technical assistance, or budgetary support.

(d) Dividends and Profits: Revenue earned by the government from its ownership stakes in public sector enterprises or corporations through dividends, profits, or surpluses generated by these entities.

(e) Interest and Investment Income: Revenue generated from interest on loans given by the government, interest earned on government securities, or income from investments made by the government’s funds or reserves.

(f) Miscellaneous Receipts: Other sources of revenue that do not fall under the above categories, such as donations, gifts, recoveries of loans, and other miscellaneous sources of income.

20. What is the significance of revenue receipts?

Ans: Revenue receipts hold significant importance for governments due to the following reasons:

(a) Funding Government Expenditure: Revenue receipts serve as a crucial source of funds for meeting the government’s day-to-day operational expenses, such as salaries, infrastructure maintenance, social welfare programs, defence, healthcare, education, and other essential services. These receipts provide the necessary financial resources for the government to function and deliver public goods and services.

(b) Budgetary Planning and Execution: Revenue receipts play a key role in the budgetary planning and execution process. Governments rely on revenue estimates and projections to determine the availability of funds for various programs and projects. Accurate and reliable revenue receipts data assists in formulating realistic budgets, allocating resources efficiently, and ensuring that expenditure plans align with the available revenue.

(c) Fiscal Sustainability and Deficit Management: Monitoring revenue receipts is crucial for maintaining fiscal sustainability and managing deficits. Governments need to assess the adequacy of revenue sources to cover their expenditure obligations. Revenue shortfalls can lead to budget deficits, forcing governments to rely on borrowing or other financing methods, which can impact the overall fiscal health and sustainability of the government.

(d) Economic Stability: Revenue receipts contribute to maintaining economic stability by financing government initiatives and programs that promote economic growth. Adequate revenue allows governments to invest in infrastructure development, create employment opportunities, implement tax reforms, support businesses, and undertake measures to stimulate economic activity. These actions can have a positive impact on overall economic performance and stability.

(e) Resource Allocation and Prioritization: Revenue receipts help governments prioritise and allocate resources effectively. By analysing revenue patterns and trends, governments can identify sectors or areas that generate substantial revenue and allocate resources accordingly. This ensures that resources are directed towards areas of priority, such as education, healthcare, infrastructure, and social welfare, based on the revenue-generating capacity of different sectors.

21. What is the significance of capital receipts?

Ans: Capital receipts hold significant importance for governments due to the following reasons:

Financing Capital Expenditure: Capital receipts provide funds for financing capital expenditure, which includes investments in infrastructure development, acquisition of assets, repayment of loans, and other long-term investments. These receipts contribute to the expansion of the government’s productive capacity and the improvement of public infrastructure, such as roads, bridges, schools, hospitals, and utilities.

(a) Debt Management: Capital receipts play a crucial role in managing government debt. Governments often borrow funds through capital receipts, such as issuing bonds or taking loans from domestic or international sources. These borrowed funds can be used to finance development projects or meet expenditure requirements. Effective management of capital receipts helps in ensuring the sustainability of government debt, minimising the burden of interest payments, and maintaining a favourable debt-to-GDP ratio.

(b) Investment and Income Generation: Capital receipts can come from the sale or disposal of assets or investments made by the government. These receipts can include proceeds from the sale of shares in public sector enterprises, disinvestment of government-owned assets, or returns from investments in financial instruments. Capital receipts contribute to the government’s investment portfolio and can generate income through dividends, capital gains, or interest payments.

(c) Infrastructure Development: Capital receipts are instrumental in financing infrastructure development, which is crucial for economic growth and improving the quality of life for citizens. By channelling funds through capital receipts, governments can invest in building and upgrading infrastructure, such as transportation networks, energy facilities, telecommunications systems, and water supply systems. These investments stimulate economic activity, attract private sector participation, and enhance overall productivity.

(d) Economic Stimulus and Growth: Capital receipts can be utilised by governments to implement economic stimulus measures during periods of economic downturn or recession. By investing in infrastructure projects, providing financial support to industries, or offering incentives for investment, capital receipts can help stimulate economic activity, create jobs, and foster economic growth. These measures have multiplier effects on the economy, leading to increased consumption, investment, and overall economic prosperity.

(e) Long-Term Planning and Development: Capital receipts contribute to long-term planning and development initiatives. Governments can strategically allocate funds from capital receipts to sectors and projects that have long-term benefits, such as research and development, technology advancements, education, healthcare, and environmental conservation. These investments support sustainable development and contribute to the well-being of future generations.

22. What is the significance of revenue expenditure?

Ans: Revenue expenditure holds significant importance for governments due to the following reasons:

(a) Provision of Essential Services: Revenue expenditure is primarily directed towards funding the day-to-day operational expenses of the government. It ensures the provision of essential services and functions that are necessary for the smooth functioning of society, such as healthcare, education, public safety, infrastructure maintenance, social welfare programs, defence, and administrative operations. These expenditures contribute to the well-being and development of the population.

(b) Human Development and Social Welfare: Revenue expenditure plays a crucial role in promoting human development and social welfare. It enables governments to invest in education, healthcare, poverty alleviation programs, social security schemes, and other initiatives aimed at improving the quality of life and reducing social inequalities. These expenditures support inclusive growth, empower marginalised communities, and address social challenges.

(c) Employment Generation: Revenue expenditure can contribute to employment generation and economic stability. Government spending on public infrastructure projects, healthcare facilities, education institutions, and social programs creates jobs and stimulates economic activity. It provides income opportunities for individuals, boosts consumer spending, and supports local businesses and industries.

(d) Economic Support and Stabilization: Revenue expenditure can be used to provide economic support during periods of economic downturn or crisis. Governments may allocate funds for financial assistance programs, subsidies, grants, and other measures to alleviate the impact of economic challenges on individuals, businesses, and sectors. These expenditures help stabilise the economy, protect vulnerable populations, and promote recovery.

(e) Maintenance and Upkeep of Assets: Revenue expenditure is allocated for the maintenance, repair, and upkeep of existing assets and infrastructure. It ensures that public infrastructure, such as roads, bridges, utilities, public buildings, and parks, are properly maintained and functional. Regular expenditure on maintenance helps extend the lifespan of assets, improves safety, and enhances the overall quality of public services.

23. What is the significance of capital expenditure?

Ans: Capital expenditure holds significant importance for governments due to the following reasons:

(a) Infrastructure Development: Capital expenditure plays a crucial role in funding the development of infrastructure, such as transportation networks, energy facilities, telecommunications systems, water supply systems, and public buildings. These investments in physical assets contribute to economic growth, enhance connectivity, and improve the overall quality of life for citizens.

(b) Long-Term Investments: Capital expenditure allows governments to make long-term investments that have a lasting impact on the economy. It enables the acquisition of capital assets, such as land, buildings, machinery, and equipment, which are essential for the expansion of productive capacity and the provision of public services. These investments contribute to economic productivity and create a foundation for sustainable development.

(c) Job Creation and Economic Stimulus: Capital expenditure has the potential to stimulate economic activity and create employment opportunities. Government investments in infrastructure projects, such as construction and development, not only provide job opportunities but also generate demand for materials, equipment, and services from various sectors of the economy. This leads to a multiplier effect, supporting economic growth and stimulating other industries.

(d) Public Service Enhancement: Capital expenditure is directed towards improving public services and facilities. It enables governments to upgrade and modernise existing infrastructure, expand healthcare facilities, upgrade educational institutions, enhance public transportation systems, and develop cultural and recreational amenities. These investments contribute to the well-being of citizens and enhance their overall quality of life.

(e) Technological Advancement: Capital expenditure allows governments to invest in technology and innovation. It supports the adoption of advanced systems, equipment, and processes that enhance operational efficiency, improve service delivery, and promote digital transformation. These investments enable governments to stay competitive, streamline operations, and deliver services more effectively.

(f) Asset Value and Long-Term Returns: Capital expenditure helps governments acquire assets that have long-term value and potential returns. These assets, such as land, buildings, and infrastructure, can appreciate in value over time, contribute to revenue generation, or be leveraged for future economic activities. Strategic investments in capital assets can lead to long-term financial benefits for the government and the economy.

24. How can changes in government expenditure impact fiscal stability?

Ans: Changes in government expenditure can have a significant impact on fiscal stability, both positively and negatively. Here are some ways in which changes in government expenditure can influence fiscal stability:

(a) Budget Deficit/Surplus: Government expenditure plays a crucial role in determining the budget deficit or surplus. An increase in government expenditure, without a corresponding increase in revenue, can lead to a larger budget deficit. This can strain fiscal stability by increasing government borrowing, debt levels, and interest payments. On the other hand, a decrease in government expenditure or an increase in revenue can contribute to a smaller deficit or even a budget surplus, promoting fiscal stability.

(b) Debt Sustainability: Changes in government expenditure affect the sustainability of public debt. Increased expenditure, particularly if financed through borrowing, can lead to a higher debt-to-GDP ratio, making debt less sustainable in the long run. High levels of debt can pose risks to fiscal stability, such as increased interest payments, limited fiscal space for future investments, and vulnerability to financial market fluctuations. Controlling expenditure growth can help maintain debt sustainability and improve fiscal stability.

(c) Economic Growth and Productivity: Government expenditure can impact economic growth and productivity, thereby influencing fiscal stability. Investments in infrastructure, education, research and development, and other productive sectors can stimulate economic activity, enhance productivity, and contribute to revenue generation. On the other hand, excessive or inefficient expenditure may strain public finances, limit resources for productive investments, and impede economic growth, affecting fiscal stability in the long term.

(d) Public Confidence and Market Perception: Changes in government expenditure can influence public confidence and market perception of a country’s fiscal stability. High levels of wasteful or unproductive expenditure, excessive deficits, or a lack of transparency in budgetary practices can erode public trust and investor confidence. This can lead to increased borrowing costs, reduced foreign investment, currency depreciation, and financial market instability, impacting fiscal stability.

25. What are the key principles of fiscal responsibility?

Ans: The key principles of fiscal responsibility guide governments in managing their finances and ensuring sustainable fiscal practices. While specific principles may vary across countries, some common key principles include:

(a) Sustainability: Governments should prioritise fiscal sustainability, aiming to achieve a balance between revenues and expenditures over the medium to long term. This involves managing public debt levels, avoiding excessive deficits, and ensuring that fiscal policies are aligned with long-term economic growth and stability.

(b) Prudence: Governments should adopt a prudent approach to fiscal management by carefully assessing risks, uncertainties, and potential future obligations. Prudent fiscal policies involve realistic revenue projections, conservative expenditure estimates, and contingency planning to address unexpected events or economic downturns.

(c) Transparency and Accountability: Fiscal responsibility requires transparency and accountability in the management of public finances. Governments should provide accurate and timely information on budgetary decisions, fiscal policies, revenue and expenditure data, and public debt levels. This allows for public scrutiny, promotes accountability, and helps build trust between the government and its citizens.

(d) Efficiency and Effectiveness: Governments should strive for efficiency and effectiveness in the allocation and utilisation of resources. This involves ensuring that public expenditures generate the desired outcomes and value for money. Efficiency can be achieved through rigorous evaluation of programs, cost-benefit analysis, eliminating wasteful spending, and adopting efficient processes and systems.

(e) Equity: Fiscal responsibility includes considerations of equity and fairness in the distribution of the burden and benefits of fiscal policies. Governments should strive for equitable taxation systems, ensuring that the tax burden is distributed fairly among individuals and businesses. Additionally, social welfare programs and public services should be designed to address the needs of vulnerable and disadvantaged populations, promoting inclusivity and reducing inequality.

26. How does fiscal responsibility relate to intergenerational equity?

Ans: Fiscal responsibility is closely tied to intergenerational equity as it considers the fair distribution of costs and benefits across different generations. Here’s how fiscal responsibility relates to intergenerational equity:

(a) Long-Term Sustainability: Fiscal responsibility involves making decisions that ensure the long-term sustainability of public finances. This includes managing public debt levels, avoiding excessive deficits, and implementing policies that promote economic growth and stability. By maintaining fiscal discipline, governments can prevent the accumulation of unsustainable debt burdens that could be passed on to future generations, ensuring intergenerational equity in terms of fiscal obligations.

(b) Fairness in Taxation: Fiscal responsibility requires governments to design tax systems that are equitable and distribute the burden of taxation fairly among different generations. Taxes should be structured in a way that takes into account the ability to pay and avoids placing disproportionate burdens on future generations. This promotes intergenerational equity by ensuring that each generation contributes their fair share towards public finances.

(c) Investment in Human Capital: Fiscal responsibility includes investing in human capital through expenditures on education, healthcare, and social welfare programs. These investments benefit current and future generations by providing individuals with the skills, knowledge, and opportunities needed for economic and social advancement. By prioritising such investments, fiscal responsibility supports intergenerational equity by equipping future generations with the resources and capabilities they need to thrive.

(d) Environmental Sustainability: Fiscal responsibility also encompasses environmental sustainability, recognizing that current actions can have long-lasting consequences for future generations. Governments need to consider the environmental impact of fiscal policies and implement measures that promote sustainable development. This includes investing in renewable energy, reducing greenhouse gas emissions, and addressing environmental challenges. By protecting the environment, fiscal responsibility contributes to intergenerational equity by ensuring that future generations inherit a healthy and sustainable planet.

(e) Responsible Intergenerational Transfers: Fiscal responsibility involves managing intergenerational transfers of resources in a responsible manner. This includes ensuring that transfer programs, such as pensions and social security systems, are financially sustainable and adequately funded. By maintaining the long-term viability of these programs, fiscal responsibility supports intergenerational equity by ensuring that future generations can also benefit from social safety nets and income security.

27. What are the key provisions of the Budget Management Act 2003?

Ans: India has a comprehensive legal framework for budget management and fiscal responsibility.

Some key provisions related to budget management in India include:

(a) Fiscal Responsibility and Budget Management Act (FRBM Act): The Fiscal Responsibility and Budget Management Act, enacted in 2003, sets targets for fiscal deficit reduction, debt management, and revenue consolidation. It aims to promote fiscal discipline, macroeconomic stability, and long-term debt sustainability.

(b) Annual Budget Presentation: The Finance Minister of India presents the annual budget to the Parliament, outlining the government’s revenue and expenditure plans for the upcoming financial year. The budget includes details of revenue estimates, expenditure allocations, policy initiatives, and financial targets.

(c) Expenditure Control and Accountability: The budget management framework in India emphasises expenditure control and accountability. The government follows principles of financial prudence, efficiency, and effectiveness in the utilisation of funds. Measures such as the Public Financial Management System (PFMS) and electronic fund management systems are implemented to enhance transparency and monitor expenditure.

(d) Medium-Term Expenditure Framework (MTEF): The MTEF is a key component of budget management in India. It provides a three-year expenditure outlook, linking policy priorities with resource allocations. The MTEF facilitates better planning, coordination, and monitoring of expenditure across sectors and helps ensure the alignment of expenditure with policy goals.

(e) Parliamentary Oversight: The Indian Parliament plays a crucial role in budget management. The budget is subject to scrutiny, debate, and approval by the Parliament. Parliamentary committees, such as the Public Accounts Committee (PAC) and Estimates Committee, review government expenditure and provide recommendations for better budget management.

(f) Audit and Accountability: The office of the Comptroller and Auditor General (CAG) conducts financial audits of government expenditure to ensure accountability and transparency. The CAG submits audit reports to the Parliament, highlighting any irregularities, deficiencies, or financial mismanagement.

28. What are the objectives of implementing GST?

Ans: The implementation of Goods and Services Tax (GST) aims to achieve several objectives.

Here are the key objectives of implementing GST:

(a) Streamlining and Simplifying the Tax Structure: One of the primary objectives of GST is to simplify the complex tax structure prevailing in the pre-GST era. GST replaces multiple indirect taxes, such as central excise duty, service tax, value-added tax (VAT), and others, with a single unified tax. This simplification leads to a streamlined tax structure, reducing compliance burden, and eliminating cascading effects of taxes.

(b) Promoting a Common National Market: GST aims to establish a common national market by facilitating the free flow of goods and services across state borders. The removal of inter-state barriers and the introduction of a unified tax system create a level playing field for businesses, encourage trade, and boost economic integration across regions.

(c) Eliminating Cascading Effects and Ensuring Input Tax Credit: Under the GST regime, taxes are levied only on the value addition at each stage of the supply chain. This eliminates the cascading effects of taxes, where taxes were levied on taxes paid earlier. Moreover, GST allows businesses to claim input tax credit for taxes paid on inputs, enabling the reduction of tax liability and promoting efficiency in business operations.

Broadening the Tax Base and Increasing Compliance: GST aims to widen the tax base by bringing more businesses into the formal tax net. With a simplified and transparent tax structure, the implementation of GST encourages voluntary compliance and reduces tax evasion. This helps in increasing tax revenue for the government, providing a boost to public finances.

(d) Enhancing Ease of Doing Business: GST simplifies tax compliance and administrative procedures for businesses. It replaces multiple tax filings with a single GST return, reducing paperwork and administrative burdens. This promotes ease of doing business, particularly for small and medium-sized enterprises (SMEs), leading to increased efficiency, cost savings, and improved business competitiveness.

29. What are the different types of GST?

Ans: Goods and Services Tax (GST) is implemented in various countries with different models and structures. While the specific names and details may vary, there are generally three common types of GST:

(a) Central GST (CGST): Central GST is levied by the central government on the intra-state supply of goods and services. It is collected by the central tax authorities and contributes to the revenue of the central government. The rate of CGST is typically determined by the central government and is the same across all states within the country.

(b) State GST (SGST): State GST is levied by the state governments on the intra-state supply of goods and services. It is collected by the state tax authorities and contributes to the revenue of the respective state governments. The rate of SGST is typically determined by the state governments and may vary from state to state.

(c) Integrated GST (IGST): Integrated GST is applicable to the inter-state supply of goods and services, as well as imports and exports. It is collected by the central government and distributed between the central and state governments based on predetermined formulas. IGST ensures seamless taxation on inter-state transactions and eliminates the need for separate CGST and SGST payments.

30. How do these measures of government deficit relate to each other?

Ans: The measures of government deficit are interconnected and provide different perspectives on the financial health of a government. Here’s how these measures relate to each other:

(a) Fiscal Deficit: The fiscal deficit represents the difference between a government’s total expenditure and its total revenue in a given period, typically a fiscal year. It indicates the extent to which the government needs to borrow to meet its expenditure requirements. The fiscal deficit takes into account both revenue receipts and capital receipts, as well as revenue and capital expenditures.

(b) Revenue Deficit: The revenue deficit focuses specifically on the gap between a government’s revenue receipts and revenue expenditure. It excludes capital receipts and capital expenditures from the calculation. The revenue deficit reflects the extent to which the government is relying on borrowings to finance its current expenditures, such as salaries, pensions, subsidies, and maintenance costs.

(c) Primary Deficit: The primary deficit is the difference between the fiscal deficit and the interest payments on government debt. It indicates the government’s borrowing needs excluding interest expenses. The primary deficit provides a measure of the government’s ability to generate enough revenue to cover its non-interest expenditures.

These measures of government deficit are related in the following ways:

(a) Fiscal Deficit and Revenue Deficit: The fiscal deficit includes both revenue and capital transactions, whereas the revenue deficit focuses solely on revenue transactions. The revenue deficit is a component of the fiscal deficit and represents the portion of the fiscal deficit attributed to revenue imbalances. If the revenue deficit is higher, it indicates that a larger portion of the fiscal deficit is funded through borrowings rather than revenue generation.

(b) Fiscal Deficit and Primary Deficit: The primary deficit is derived from the fiscal deficit by subtracting the interest payments on government debt. It represents the borrowing needs of the government excluding interest expenses. The primary deficit is an important indicator of the government’s ability to manage its non-interest expenditures without relying on additional borrowings.

31. What is a Deficit Budget? Why a deficit budget is considered beneficial than a surplus budget for a developing economy?

Ans: A deficit budget refers to a situation where a government’s total expenses exceed its total revenues in a given fiscal year. In other words, it indicates that the government is spending more than it is earning. A deficit budget leads to a budget deficit, which is typically financed through borrowing or by using accumulated reserves.

A deficit budget can be considered beneficial for a developing economy for several reasons:

(a) Infrastructure Development: Developing economies often require significant investments in infrastructure development to support economic growth. A deficit budget allows the government to allocate funds for infrastructure projects, such as building roads, bridges, schools, hospitals, and other critical facilities.

(b) Stimulating Economic Growth: In a developing economy, deficit spending can act as a stimulus to boost economic growth. Increased government spending can lead to increased demand for goods and services, which, in turn, stimulates production and employment opportunities.

(c) Social Welfare Programs: Developing economies often face high levels of poverty and inequality. A deficit budget enables the government to allocate funds for social welfare programs such as healthcare, education, poverty alleviation, and rural development. These initiatives can improve living standards and reduce socioeconomic disparities.

(d) Investment in Human Capital: Developing economies typically prioritise investment in human capital, including education and skill development. A deficit budget allows the government to allocate resources for improving educational institutions, vocational training programs, and research and development, which contribute to long-term economic growth and competitiveness.

(e) Countering Economic Downturns: Developing economies may face economic downturns or external shocks that impact growth. During such periods, a deficit budget allows the government to implement countercyclical measures such as increased government spending or tax cuts to stimulate economic activity and mitigate the adverse effects of the downturn.

32. What are the causes of a budget surplus?

Ans: A budget surplus occurs when a government’s total revenues exceed its total expenses in a given fiscal year. Several factors can contribute to the emergence of a budget surplus. Here are some common causes:

(a) Economic Growth: A robust and expanding economy can generate higher tax revenues for the government. Increased business activity, higher employment rates, and rising incomes result in greater tax collections, leading to a surplus in the budget.

(b) Increased Taxation: Governments can create budget surpluses by implementing new taxes, increasing existing tax rates, or broadening the tax base. These measures result in higher tax revenues, contributing to a surplus in the budget.

(c) Fiscal Discipline: Sound fiscal management practices, including effective expenditure control and prudent financial planning, can lead to budget surpluses. By carefully managing expenses and avoiding unnecessary or wasteful spending, the government can achieve a surplus position.

(d) Windfall Gains: Governments can experience unexpected windfall gains from various sources, such as natural resource revenues, asset sales, or one-time receipts. These windfalls, which may be temporary in nature, can significantly boost government revenues and result in a budget surplus.

Reduced Government Spending: Implementing cost-cutting measures or reducing expenditure in certain areas of the budget can contribute to a surplus. Governments may curtail spending on non-essential programs, streamline public services, or implement efficiency measures to reduce expenses and achieve a surplus.

(e) Debt Servicing: If a government has previously borrowed money and its debt obligations require less expenditure than anticipated, it can result in a surplus. Lower interest rates or favourable debt restructuring terms can reduce the cost of debt servicing, contributing to a surplus in the budget.

(f) External Assistance: Financial assistance from international organisations or foreign aid can contribute to a budget surplus. If the government receives grants or concessional loans, which do not require immediate repayment, it can lead to an excess of revenues over expenses.

33. Suppose in an economy, the consumption function is given as C = 60 + 0.7 Y; government expenditure (G) = 50; Export (X) = 80; government tax revenue is (T) = 60 and import (M) = 50 + 0.10 Y. Now,

(i) find out equilibrium level of income in that economy.

(ii) find out the net export at the equilibrium income.

(iii) find out what happens to equilibrium income and the net export balance when the government purchases increase from 50 to 60.

Ans: Given, C = 60 + 0.7Y G = 50 X = 80 T = 60 M = 50 + 0.10Y

(i) Equilibrium income

Y = C + G + X – M = (60 + 0.7Y) + 50 + 80 -(50 + 0.10Y)

= 60 + 0.7Y + 50 + 80 – 50 – 0.10Y

⇒ Y – 0.7Y + 0.10Y = 60 + 50 + 80 – 50 ⇒ Y(1 -0 .7 + 0.10) = 140

∴ Y = 350

Again,given, T = 60

∴ Equilibrium income,