Public Economics : Budget & Its types

THE WINNERS’ ACADEMY

ECONOMICS

PUBLIC ECONOMICS

3. PUBLIC ECONOMICS Marks : 04

Marks with option : 07 Points to be Learn :

Meaning and Definition of Budget Features & Objective of Budget Types of Budget Concept of Public Revenue & Public Expenditure

Q.1 What is Budget? What are the features of Budget? -

The term 'Budget' is is derived from the French word Bougetee. Bougetee. It means small bag or

Wallet. A Budget is a government document showing information of the estimated receipts / revenue & Expenditure of government for a coming financial year. It is a systematic

‘Annual Financial Statement’ showing government revenue / r eceipts & expenditure. Budget gives information about…….. Receipts earned & Expenditure incurred in last financial year. Receipts Expenditure estimated during current year with financial progress. Anticipated revenue & expenditures for the next financial year. Public economics is a branch of economics. It is concerned with raising of funds to incur expenditures to achieve certain pre-determined objectives. In India, Article 112 of the constitution requires that central government has to prepare 'Annual Financial Statement'. This is known as 'Budget'. It can be defined as under……. Government “ A public Budget is a systematic estimate of Government revenue & expenditures for a Period of one year .” In India, Budget is presented by finance minister every year on last working day of February month in the house of parliament. Following are the features of Budget 1. Systematic estimate It is a systematic estimate of revenue & expenditures. The estimate is made on the basis of performance of economy.

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2. Period - Budget is normally prepared for a period of one year. In India, the budget is prepared for a financial year beginning from 1st Apr & ending on 31 st March of next year. 3. Presentation - In India, Finance minister presents presents the budget in parliament. parliament. Such presentation is required to get the approval of parliament to collect funds & undertake expenditures. 4. Objectives The budget is undertaken to achieve certain pre-determined socioeconomic objectives. These objectives include employment generation, regional development, reduction in inequalities etc. Revision - Government may revise budget budget estimates taking in to consideration the social & general situation in the country.

Q.2 What are the Objectives of the government Budget? -

Budget is a systematic estimate of government revenues & expenditures for a period

of one year. This estimate helps government to achieve pre-determined objectives. These objectives are asunder, 1. Social development - Through

budget,

Government

allocates

funds

for

social

development activities such as health, education and family welfare. As a result, there is a social development. 2. Economic development -

Government

allocates

funds

for

infrastructure

development such as power, transport, Communication etc. ; that would result in economic development. 3. Reduction of In-equalities -

Budget aims at reduction of inequalities of income.

Therefore Government allocates funds for social security, food subsidy etc. 4. Regional Development -

Government also aims at regional development through

budget. Special funds are allocated for development of backward areas. 5. Employment Generation -

Government also aims at generating employment.

Funds are allocated for various employment generation schemes. 6. Up-liftment of weaker sections -

Through budget, Government tries to uplift the

weaker section such as SC & ST. All above are the different objectives of Government. SYJC : COMMERCE

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Q.3

What are the components of government budget?

-

There are TWO main components of government budget.

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Budget Receipts / Budget Revenue Budget Expenditure I. Budget Receipts / Budget Revenue :

Receipts / Revenue collected by government

is of Two types. Revenue Receipts Capital Receipts 1. Revenue Receipts -

Income received by government during a normal course of

governance is called as ‘ Revenue receipt'. It is received regularly every year by government while receiving revenue income there is no reduction in government assets or no creation of liabilities. Revenue receipts are of two types : a) Tax Revenue -

It is a major source of revenue to government. Amount collected

by government by imposing various taxes on individuals and commodities is called as 'Tax revenue’. It is regular income source to government. It is the responsibility of every citizen to pay tax. There are of two types of Tax Revenue : i. Direct Taxes :

Direct taxes are such taxes which are to be paid by an

individual on whom they are imposed. Direct taxes include income tax, corporation tax, wealth tax, etc. Burden of paying direct tax cannot be shifted to other person. ii. Indirect Taxes :

Indirect taxes are such taxes which are imposed on

commodities and services. Burden of paying indirect tax can be shifted to other person. It includes Sales Tax, Service Tax and Excise Duty etc. b) Non - Tax Revenue -

Along with tax revenue, government also receives income

from other sources. It is known as 'Non-tax revenue'. It includes stamp duty, registration charges, fines and penalties, Interest and dividend etc. i. Interest and Dividend on Investments : Government receives interest on loans given to State governments, Private / Public enterprises etc. Dividends are received by governments from its investments in other companies. This is major source of Non-tax revenue to government.

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ii. Fees and License Fees :

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Fees refer to charge imposed by government to

cover the cost of recurring services provided by it. It is also a compulsory contribution. For example, registration fees, court fees etc. iii. Gifts and Grants :

Government receives gifts and grants from international

organizations and foreign governments. Sometimes individuals and companies voluntarily gift money to the government during natural calamities. iv. Escheats :

It refers to claim of the government on the property of a person

who dies without leaving behind any legal heir or a will. v. Fines and penalties : Fines and penalties are levied on defaulters to maintain law and order. This generates revenue for example fine for jumping a signal etc. 2.

Capital Receipts :

Receipts which create liability or result into

reduction of assets or creation of liabilities are called as 'Capital receipts'. They are obtained by government by borrowing loans, selling assets etc. It includes... 1. Loans taken from Reserve bank of India. 2. Loans taken from foreign countries. 3. Amount received by selling shares and debentures. 4. Amount received from dis-investrnent. 5. Recovery of loans given to state government etc. II. Budget Expenditure : Budget expenditure refers to the estimated expenditure of the government during a given fiscal year. Budget expenditure includes. 1. PIan expenditure :

That is expenditure incurred on various programs in the

plan. For example, expenditure on irrigation, transport, energy, agriculture allied activities, general economic social services, communication etc. 2. Non-Plan Expenditure :

It is the expenditure incurred on other activities,

which is out of the scope of government plans. For example, expenditure incurred on rescue of people affected by various calamities. 3. Development expenditure :

Which

is directly related to social and

economical development of the country. For example, expenditure on health, education, industrial development, social welfare etc.

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4. Non-Development Expenditure :

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It is incurred on essential services of

the government. For example, expenditure on administrative services, defense, judiciary, Police etc. Budget expenditure can be classified in to two types : a) Revenue Expenditure : The expenditure which does not create any asset or reduce any liability is called as 'Revenue expenditure'. It is incurred to run day to day activities of government departments and for providing various services to citizens. This expenditure is recurring in nature. It includes amount spent on defence, administration, payment of interest on loans taken, amount spent on education, health, medical facilities etc. Revenue expenditure includes......... Expenditure on general services. Expenditure on social & community services. Expenditure on Economic services. Grants given to state government. b) Capital Expenditure : Expenditure which reduces liabilities or creates assets is called as capital Expenditure. expenditure. This expenditure is developmental in nature. It includes purchase of assets, repayment of loans, investment in shares and debentures by government etc. It includes ............ a) Expenditure on Land and Building. b) Expenditure on Machinery & Investment. c) Investment in shares. d) Loans given to state government. e) Loans to corporations All above are different components of government budget. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ECONOMICS

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COMPONENTS OF BUDGET

BUDGET

Budget Receipts /

Budget Expenditure

Budget Revenue

Revenue Receipts

Tax Revenue

Direct Tax

Capital Receipts

Revenue Expenditure

Capital Expenditure

Non-Tax Revenue

Indirect Tax

Q.4

What is Revenue Budget?

-

The Budget which gives details of Revenue Receipts and Revenue expenditure is

called as Revenue Budget. It consists of REVENUE RECEIPTS and REVENUE EXPENDITURE. (A) Revenue Receipts - Income received by government during a normal course of

governance is called as ‘ Revenue receipt'. It is received regularly every year by government while receiving revenue income there is no reduction in government assets or no creation of liabilities. Revenue receipts are of two types : a) Tax Revenue -

It is a major source of revenue to government. Amount collected

by government by imposing various taxes on individuals and commodities is called as 'Tax revenue’. It is regular income source to government. It is the responsibility of every citizen to pay tax. There are of two types of Tax Revenue : i. Direct Taxes :

Direct taxes are such taxes which are to be paid by an

individual on whom they are imposed. Direct taxes include income tax, corporation tax, wealth tax, etc. Burden of paying direct tax cannot be shifted to other person.

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ii. Indirect Taxes :

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Indirect taxes are such taxes which are imposed on

commodities and services. Burden of paying indirect tax can be shifted to other person. It includes Sales Tax, Service Tax and Excise Duty etc. b) Non - Tax Revenue -

Along with tax revenue, government also receives income

from other sources. It is known as 'Non-tax revenue'. It includes stamp duty, registration charges, fines and penalties, Interest and dividend etc. i. Interest and Dividend on Investments : Government receives interest on loans given to State governments, Private / Public enterprises etc. Dividends are received by governments from its investments in other companies. This is major source of Non-tax revenue to government. ii. Fees and License Fees :

Fees refer to charge imposed by government to

cover the cost of recurring services provided by it. It is also a compulsory contribution. For example, registration fees, court fees etc. iii. Gifts and Grants :

Government receives gifts and grants from international

organizations and foreign governments. Sometimes individuals and companies voluntarily gift money to the government during natural calamities. iv. Escheats :

It refers to claim of the government on the property of a person

who dies without leaving behind any legal heir or a will. v. Fines and penalties : Fines and penalties are levied on defaulters to maintain law and order. This generates revenue for example fine for jumping a signal etc. (B) Revenue Expenditure : The expenditure which does not create any asset or reduce any liability is called as 'Revenue expenditure'. It is incurred to run day to day activities of government departments and for providing various services to citizens. This expenditure is recurring in nature. It includes amount spent on defence, administration, payment of interest on loans taken, amount spent on education, health, medical facilities etc. Revenue expenditure includes......... i. ii. iii. iv.

Expenditure on general services. Expenditure on social & community services. Expenditure on Economic services. Grants given to state government. (Here, Revenue Receipts and Revenue Expenditure is explained from Q.3)

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Q.4

What is Capital Budget?

-

The Budget which gives details of Capital Receipts and Capital expenditure is called

as Capital Budget. It consists of CAPITAL RECEIPTS and CAPITAL EXPENDITURE. (A) Capital Receipts :

Receipts which create liability or result into reduction of

assets or creation of liabilities are called as 'Capital receipts'. They are obtained by government by borrowing loans, selling assets etc. It includes... 1. Loans taken from Reserve bank of India. 2. Loans taken from foreign countries. 3. Amount received by selling shares and debentures. 4. Amount received from disinvestment. 5. Recovery of loans given to state government etc. (B) Capital Expenditure : Expenditure which reduces liabilities or creates assets is called as capital Expenditure. expenditure. This expenditure is developmental in nature. It includes purchase of assets, repayment of loans, investment in shares and debentures by government etc. It includes ............ a) Expenditure on Land and Building. b) Expenditure on Machinery & Investment. c) Investment in shares. d) Loans given to state government. e) Loans to corporations (Here, Capital Receipts and Capital Expenditure is explained from Q.3)

Q.5 What are the types of Government Budget? -

“A public Budget is a systematic estimate of Government revenue & expenditures

for a Period of one year." Government budget are of THREE types........ 1. Surplus Budget 2. Deficit Budget 3. Balanced Budget SYJC : COMMERCE

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1.

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Surplus Budget : A Surplus budget is that type of budget in which estimated revenues are greater than estimated expenditures. Surplus Budget is an indicator of sound financial position. In today's situation, it is difficult to have Surplus Budget. It is advised during inflation to reduce prices. In surplus budget, Govt. revenue is increased by imposing taxes on people. During inflation, prices are continuously rising. This has to be checked. During inflation, people who are having fixed income suffer a lot.

Estimated Revenue > Estimated Expenditures Merits of Surplus Budget (Advantages of Surplus Budget) : (1)It imposes strict financial discipline on government. (2)It makes sufficient reserves to face any financial emergency. (3)It helps to control inflation. Demerits of Surplus Budget (Disadvantages of Surplus Budget) : (1)It results in reduction in demand and Employment. (2)It restricts the role of government. (3)It creates deflationary pressure in economy. 2.

Deficit Budget :

Deficit budget take place when the estimated expenditures

exceed estimated revenue. It is advocated by Prof. Keynes during depression. The excess expenditures incurred by government will increase the level of employment in the economy. Due to this demand for goods & services will increase. Due to limitations of raising resources through taxation, budget deficit is covered by Government by following ways. 1) Borrowing from central bank. 2) Borrowing from foreign country. 3) Issue of new currency notes by government. Deficit Budget is not possible during inflation. Deficit budget is the only option when a country requires huge resources for the purpose of economic growth and it is not possible to raise resources through taxation. Though it is inflationary, it helps government to undertake various welfare schemes.

Estimated Revenue < Estimated Expenditures

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Merits of Deficit Budget (Advantages of Deficit Budget) : (1)It helps in reducing the unemployment. (2)It improves the productivity of the economy and leads to economic growth. (3)It is useful to control the inflation. Demerits of Deficit Budget (Disadvantages of Deficit Budget) : (1)It increases money supply and may invite the inflation. (2)It leads to misallocation of resources. (3)It increases unnecessary spending in the economy. 3.

Balanced Budget : A balanced budget takes place when the estimated revenue is equal to estimated expenditures. There is neither surplus nor deficit. It implies that the government is returning the entire money to its people. This kind of budget was advocated by classical economist like Adam Smith. According to this government revenue should not fall short of expenditure. A balance budget was considered is an effective check on government’s extravagant expenditure. In this government must exercise financial discipline. It should keep its expenditure within available income. Till 1930, Balanced budget was considered as good. But the great depression of 1930's proved, that balanced budget was not a guarantee of stability and full employment.

Estimated Revenue = Estimated Expenditures Merits of Balanced Budget (Advantages of Balanced Budget) : 1. It ensures financial stability 2. Unproductive expenditures are controlled. 3. It compels to raise sufficient income to incur expenditures. Demerits of Balanced Budget (Disadvantages of Balanced Budget) : 1. It will not work during depression. 2. It is not suitable in less developed countries. 3. Practically it is impossible to have balanced budget.

Q. 6 Define the Term or Explain the Term. 1. Budget : Budget means "Systematic estimate of government revenue & expenditures for a period of one year." Budget gives information about...... 1. Revenue earned & expenditures incurred during last financial year. 2. Financial progress during current year. SYJC : COMMERCE

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3. Estimated revenue & expenditures for the next financial year. Features of Budget : 1. It is systematic estimate of government revenue & expenditures. 2. It is prepared for a period of one year commencing from 1 st April & ending on 31 st March of next year. 3. It is prepared & presented by finance minister at parliament. 4. It is prepared to achieve socio-economic objectives. 5. Government may revise budget estimates according to need. 2. Fines and Penalties : This is a type of revenue to government revenue from Fines & penalties which is levied for breach of law. For Example, Fines for not following Traffic Rules, Travelling without proper Ticket etc. To maintain law and order in the country government has prepared different laws and rules. It is the duty of every citizen to follow this rules and regulations. Any violation is a punishable offence. The violator has to pay fines and penalty charges to government. Such amount receipt is non-tax revenue to government. It is a regular income. It is received without selling any asset and taking loans. It is a revenue receipt. 3. Recovery of Debt :

Loans are given by central government to state government,

public sector undertakings etc. to manage financial requirements. Such loan given is an asset to central government. The borrower pays regular interest (EMI) to central governments for repayment of loan taken. So the interest of debt is revenue income for central government. Sometimes, State government makes repayment of loan to central government. Such repayment is capital assets to central government. 4. Plan Expenditure :

It refers to development expenditure like investment in

transport, communication, education, industrial development etc. Plan expenditure may be classified as revenue expenditure or capital expenditure. Revenue expenditure refers to that expenditure which is recurring in nature. It does not create any asset to the government. It includes both development & non development expenditure. It includes... a) Expenditure on agriculture & industries development.

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b) Expenditure on research, education, health etc. c) Expenditure on defense, administrative services etc. Capital expenditure is mostly developmental in nature. It increases assets of a nation. It directly increases productivity of the nation. It includes expenditure on Infrastructure, Transport facilities, Construction of Dams, buildings, Hospitals etc. 5. Revenue Receipts :

Income received by Government during normal course of

governance is called as 'Revenue Receipts'. It is received regularly every year by government. While receiving revenue income there is no reduction in government assets or no creation of Liabilities. Revenue receipts are of two types. i. Tax Revenue. ii. Non-Tax Revenue. i) Tax Revenue : Amount collected by Government by imposing various taxes on individuals & commodities is called as 'Tax Revenue'. Tax Revenue is collected by imposing direct Taxes & Indirect Taxes. ii) Non-Tax Revenue : Along with tax revenue, Government receives income from non tax sources. It is called as 'Non-Tax Revenue. It includes stamp duty, registration charges, fines & penalties, Interest & dividend, license fees etc. In short,

Revenue Receipts = Tax Revenue + Non-Tax Revenue 6. Deficit Budget :

Deficit budget take place when the estimated expenditures

exceed estimated revenue. It is advocated by Prof. Keynes. The excess expenditures incurred by government will increase the level of employment in the country. Due to this demand for goods & services will in-creases. Normally developing countries prepare deficit budget. Today almost all countries of the world follow the norms of deficit budget. Deficit budget is the only option when a country requires huge resources for the purpose of economic growth and it is not possible to raise resources through taxation. Though it is inflationary it helps government to undertake various welfare schemes. Merits : 1. It helps in reducing the unemployment. 2. It improves productivity of economy. 3. It accelerates economic growth. Demerits : 1. It increases money supply & invites inflation. 2. It leads to misallocation of resources. 3. It increases unnecessary spending in economy. SYJC : COMMERCE

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7. Revenue Expenditures : - The expenditure which does not create any asset or reduces any liability is called as 'Revenue Expenditures'. It is incurred to run day to day activities, of government departments. It is incurred for providing various services to citizens. This expenditure is recurring in nature. It includes....... 1. Expenditure on consumption of goods & services. 2. Defense & Administration expenditure. 3. Expenditure on education, health & social services. 4. Payment of interest on loans taken. 5. Expenditure on external affairs. Such expenditures maintain the country in current working position. 8. Capital Receipts :

Revenue received by government by selling asset or by taking

loans & advances is called as 'Capital Receipt'. It is non-recurring in nature. While receiving this income either there is reduction in assets or creation of liability. It includes....... 1. Loans taken from Reserve Bank of India. 2. Loans taken from foreign countries. 3. Amount received by selling shares & debentures. 4. Dis-investment by government. 5. Recovery of loans given to state government. 9. Revenue Budget :

Revenue budget consist of revenue receipts and revenue

expenditures. Revenue receipts are those receipts which do not create any liability or reduces any asset of the government. It includes Tax Revenue and Non-Tax revenue. It includes direct Tax, Indirect taxes, Fines and penalties, stamp duty etc. Revenue expenditure is those expenditures which does not create any assets or reduces any liabilities. It includes administration expenditure, payment of interest on loans taken, amount spent on public utility services etc. The difference between revenue receipts & revenue expenditures is called as Revenue Surplus or Revenue Deficit. 10. Capital Budget :

Capital

budget

consists

of

capital

receipts

and

capital

expenditures. Capital receipts are those receipts which increase liability or reduce assets of ECONOMICS

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government. Capital receipts include loans taken from Reserve Bank of India, foreign government, issue of shares & debentures, dis-investment etc. Capital expenditures are those expenditures which increases government assets or reduces liability of government it includes loans repaid, purchase of land, building, machinery, investment in shares & Debentures etc. The difference between capital receipts & capital expenditures is called as 'Capital Surplus or Capital deficit. 11. Tax Revenue :

It is a type of revenue receipt. It is a major source of revenue to

government. Amount collected by government by imposing various taxes on individuals & commodities is called as 'Tax Revenue’. It is regular & recurring income to government. It is the responsibility of every citizen to pay tax. Tax revenue consists of Direct Taxes revenue & Indirect taxes revenue. Direct Taxes include income tax, Wealth Tax, Corporation Tax etc. Indirect taxes include Service Tax, Excise duty, Sales Tax etc. A Tax is a compulsory payment made by citizens without any direct quid-pro-quo. It implies that tax has to be paid by all the people & government need not repay anything. 12. Tax :

Tax can be defined as a levy imposed by the government on the income,

wealth, properties of persons. There are 2 types of tax i.e. Direct Tax & Indirect Tax. It is also imposed on capital gains & spending on goods & services. It is a compulsory payment made by an individual or a firm to government. It includes direct taxes such as income tax & indirect taxes such as Sales tax, Service Tax etc. It is a major source of revenue to government. New taxes such as Gift Tax, Estate duty, Service Tax etc. help government to increase its revenue. 13. Direct Tax :

When the impact of tax & payment liability falls on the same person

then it is called as 'Direct Tax'. Burden of paying direct tax cannot be shifted. Income Tax, Wealth Tax etc. are the examples of direct tax. They are more pinching. 14. Indirect Tax :

When the impact of tax & payment liability falls on different

persons then it is called to as 'Indirect tax'. Burden of paying indirect tax can be shifted. Sales Tax, Service Tax, Import duty etc. are the examples of indirect tax. They are less pinching. SYJC : COMMERCE

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15. Fiscal Deficit :

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Fiscal deficit occurs when borrowing & other liabilities are added

to the Budgetary Deficit. It is over & above budgetary deficit.

Budgetary Deficit = Total Expenditures – Total Receipts Fiscal Deficit = Budgetary Deficit + Borrowings & Other Liabilities Fiscal deficit implies.... Growing inflation. More rise in money supply. Crowing inequalities Fiscal deficit up to 2.5% to 3% of Gross domestic product (GDP) is considered safe.

Q.7 Give reasons or Explain. 1. Revenue receipts and revenue expenditure is known as Revenue Budget. Reasons: 1. Revenue budget explains how revenue receipts are received by government and how revenue expenditure in incurred. 2. Revenue receipts of government are received by government from all sources i.e. Tax Revenue and Non-Tax revenue. These receipts do not create any liability or reduces any asset. 3. Revenue expenditure is expenditure incurred for the normal running of government departments and various services. This expenditure does not create any asset or reduces any liability. 2. Income collected from tax is a main source of government revenue. Reasons : 1. Tax revenue includes receipts from taxes – direct taxes and Indirect Taxes and also other duties levied by the government. 2. It is a major source of revenue because every citizen is bound by law to pay taxes. 3. Non-Payment of taxes is punishable. It means it is compulsory payment. 4. Taxes are to be paid by every person while receiving the income and also while spending his income hence it is a major source. ECONOMICS

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3. Government Expenditure is more than Government Revenue. Reasons : 1. Government expenditure is more than government revenue means it indicates sound financial background of government. 2. Less government expenditure indicates a decrease in the welfare of the people. Less expenditure of government also indicates low development. 3. In modern times, government has so many social, economic and political responsibilities, it will be impossible to fulfill it with more revenue and less expenditure. 4. If government spending is less than income and aggregate demand will decrease, which will lead to problems of unemployment and recession. Hence, government expenditure is more than government revenue. 4. Public revenue may exceed Public expenditure. Reasons : 1. Public revenue means revenue collected by government during a year. 2. It is collected from Revenue Receipt & capital receipt. It includes Tax Revenue, Non – Tax revenue, Loans taken from Reserve bank of India, issue of shares by government, profits of public enterprises etc. 3. Public expenditure means expenditure incurred in a country during a year. 4. Expenditure is made on revenue items & capital items. It is developmental & nondevelopmental expenditure. Public revenue may be more than, equal to or less than public expenditure. Conclusion :

Public revenue may or may not be balanced to public expenditure.

Hence, Public revenue may exceed the public expenditure. 5. Government budget is prepared for a period of one year. Reasons : 1. Budget is a systematic estimate of government revenue & expenditures for a period of one year. 2. In India, Article 112 of the constitution requires that the central government has to prepare Annual financial statement. 3. It is prepare for a period of one year. In India the budget is prepared for a financial year beginning from 1st April & ending on 3lst March of next year. SYJC : COMMERCE

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4. Budget gives information about estimated revenue & expenditures for the next financial year. It is prepared by finance minister of the country. Conclusion : Budget is prepared for a period of one year. 6. Surplus budget is useful to overcome the inflation. Reasons : 1. Surplus budget helps to fight inflation and to bring price stability. During inflation, private expenditure has to be controlled. 2. Under, surplus budget government enjoys more revenue through heavy taxation. As a result it will reduce disposable income & purchasing power of people. 3. During inflation, government can go for public borrowing. It will automatically control private expenditure. 4. Under surplus budget, government expenditure declines, which in turn reduces the flow of money in the economy. Conclusion : So, During inflation surplus budget is needed to control money supply. 7. Deficit budget helps the government to overcome the problem of deflation. Reasons : 1. Deficit budget takes place when estimated expenditure is more than estimated revenue. 2. Deflation is a market situation in which prices are continuously falling. It brings less amount of profit to entrepreneurs. It affects the process of industrialization. 3. To overcome deflation government has to spend more amounts on capital items in the country. 4. The excess amount spent by government on capital items will increase the level of employment in the economy. Due to this demand and supply will increase. 5. It increases the flow of money in the economy & helps for economic development. Conclusion :

To overcome deflation government has to follow deficit Budget.

8. In balanced budget, expenditure and receipts are some. Reasons : 1. Balanced budget is a type of budget in which estimated government revenue is equal to estimated government expenditures.

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2. In Balanced budget there is neither surplus nor deficit. Balanced budget is advocated by classical economist. 3. Balanced budget implies that government is returning entire money to its people. It ensures financial stability, unproductive expenditures are controlled. Estimated Government Revenue = Estimated Government Expenditure Conclusion :

Hence in balanced budget receipts and expenditure is same.

9. Government budget is not always balanced budget. Reasons : 1. Budget is a systematic estimate of government revenue & government expenditure for the period of one year to achieve pre-determined objectives. 2. In the modern period government budget is used to achieve price, stability, economic growth full employment etc. 3. Therefore, government budget may be balanced, surplus or deficit. 4. Surplus budget is suitable during inflation 5. Deficit budget is suitable to overcome deflation. It helps for rapid economic development. Conclusion :

It is possible, that there may be difference in between public revenue &

public expenditures. 10. Budget is prepared to achieve pre-determined objectives. Reasons : 1. Budget is a systematic estimate of government revenue & government expenditure relating to one year to achieve pre-determined objectives. 2. Though budget government allocates funds for social development activities such as health, education & family welfare. 3. Budget aims at reduction of inequalities of income. 4. Government aims at generating employment opportunities. 5. Government also allocates funds for Infrastructure development such as power, transport etc. Through budget government tries to uplift the weaker section of the society. Hence, government budget is prepared to achieve some predetermined objectives.

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11. Fiscal policy is a budgetary policy of government. Reasons : 1. The fiscal policy aims at stability. 2. It also aims at growth & development of economy. 3. It can be achieved through taxation public expenditures, borrowing etc. 4. It maintains both internal & external stability. Thus, fiscal policy is a budgetary policy of government. 12. Deficit budget create inflationary pressure. Reasons : 1. Deficit budget indicates excess of total expenditures over total receipts of the government. 2. In order to meet the deficit, generally government may go for printing of more currency notes. This leads to increase in money supply. 3. As government spends this money, there is excess supply of money without corresponding increase in production of goods & services. 4. Due to increase in purchasing power, prices of goods & services begin to rise. Thus, the deficit budget creates inflationary pressures in the economy.

DISTINGUISH BETWEEN 1. Revenue Budget V/s Capital Budget Point of Difference

Revenue Budget

Capital Budget

Meaning

Revenue budget includes, 1) Revenue Receipts 2) Revenue Expenditure.

Capital budget includes, 1) Capital Receipts 2) Capital Expenditure

Impact

Revenue Receipts do not create any liability of the government. Revenue expenditure does not lead to the creation of assets.

Capital receipt creates a liability of the government. Capital expenditure leads to the creation of assets

2. Direct Tax V/s Indirect Tax Point of Difference Meaning

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Direct Tax

Indirect Tax

When the impact of tax & payment liability of tax falls on the same person then it is called as Direct Tax.

When the impact of tax & payment liability of tax falls on different persons then it is called as indirect Tax.

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Burden of Payment

Burden of Payment of Direct tax Burden of Payment of indirect tax cannot be shifted. can be shifted to other person.

When Arise

This tax is paid while earning This tax is paid at the time of income. Spending income.

Examples

Income Tax, wealth Tax, Property VAT, Service Tax, Entertainment Tax etc. Tax, Excise Duty etc.

3. Deficit Budget V/s Balanced Budget Point of Difference Meaning

Usefulness

Flow of Money

Effect

Deficit Budget

Balanced Budget

When the government revenue is When the government revenue is less than government equal to government expenditure, expenditure, it is called a Deficit it is called a Balanced Budget budget. It is not possible to introduce a It is suitable when during the Balanced budget under present Depression. circumstances. Deficit budget leads to flow of The flow revenue of the money from the government to government is equal to meet the the economy. expenditure of the government. Balanced Budget would not affect Deficit budget would lead to the aggregate demand in the increase in aggregate demand. economy. The balanced budget The policy of deficit budget policy is called "Sound Finance" would lead to increase in where the government performs employment, investment etc. only minimum functions.

4. Balanced Budget V/s Surplus Budget Point of Difference

Balanced Budget

Surplus Budget

Meaning

When estimated revenue is equal to estimated expenditures then such budget is called as 'Balanced Budget'.

When estimated revenue is more than estimated expenditures then budget is said to be 'Surplus Budget'.

Effect

It helps to maintain financial It may result in depression in an stability in an economy. economy.

Existence

Practically, it may or may not be Practically, it is impossible to have possible to have balanced budget. surplus budget.

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5. Surplus Budget Point of Difference

ECONOMICS

V/s

PUBLIC ECONOMICS

Deficit Budget Surplus Budget

Deficit Budget

Meaning

When estimated revenue is more than estimated expenditures then budget is said to be 'Surplus Budget'.

When the government revenue is less than government expenditure, it is called a Deficit budget.

Supported by

It is Supported by classical It is Supported by modern economists like Prof. Marshall. Economists like Prof. Keynes.

Flow of money

It takes out flow of money from economy.

Growth

It leads to reduction in demand, It helps for income, output etc. development.

It increases the flow of money in economy.

rapid

economic

6. Revenue Receipts V/s Capital Receipts Revenue Receipts

Capital Receipts

Meaning

Income received by Government during normal course of governance is called as 'Revenue receipts'.

Receipts obtained by Government by borrowing loans, by selling assets etc. is called as 'Capital Receipts.'

Effects on Assets & Liabilities

While receiving revenue receipt there is no reduction in Government assets or no creation of government liability.

While receiving capital receipt there is a reduction in Government asset or creation of government liability.

Nature

It is Recurring in Nature.

It is Non-recurring in Nature.

Examples

Tax Revenue & Non-tax Revenue such as direct tax, indirect Tax, Fines & Penalties, Stamp duty, escheats etc.

It includes loans taken from R.B.I., Loans from foreign countries, amount received from disinvestment etc.

Point of Difference

7. Revenue Expenditure V/s Capital Expenditure Point of Difference

Meaning

ECONOMICS

Revenue Expenditure

Capital Expenditure

The expenditure incurred for administration and maintenance of the country in working condition is called as Revenue Expenditure.

The expenditure incurred for development, to purchase the assets, for repayment of loans etc. are called as Capital Expenditure.

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Effects on Assets & Liabilities

Revenue Expenditure does not Capital expenditure increases the increase any assets or reduce any assets or reduces the liabilities of liability. a nation.

Nature

It is Recurring in Nature.

Productiveness

Revenue expenditure productive.

Examples

Expenditure on Defense Services, Expenditure on Purchase of Land Administrative services, Judiciary & Building, Machinery, Loans system of the country etc. given to state Govt. & others etc.

It is Non-recurring in Nature.

is

non-

Capital expenditure is productive.

जीवनात , स ुखाचे, द ु:खाचे, यशाचे, अपयशाचे, आशेच,े नराशेचे असे अनेक संग येतात . पण वचारांचा भकम पाया असणार माणसं क ु ठलयाह संगी ठामपणे उभी राहतात . 8. Public Revenue

V/s

Public Expenditure

OR

Government Revenue

V/s

Government Expenditure

OR

Budget Revenue (Receipts)

V/s

Budget Expenditure

OR

Point of Difference

Public Revenue

Public Expenditure

It refers to the expenditures It refers to the revenue collected incurred by public authorities like Meaning by central government, state state government, central government etc. government etc. It is the income part of It is the expenditure part of Part of Govt. Budget government budget. Government budget. Public revenue may be revenue Public expenditures may be Types receipts and capital receipts in revenue expenditure and capital nature. expenditure in nature. 9. Income Tax

V/s

Point of Difference

Sales Tax Income Tax

Sales Tax

Meaning

It is the tax imposed on the It is the tax imposed on the sale of income of a person. a commodity.

Type of Tax

It is a direct tax.

Shifting

Liability of paying Income tax Liability of paying sales tax can be cannot be legally shifted. legally shifted.

Effect

Income Tax reduces the income of Sales tax increases price of a consumers. commodity.

SYJC : COMMERCE

It is a indirect tax.

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ECONOMICS

PUBLIC ECONOMICS

OBJECTIVE-TYPE QUESTIONS 

Fill in the blanks with proper alternatives from brackets. (1) ...................... Taxes are directly paid by the people to the government. (Indirect / Direct / Excise) (2) Two main components of budget are .................... budget and the capital budget. (Deficit / Revenue / Balanced) (3) A budget is ....................... financial statement of the estimated receipts and expenditures of the government.

(a monthly / an annually / a half yearly)

(4) Concept of balanced budget is a ..................... principle of public finance. (Modern / Traditional / Neutral) (5) Deposits of PPF are part of ....................... receipts.

(Revenue / Capital / None of

these) (6) When revenue is less than expenditure, there is said to be ..................... budget. (Balanced / Surplus / Deficit) (7) ...................... deficit is the fiscal deficit less interest payment. (Primary / revenue / budgetary) (8) In India, financial year runs from ...................... (1 st April To 31 st March of next year / 1 st June To 31 st May / None of these) (9) The difference between total receipts and total expenditure of the government is known as .......................

(Revenue deficit / Fiscal Deficit / Budgetary Deficit)

(10) During depression ....................... budget is preferable. (Balanced / Surplus / Deficit / Zero) (11) ........................ is an example of direct tax. (Excise duty / Wealth tax / Sales tax / Gifts) (12) The term budget is derived from ................... word Bougette. (Italian / French / Latin / Greek) 

State whether following statements are TRUE or FALSE.

1. Public economics is concerned with raising of funds to incur expenditure to achieve certain predetermined objectives.

- TRUE

2. Budget is prepared once in a period of Five year.

ECONOMICS

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- FALSE

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PUBLIC ECONOMICS

3. Budget is prepared on 1st April of every year.

- TRUE

4. Budget is prepared for the period of One year.

- TRUE

5. Budget is prepared to achieve economic objectives only.

- FALSE

6. Tax is the major source of revenue for the government of India.

- TRUE

7. Capital Receipt increases liability.

- TRUE

8. Surplus budget works during inflation.

- TRUE

9. Burden of paying direct taxes can be shifted.

- FALSE

10.Deficit budget is suggested for underdeveloped countries.

- TRUE

11.Income Tax is a direct tax.

- TRUE

12.Budget is a systematic estimate of government revenue & expenditures.

- TRUE

13.Government budget is always balanced budget.

- FALSE

14.Tax is the only source of public revenue.

- FALSE

15.Government budget is the nerve centre of public economy.

- TRUE

16.Deficit budget is not possible during inflation.

- TRUE

17.Balanced budget ensure financial stability.

- TRUE

18.Economic growth takes place in the country when there are more revenue receipts & more capital expenditure.

- TRUE

19.Revenue expenditure is important for administrating the country.

- TRUE

20.Capital receipts are received during normal course of governance.

- FALSE

21.When estimated revenue is more than estimated expenditures then budget is called as Surplus Budget.

- TRUE

⦿⦿⦿⦿⦿

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Public Economics : Budget & Its types

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