Easy Economics for Class XII_ Government Budget and Economy

8/11/2019 Easy Economics for Class XII_ Government Budget and Economy

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When the liability to pay a tax and the burden of that tax falls on the same person, the tax is called

direct tax. e.g. Income tax, corporation tax, Gift tax etc.

When the liability t o pay a tax falls on one person and burden of t hat tax falls on s ome other person,

the tax is called an Indirect tax. e.g. Sales tax, Custom duties, Service tax etc.

2) Non-Tax Revenue: - Non tax revenue consists of all revenue receipts other than taxes. For eg.:-

i) Interest

ii) Profit and dividend

iii) Fees and fines

iv) External grant-in-aid

Meaning of Budget Expenditure:-

Budget expenditure refers to the estimated expenditure to be incurred by the government under

different heads in a year.

Revenue Expenditure:-

An expendit ure which do not creates ass ets or redu ces liabilit y is called Revenue Expen dit ure.

Examples are Salaries of government employees, interest payment on loan taken by the government,

pension, subsidies, grants etc.

Capital Expenditure:-

It refers to the expenditure which leads to creation of assets and reduction in liabilities eg.

Expenditure incurred on constr uction of b uilding, roads, bridges etc.

Balanced Budget:-

A Gov ernment budget i s said to be a balanced in which go vernment receip ts are sh own eq ual to

government expenditure

Surplus Budget:-

When government receipts are more than government expenditure in the budget, the budget is called

a surplus budget.

Budget Deficit

Deficit Budget:-

When government expenditure exceeds government receipts in the budget is said to be a deficit

budget.

Types:-Revenue Deficit:-

Revenue deficit refers to the excess of revenue expenditure of the government over its revenue

receipts.

Revenue deficit = Total revenue expenditure Total revenue receipts.

Importance: - Since it is largely related with the recurring expenditure. Therefore, high revenue deficit

gives a warning to the government either to cut expenditure or to increase revenue receipts. It also

implies requirement burden in future.

Fiscal Deficit:-

Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowings.

Fiscal Deficit = Total budget expenditure - Total budget receipts net of borrowings.

Importance: - Fiscal deficit is a measure of total borrowings required by the government. Greater fiscal

deficit implies, greater borrowings by the government. This creates a large burden of interst payments

in the future that leads to increase in revenue expenditure, causing an increase in revenue deficit.

Thus a vicious circle sets in. In the present, a large fiscal deficit may also lead to inflationary

pressures.

Primary Deficit:-

Primary deficit is defined as fiscal deficit minus interest payment. It is equal to fiscal deficit reduced by

interest p ayment.

Primary deficit = Fiscal deficit interest payment.

Importance: - Primary deficit signifies borrowing requirements of the government. A low or zero

primary deficit means that while governments interest requirement on earlier loans have compelled

the government to borrow b ut it i s aware of th e need to t ighter its belt.

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y Economics for Class XII: Government Budget and Economy http://ecoarun.blogspot.in/p/government-budget-and-economy.html

5 10/26/2013 5:17 PM


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Q1. Give the meaning of budget.

Ans. A bud get is an annual st atement of the estimated receipt s and

Expenditure of the government over the fiscal year.

Q2. Name the two components of budget.

Ans. 1) Bud get Receipts 2) Budget Expend itu re.

Q3. Why is borrowings considered as Capital receipt?

Ans. It incr eases the liab ilit y of the government , so it i s co nsid ered as

Capital receipt.

Q4. Define tax

Ans. Tax is leg al compulsory payment imposed by the g overnment on

the people.

Q5. Give two example of direct tax.

Ans. 1) Income tax 2) Gif t t ax

Q6. Give two example of indirect tax.

Ans. 1) Sales t ax 2) Cust om du ty

Q7. Give two example of non-tax revenue.

Ans. 1) div idend 2) Fees and f ines

Q8. When Budget is normally presented in the Parliament?

Ans. O n 28th February.

Q9. Why is tax not a Capital receipt?

Ans. Tax neither c reates liabi lit y nor r educes asset s, so it is not

Considered as capital receipt.

Q10. Give two example of revenue expenditure.

Ans. 1) Payment of Salar ies 2) Interest payment

Q11. Give two example of Capital expenditure.

Ans. 1) Loan to p ublic 2) Acqu irin g land , bu ilding, machin e and

investment in shares etc.

Q12. What is balanced budget?

Ans. A Government b udget is said t o be a balanced in which government

receipts are shown equal to government expenditure

Q13. What is Surplus budget?

Ans. When go vernment receip ts are more th an gov ernment expenditu re

in the budget, th e budget is called a surplus budget.

Q14. What is deficit budget?

Ans. When go vernment expend itu re exceeds go vernment receip ts in the

budget is said to be a deficit budget.

Q15. Give the formula to calculate revenue deficit.Ans. Revenue def ici t = Total r evenue expend itu re Total revenue

receipts.

Q16. Give the formula to calculate fiscal deficit.

Ans. Fiscal Defici t = Total budget exp endit ure = Total b udget receip ts

net of borrowings.

Q17. Give the formula to calculate primary deficit.

Ans. Pr imary deficit = Fiscal def icit int erest payment .

Q18. Define Capital receipt s.

Ans. Capital Receipts refer t o those receip ts of the g overnment which i)

tend to create a liability or ii) Causes reduction in its assets.

Q19. Define revenue receipts.

Ans. A revenu e receipts are t hose receip ts whic h neit her create a liabil ity

nor reduce assets of the government. eg. Tax and non-tax receipts.

Q20. Define revenue expenditure.Ans. It does n ot r esult in cr eation of assets or reduc tion in liabi liti es

eg. Payment of salaries.

Q21. Define Capital expenditu re.

Ans. It refers t o t he expend iture which leads to creation of as sets and

reduction in liabilities eg. Expenditure incurred on const ruction of

building, roads, bridges etc.

Q22. Give two sources of Capital receipts.

Ans. 1) Recover y of loans 2) Bor row ings .

Q23. Give one objective of budget.

Ans. To redu ce inequalit ies o f in come and wealth.

Q24. Define direct tax.

Ans. T hese t axes are t hose tax in which liabili ty to pay and bur den of tax

falls on same person.

Q25. Define indirect tax.

Ans. L iabili ty to pay and burden of indir ect t ax fal ls on dif ferent persons.

Short Answer Question (3/4 Mark)

Q1. Write any three objective of government Budget.

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Ans. T he ob jective th at are pursued by t he go vernment th roug h th e

budget are-

i) To achieve economic growth.

ii) To reduce in equalities in income and wealth.

iii) To achieve economic stability.

Q2. Explain the basis of classifying government receipts into revenue

receipts and capital receipts.

Ans. Revenue Receip ts :-A g overnment reven ue receipts are t hose

receipts i) which neither create liability ii) nor reduce assets of the

government eg. Dividend.

Capital Receipts :- Capital Receipts refer to those receipts of the

government which i) tend to create a liability or ii) Causes

reduction in its assets of the government. eg. Borrowings

Q3. Distinguish between direct tax and indirect tax

Ans.

Direct Tax Indirect Tax

1. Liability to pay and burden of

direct tax f alls on same person.

2. Levied on income and property

of person.

3. eg. Income tax 1. Liability to pay and burden

of direct t ax falls on some

other person.

2. Levied on goods and

services on their sale,

production, import and export.

3. eg. Sales tax

Q4. Define revenue receipts. Write the groups in which they are

classified.

Ans. An y receipts which does not either cr eate a liab ilit y or lead to

Reduction in assets is called revenue receipts. Revenue receipts

consist of

1) Tax Revenue and 2) Non-Tax Revenue.

Q5. Distinguish between Revenue and Capital expenditure.Ans.

Revenue Expenditure Capital Expenditure

1. It does not result in creation of

assets

2. It is for short period and

recurring in nature

3. eg. Expenditure on salaries of

employees 1. It result in creation of assets

2. It for long period and non-

recurring in nature

3. eg. Expenditure on acquisition

of assets like land, building etc.

Primary Deficit is the difference between Fiscal deficit and interest payments. It determines whether

the fiscal deficit in government budget has arisen due to interest payment or any other activity of the

government.

A larg e pr imary defic it ind icates that the dif ference between f isc al def icit and in terest payment is more.

It means government is spending more than its receipt on other activities. The government may be

spendthrift.

A zero primary d efici t indicat es th at in terest payment s and fis cal def icit is equal. The fiscal deficit has

arisen due to interest payment.

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