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NIOS Class 12 Economics Chapter 29 Government And It’s Budget
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Government And It’s Budget
Module – XI: Money, Banking And Government Budget
TEXT BOOK QUESTIONS WITH ANSWERS
INTEXT QUESTIONS 29.1.
Q. Choose the correct alternative.
1. Government budget is a financial statement of
(a) Actual expenditure and actual receipts.
(b) Expected expenditure and expected receipts.
(c) Expected expenditures.
(d) Expected receipts.
Ans. (b) Expected expenditure and expected receipts.
2. Capital receipts are:
(d) Borrowings, recovery of loan, grants from foreign countries.
Ans. (d) Borrowings, recovery of loan, grants from foreign countries.
3. Revenue receipts are:
(b) Recovery of loans.
(c) Grants from foreign countries.
(d) Taxes and interest, dividents, profit from public sector undertakings.
Ans. (d) Taxes and interest, dividents, profit from public sector undertakings.
4. Government expenditure on defence is a:
(a) Revenue expenditure.
(b) Capital expenditure.
(c) Plan expenditure.
(d) Non-plan expenditure.
Ans. (d) Non-plan expenditure.
INTEXT QUESTIONS 29.2.
Q. 1. Fill in the blanks with appropriate word(s) within the brackets:
(i) Government budget is in deficit when total budgeted expenditure is _______ total budgeted revenue. (less than, greater than, equal to).
Ans. greater than.
(ii) Fiscal deficit ________ government borrowings. (includes, excludes).
(iii) Budgetary deficit is _______ measure of deficit compared to fiscal deficit. (a better, not a better).
Ans. not a better.
(iv) Money supply _______ when government borrowings from the Reserve Bank of India. (decreases, increases)
Q. 1. What is government budget? What do you understand by the term ‘financial year’?
Ans. Government in every country plans to undertake various economic and other activities and wants to pursue certain policies. The government has to incur expenditure for these activities and pursing these policies. As such, it has to raise necessary revenues to finance these expenditures. Accordingly the government has to draw a financial plan corresponding to various activities it wants to undertake in the coming period (usually a period). Such a financial plan is known as budget. Thus, a government budget is a statement of expected expenditure of the government and the sources of financing these expenditure during a financial year such an exercise is undertaken much before the financial year starts. The statement details all expenditures to be incurred during the coming financial year and the sources of meeting this expenditure.
In India, financial year refers to the period of time from 1st April to 31st March.
Q. 2. Outline the structure of government budget and briefly explain its various constituents.
Ans. Structure of Government Budget: The basic structure of a government budget is nearly the same at all levels of government. The terms of expenditure, the weight given to different items and the sources of finance may differ from Budget to Budget.
The Budget has two main parts
(a) Receipts and
(a) Receipts: The receipts of the Government are of two types:
(i) Revenue receipts. and
(ii) Capital receipts.
Revenue receipts are current income receipts from all sources. The main forms of such receipts are taxes, profits of public enterprises, grants, etc. Capital receipts constitute borrowings of the Government, recovery of loan and resale of shares of public.sector undertakings.
(b) Expenditure: All government expenditure can be classified into groups in two ways. We can classify these expenditures into capital expenditure and revenue expenditure. Government expenditure can also be classified into plan expenditure and non-plan expenditure. Let us explain the meaning of such expenditure.
Capital expenditure is the expenditure on creation of assets. Such expenditure is incurred on items like construction of buildings, roads, bridges, etc.
All those expenditures of the government which do not create any physical or financial assets are treated as revenue expenditure.
Provision of expenditure every year according to five year plan is a plan expenditure. Provision of expenditure on routine functions of government during the year is non-plan expenditure.
Q. 3. Distinguish between revenue receipts and capital receipts.
Ans. There is an important difference between revenue receipts and capital receipts. In revenue receipts government is under no future obligation to return the amount. Capital receipts on the other hand, being borrowings, the government is under obligation to return the amount along with interest. All capital receipts create liabilities or reduce assets.
Q. 4. Distinguish between revenue expenditure and capital expenditure.
Ans. Difference between capital expenditure and revenue expenditure: When government incurs expenditure to create assets such as school and hospital buildings, roads, bridges, canal, railway lines, etc. such expenditures are known as capital expenditures. But when government incurs expenditure that does not create any asset, such expenditures are known as revenue expenditures. For example, payment of salaries to an government employees, maintenance of public property, providing free education and health services to people, etc. constitute revenue expenditures which do not create any public asset.
Q. 5. Distinguish between plan and non-plan expenditures.
Ans. Distinction between plan and non- plan expenditures:
Plan expenditures: After independence, our country adopted the path of planning to achieve economic development. Under planning, provisions were made in government budget on expenditures that were to be incurred every year according to the priorities laid down in the five-year plans. Such expenditures are known as plan expenditures.
Non-plan expenditures: Beside plan expenditures, government also incurs routine expenditures such as on police, on judiciary, on water supply, sanitation and health, on legislatures, on defence, on various government departments, etc. Such routine expenditures are termed as non-plan expenditures.
Q. 6. State the difference between fiscal deficit and budgetary deficit.
Ans. Fiscal Deficit: This concept of deficit differs from the earlier concept because it does not take into account the borrowings in total receipt of government. Fiscal deficit is defined as the excess of total budgeted expenditure over total budgeted receipt net of borrowings. In other words,
Fiscal deficit = Total budgeted expenditure – Total budgeted receipts net of borrowings.
It shows the total amount that the central government needs to borrow.
Budgetary Deficit: It is defined as the excess of total budgeted expenditure over total budgeted receipts. In other words,
Budgetary deficit = Total budgeted expenditure – Total budgeted receipt.
This concept of deficit takes into account both revenue and capital receipts; and revenue and capital expenditures. Suppose, in a government budget, the total expenditure was Rs. 200 crores while the total receipt was Rs. 175 crores; the budgetary deficit then would be Rs. 25 crores. What does this mean? It means that the government’s total receipt falls short of total expenditure by Rs. 25 crores.
Q. 7. Why fiscal deficit is a better measure of deficit compared to budgetary deficit?
Ans. Fiscal deficit is a better measure of deficit compared to budgetary deficit. It is because of the following reasons:
(i) It indicates the additional amount of financial resources needed to meet government expenditure.
(ii) It is an indicator of the increase in future liabilities of the government on interest payment and loan repayment. The government has to pay back the borrowed amount with interest in future. Consequently, the government has to either borrow more from the people or tax people more in future to pay interest and loan amount.
Q. 8. What are the different ways to finance deficit in government budget? Explain them.
Ans. There are three different ways to finance deficit in government budget.
These are as follows:
(a) Borrowings from Public and Foreign Governments.
(b) Withdrawing Cash Balances held with the Reserve Bank of India (R.B.I.).
(c) Borrowings from the Reserve Bank of India (R.B.I).
The Government ordinarily prefers to borrow either from its citizens or from foreign governments instead of withdrawing cash balances held with the R.B.I. or borrowing from it. The latter two ways to finance deficit increase the supply of money about which you will learn in the next chapter. You will also learn that the increase in supply of money increases the prices in an economy. On the other hand, borrowing domestically from public has no effect on the supply of money and consequently on prices because when government borrows, the money held by people is transferred to government with no change in supply of money. Likewise, there is no impact on the money supply when government borrows from foreign countries. The last two ways to finance deficit increase the supply of money. Any money that flows out of the R.B.I. increases the supply of money in economy and increases the prices in domestic economy.
Q. 9. State the effects of government borrowing from public and Reserve Bank of India. Which is better and why?
Ans. To finance its expenditure government likes to borrow from public rather than withdrawing cash from Reserve Bank of India because borrowing from public has no effect on money supply in the country. When government borrows, money is transferred from the public to the government. The net effect on total money supply in the country is nil.
For this purpose withdrawals from cash balances held in Reserve Bank and borrowing from Reserve Bank leads to increase in money supply. Any money that flows out of Reserve Bank of India leads to increase in money supply. This increase in money supply in turn may lead to rise in prices and may create many problems in the economy. As such government will like to use this sources only. When it is forced to do so and when no other option of financing is left.
It is to be noted that borrowing from public does not create any problem. It may create problems but not that serious as arise from borrowing from the Reserve Bank of India. We know that borrowing from public create liability of government in two ways. First, government has to repay back loans in future. Second, government has to pay interest on these loans. Government generally borrows from the public in the hope that it will be able to raise additional resources in the near future and pay back loans and interest out of these. If government fails to raise additional resources in future even borrowing from public may create serious problem.
Q. 10. State and explain the objective of budgetary policy.
Ans. Budgetary policy: The selection of items of expenditure and sources of finance in turn with government policies and programmes is the budgetary policy of government.
Objectives of budgetary policy:
(i) To promote economic growth: Government promotes economic growth by setting up basic and heavy industries like steel, chemical, fertilizers, machine tools, etc. It also builds infrastructure like roads, canals, railways, airports, education and health services, water and electricity supply, telecommunications, etc. That costs economic growth. Both basic and heavy industries and infrastructure require huge amount of investment which normally the private sector do not take up. Since these industries and infrastructure facilities are essential for economic growth in the country, the burden to set them up and develop them falls on the government.
(ii) To reduce income and wealth inequalities: Government reduces inequalities in income and wealth by taxing the rich more and spending more on the poor. Further, it provides for the employment opportunities to the poor that help them to earn.
(iii) To provide employment opportunities: Employment opportunities are increased by the government in various ways, One, jobs are created when it sets up public sector enterprises. Two, it provides subsidies and other incentives like tax holidays, low rates of taxes, etc. to private sector that encourage production and employment. It also encourages setting up of small scale, cottage and village industries by people which are employment oriented. This it does by providing tax and concessions, subsidies, grants, loans at low rates of interest, etc. Finally, it creates jobs for poor when it undertakes public works programs like construction of roads, bridges, canals, buildings, etc.
(iv) To ensure stability in prices: Government ensures stability of prices of essential goods and uses by regulating their supplies. Hence, it incurs expenditure on ration and fair price shops that keep sufficient stock of foodgrains. It also subsidises cooking gas, electricity, water and essential services like transport and maintains their prices at low level affordable to the common man.
(v) To correct balance of payment deficit: The balance of payment accounts of a country records its receipts and payment with foreign countries. When payments to foreigners are more than receipt from foreigners the balance of payments account is said to be a deficit. Quite often this deficit is caused when a country imports more than its exports. Consequently, the payments on imports to foreigners are more than the receipts from exports. In such a situation, to reduce the deficit in balance of payment account the government discourages imports by increasing taxes on them and encourages export by increasing subsidies and other incentives.
(vi) To provide for effective administration: Government incurs expenditures on police, defence, legislatures, judiciary, etc. to provide for effective administration.
Some Other Important Questions For Examinations
Very Short Answer Type Questions
Q. 1. What is a budget?
Ans. A budget is a consolidated financial statement prepared by government on expected public expenditure and public revenue during a financial year.
Q. 2. What are revenue receipts?
Ans. Revenue receipts are current income receipts from all sources such as taxes, profits of public enterprises, grants, etc.
Q. 3. What are capital receipts?
Ans. Capital receipts are borrowings of government which it has to return with interest in future. All capital receipts create liabilities for government because to be returned with interest in future.
Q. 4. Make one difference between revenue receipts and capital receipts.
Ans. All capital receipts create liabilities for government because to be returned with interest in future. On the contrary for revenue receipts government is under no obligation to return the amount.
Q. 5. What is tax revenue?
Ans. A government collects revenue from various taxes like income tax, sales tax, service tax, excise duty, custom duty, etc.
Q. 6. What is the primary source of government income?
Ans. Traditionally the revenue from taxes has been the primary source of government income.
Q. 7. Define tax.
Ans. A tax is a legal compulsory payment by the people to the government of a country.
Q. 8. Who is liable to pay income tax?
Ans. Income tax is imposed on those who earn income such as wages, salaries, rent, interest and profit.
Q. 9. What is sales tax?
Ans. Sales tax is the tax on the sale of goods. Whenever we purchase a good, a part of our payment goes to the government as sales tax.
Q. 10. What is service tax?
Ans. Service tax is the tax we pay when we use a service such as telephone service.
Q. 11. What is excise duty?
Ans. Excise duty is a tax paid by producer manufacturing a good.
Q. 12. When a custom duty is paid?
Ans. Custom duty is paid when a good is imported or exported.
Q. 13. Mention some direct taxes.
Ans. Direct taxes are:
(i) Income tax.
(ii) Corporation tax.
(iii) Wealth tax.
(iv) Gift tax.
Q. 14. Mention indirect taxes.
Ans. Indirect taxes are:
(i) Sales tax.
(ii) Excise duty.
(iii) Customs duty.
(iv) Service tax.
Q. 15. What are non-tax revenues?
Ans. The incomes accruing to government from sources other than taxes are non-tax revenues.
Q. 16. What are interest receipts?
Ans. Interest receipts are the interests earned by the central government on loans given to state governments, local governments, public sector enterprises, etc.
Q. 17. Mention the major sources of capital receipts of the central government.
Ans. The major sources of capital receipts of the central government are:
(i) Borrowings upp.
(ii) Recovery of loans.
(iii) Disinvestment release of shares of public sector undertakings.
Q. 18. What are capital expenditures?
Ans. When government incurs expenditure to create assets such as school and hospital buildings, roads, bridges, canals, railway lines, etc. such expenditures are known as capital expenditures.
Q.19. What are revenue expenditures?
Ans. When government incurs expenditures that does not create any assets such expenditures are known as revenue expenditures.
Q. 20. What is plan expenditure?
Ans. After independence our country adopted the path of planning to achieve economic development. Under planning, provisions were made in government budget on expenditures that more to be incurred every year accordingly to the priorities laid down in the five-year plans. Such expenditures are known as plan expenditures.
Q. 21. Define fiscal deficit.
Ans. Fiscal deficit is defined as the excess of total budgeted expenditure over total budgeted receipt net of borrowings.
Q. 22. What is budgetary deficit?
Ans. Budgetary deficit is defined as the excess of total budgeted expenditure over total budgeted receipts.
Q. 23. What is budgetary policy?
Ans. The selection of items of expenditure and sources of finance inturn with government policies and programmes is the budgetary policy of government.