Government Budget And The Economy - Class 12 Commerce Economics - Extra Questions

Government expenditure refers to the purchase of goods and services, which include public consumption and public investment, and transfer payments consisting of income transfers (pensions, social benefits) and capital transfer. Government spends money for a variety of reasons, including: To supply goods and services that the private sector would fail to do, such as public goods, including defence, roads and bridges; merit goods, such as hospitals and schools; and welfare payments and benefits, including unemployment and disability benefit.

The difference between cash credits and overdraft facility is as follow: 

1. A Cash Credit (CC) is a short-term source of financing for a company which enables a company to withdraw money from a bank account without keeping a credit balance in it but only after providing the required security as collateral whereas Overdraft refers to a continuous withdrawing facility in which the bank allows the customer to withdraw amount more than what he holds to his credit, but only up to a certain extent. 

2. For availing cash credit facility, the borrower must have a cash credit account with the bank or financial institution whereas to avail overdraft facility, the borrower must have a current account with the bank.

3. Cash credit facility is given against the pledge of inventory or other current assets or collateral security of the company whereas Overdraft facility is given against the security of fixed assets.

(a) The private sector is interested in industries that maximise profits, while the government aims at welfare maximisation. The government through its budgetary policy aims to reallocate the resources according to economic and social objectives. This is done through giving subsidies, tax concessions etc to encourage investment in socially important areas. The government can also discourage production of harmful goods like liquor etc through heavy tax duties.

Surplus Budget: In this type of budget, government revenue is greater than government expenditure due to which there is a surplus in the budget. 

Deficit budget: In this type of budget, government expenditure is greater than government revenue due to which there is a deficit in the budget. 

There are three types of budget in general. 

Budget is a statement of the estimates of the government receipts and government expenditure during the period of the financial year. There are two main component of a budget: 

Increase in the government expenditure during deficient demand or deflation causes injection of expenditure in the economy. As a result, aggregate demand, purchasing power and money supply get increased. Thus, the problem of deficient demand or deflationary gap in the economy gets combated.

The various components of expenditure method are: 

Inequalities of income and wealth reflect a section of society being deprived of even basic necessities. Thus arises the need for reducing them in society. Two budgetary measures by which it can be done: 
$$\bullet$$ Progressive taxation.
$$\bullet$$ Increasing government's expenditure. 

The main differences between the two are: 
(i) Revenue budget comprises only revenue receipts and revenue expenditures of the government, while capital budget comprises of capital receipts and capital expenditures of the government. 
(ii) Revenue budget include all such financial transactions which do not create any asset or liability for the government. On the other hand, transactions in capital budget do create assets or liabilities for the government. 

Besides the objective of raising more revenue, the proposals also serve some welfare objectives. 
$$\bullet$$ Firstly, raising tax on cigarettes willthake cigarettes costlier and discourage smoking. Less smoking will have positive influence on health and raise welfare of the people. 
$$\bullet$$ Secondly, raising income tax on incomes above rupees one crore will help in reducing inequalities in income. 
$$\bullet$$ Thirdly, the extra revenue raised from these proposals, if spent on health and education of the poor will also raise welfare of the poor. 

(i) It is a direct tax as its impact and incidence lie on the same person. 
(ii) It is an indirect tax as its impact and incidence lie on different persons. 
(iii) It is a direct tax as its impact and incidence lie on the same person. 
(iv) It is a direct tax as its impact and incidence lie on the same person. 

Increase in the government spending during deficient demand or deflation causes injection of expenditure in the economy. As a result, aggregate demand, purchasing power and money supply get increased. Thus, the problem of deficient demand or deflationary gap in the economy gets combated.

Surplus budget refers to a budget where estimated total receipts are more than estimated total expenditure. In case of a surplus budget, the government takes more money from the economy than it injects into it. It results in a fall in aggregate demand and price level in the economy and helps to combat inflationary situations. 

One of the objectives of a government is to maintain the economic stability. Economic stability can be achieved by correcting the situations of deficient and excess demand in the economy.

Economic growth can be achieved by creating an investment friendly economy. In investment friendly economy, the production of goods and services rises which in turn lead to GDP growth. One of the objective of the government budget is to ensure economic growth.

The distribution of income and wealth is highly unequal in countries like India. 'Economic Divide' is huge and alarming. The problem of the economic divide is combated by the revenue and expenditure policy of the government. 'Taxation and subsidies' is the key policy instrument used by the government in this context.

One of the objectives of a government is to maintain the economic stability. Economic stability can be achieved by correcting the situations of deficient and excess demand in the economy. Inflationary gap or excess demand is corrected by reducing government expenditure and increasing the revenue. Whereas, deflationary gap or deficient gap is corrected by increasing the government expenditure and reducing the revenue.

Fiscal deficit $$=$$ Primary Deficit $$+$$ Interest Payments $$= 4,400 + 400 = 4,800$$ crores. 

Government can reduce the gap between the rich and the poor by imposing taxes on the rich and spending more on the welfare of the poor.

Market economies are believed to achieve the optimum allocation of resources. Social welfare often suffers as the market economies do not produce enough of public goods which satisfy collective needs of the society. Also, these economies fall to account for externalities of production which often lead to loss of social welfare on account of environmental degradation.

Growth of population, Increase in the de-fence expenditure, Welfare activities, Urbanisation 

The distribution of income and wealth is highly unequal in countries like India. 'Economic Divide' is huge and alarming. The problem of the economic divide is combated by the revenue and expenditure policy of the government. 'Taxation and subsidies' is the key policy instrument used by the government in this context. 

The budget of a government shows its comprehensive exercise on taxation and subsidies.

1.      A government uses fiscal instruments of taxation and subsidies with a view of improving the distribution of income and wealth in the economy.

2.       A government reduces the inequality in the distribution of income and wealth by imposing taxes on the rich and giving subsidies to the poor, or spending more on the welfare of the poor.

3.       It will reduce the income of the rich and raises the living standard of the poor, thus, leads to equitable distribution of income.

4.      Expenditure on special anti-poverty and employment schemes will be increased to bring more people above the poverty line.

5.      Public distribution system should be inferred so that only the poor could get foodgrains and other essential items at subsidized prices.

6.      Equitable distribution of income and wealth is a sign of social justice which is the principal objective of any welfare state in India.

One of the objectives of a government is to maintain economic stability. Economic stability can be achieved by correcting the situations of deficient and excess demand in the economy. Inflationary gap or excess demand is corrected by reducing government expenditure and increasing the tax. Whereas, deflationary gap or deficient gap is corrected by increasing the government expenditure and reducing the tax. 

S. No.	Balance of Trade	Balance of Payments
1	It is a Narrow Concept.	It is a Broader Concept.
2	It includes only Visible merchandise (goods) transactions.	It includes transactions of both visible and invisible merchandise (goods).
3	Gives a Partial Picture of foreign Trade.	Gives a complete Picture of Foreign trade.

• Public Provision: The provision which is financed through the budget and can be used without any direct payment is called public provision. Public provision can be obtained without any direct payment.
• Public Production: When goods are produced directly by the government is called public production.Public goods produced by the government can be obtained with payment.
  

The budget reveals the financial performance of the Government in the last year and financial policies for the coming fiscal year. 

Capital expenditure is incurred mainly for the acquisition of assets and granting of loans and advances.

Government expenditure refers to the total expenditure incurred by the Government on consumer goods and capital goods to satisfy the common needs of the economy. 

In India, interest payments have considerably increased in recent years. High-interest payments on past borrowings have greatly increased the fiscal deficit. To reduce the fiscal deficit, interest payments should be reduced through repayment of loans as really as possible. 

An expenditure can be classified as follows:

1. An expenditure is a capital expenditure if it either creates an asset or reduces a liability.
2. An expenditure is revenue expenditure if it neither creates any asset nor reduces any liability.

Revenue receipts are the receipts which neither reduce assets nor increase liabilities.
These comprises of tax and non-tax receipts, duties and fines, interest and dividends receipts on government investments and assets.

The budget is presented in the Parliament on the first day of February each year. 

The budget period is from 1st April to 31st March. A budget shows the receipts and expenditures incurred in a year.

Interest payment = 9,000.
Interest payment = 40% x Primary deficit.
9,000 = 40% x Primary deficit,
Primary deficit = 9,000 x 100/40 = 22,500.
Fiscal deficit = Primary deficit + Interest payment = 22,500 + 9,000 = 31,500 crores.

Primary deficit = Fiscal deficit (borrowings) - Interest payment = 70,000 - 40,000 = 30,000.

Planned expenditures refer to the expenditure that is incurred on the programs detailed in the current five-year plan. For example, expenditure on agriculture and allied activities, irrigation, energy, transport, communication, general economic and social services, etc. 

Non-planned expenditures refer to the expenditure other than expenditure related to the current five-year plan. For example, payment of interest, expenditure on defense services, subsidies, expenditure to be incurred on administrative services, etc. These are incurred on the routine functioning of the Government. Therefore, these are a must for every country. 

Primary deficit = Fiscal deficit - Interest payments.

Revenue deficit = Revenue expenditure - Revenue receipts.

The expenditure incurred on administrative and defence services is a revenue expenditure because it neither creates an asset nor reduces any liability of the Government. 

Fiscal deficit = Primary deficit + Interest payment = 5,300 + 300 = 5,600.

The following are the formulae for calculating fiscal deficit:

1. Fiscal deficit = Total expenditure - Total receipts (excluding borrowings).
2. Fiscal deficit = (Revenue expenditure + Capital expenditure) - (Revenue receipts + Capital receipts excluding borrowings).
3. Fiscal deficit = (Revenue expenditure - Revenue receipts) + (Capital expenditure - Capital receipts excluding borrowings).
4. Fiscal deficit = Revenue deficit + (Capital expenditure - Capital receipts excluding borrowings).
5. Fiscal deficit = Borrowings.

a) Revenue Deficit = Revenue Expenditure - Revenue Receipts (Tax revenue + Non-tax revenue) = Rs.(100 - 70) = Rs.30.
b) Fiscal Deficit = Revenue deficit + Capital expenditure - Capital receipts excluding borrowings = Rs.(30 + 120 + 80 - 0) = Rs.230.
c) Primary Deficit = Fiscal Deficit - Interest Payments = Rs.(230 - 30) = Rs.200.

The government also aims at insulating the economy from major fluctuations (like inflation. unemployment) and business cycles such as boom, recession, depression and recovery. The government through its budgetary policy tries to combat such situations. The major concern of government is to achieve higher economic growth rates while maintaining price and employment stability. This state of economic growth with stability ensures a smooth and efficient functioning of an economy.