Chapter 15 Public Economics

A] Define / Explain the Concepts:-

1. Budget- The term budget is derived from the French word “Bougettee” which means a bag
containing financial proposals.
A budget is an annual financial statement of the estimated receipts and expenditures of
the government for the financial year.
It is prepared for financial year starting from April 1 st to March 31st and presented in
parliament on February 28th in India.
2. Balanced budget- Refer to Q C-1(1)
3. Surplus budget- Refer to Q C-1(2)

B] Give reason / state whether the following statements are true or false:-
1. There are no limitations of balanced budget.
Ans- This statement is false.
There are certain limitations of balanced budget are as-
 It fails to achieve the objectives of full employment, social justice and social welfare
 It fails to realize the role of public borrowing as an instrument of fiscal policy.
 It is not suitable to developing country like India.
2. During inflation, surplus budget is needed.
Ans- This statement is true.
During inflation, surplus budget is needed
 During inflation, it is necessary to reduce private expenditure.
 The government can increase the taxes and this, in turn, will reduce the disposable income of
people by surplus budget.
 The government can also resort to public borrowing and this will control the private
expenditure.
3. Public expenditure is increasing in India.
Ans- This statement is true.
Public expenditure is increasing in India because-
In modern days, the activities of the government are fast expanding and they tend to cover
almost all aspect of social life. The government provides funds on-
 Social services like public health, education, medical facilities, etc.
 Transport and communication facilities,
 Irrigation facilities,
 Defence and police services and
 Social justice.
4. Budget should always be balanced. Or Public revenue always exceeds public expenditure.
Ans- This statement is false.
Budget should not always be balanced because-
 Public revenue can be less than, equal to or more than public expenditure.
 Balanced budget is a budget where total receipts/revenues of government are equal to total
expenditures of government over a period of time.
 Surplus budget is a budget where total receipts/revenues of government are more than total
expenditures of government. It is needed to control inflation.

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 Deficit budget is a budget where total receipts/revenues of government are less than total
expenditures of government. It is necessary for rapid development and to ensure full
employment, to remove poverty, etc.
5. Public finance plays important role in government budget.
Ans- This statement is true.
Public finance plays important role in government budget because-
 It includes the study of methods raising public revenue and the principles of taxation.
 It includes the study of the principles and the effect of public expenditure.
 It studies the cause and the methods of public borrowing as well as debt management.
 It studies the use of public finance operations to bring about economic stability and growth in
the country.
 It includes the preparation and sanctioning of the budget, auditing, etc.

C] Answer the following:-

1. What are the different types of budget?
Ans- The different types of budget are as follows-
1. Balanced budget- Balanced budget is a budget where total receipts/revenues of
government are equal to total expenditures of government over a period of time. The
classical economists like Adam Smith, Alfred Marshall, etc. advocated balanced budget
is an index of sound finance. It implies that the government expenditures are met by its
revenue and there is no need for public borrowing. In other words, Balanced budget
means Government Receipts = Government Expenditures.
Merits-
 It imposes financial discipline.
 It does not create any adverse impact on economy.
 It creates stability in the economy.
 It compels to raise sufficient income to incur expenditure.
Demerits-
 Practically it is impossible to implement.
 It cannot be accepted in a public budget.
 It affects the economy as the marginal propensity to spend of government is
not equal to the taxes collected from the people.
 Moreover, it’s sub-component i.e. revenue budget and capital budget are not
equal.
2. Surplus budget- Surplus budget is a budget where total receipts/revenues of
government are more than total expenditures of government. On other hand, the
government depends upon less of receipts, the budget becomes surplus budget.
J.M.Keynes and Hansen have stressed on Surplus budget which acts as a tool to control
inflation in modern economy. Thus, Surplus budget = Government Receipts >
Government Expenditures.
Merits-
 It imposes strict financial discipline on government.
 It makes sufficient reserves to face any financial emergency.

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 It helps to keep smaller size of the budget.

 Prudential measures are adopted by the government.
 It efficient in controlling the inflation.
Demerits-
 It ignores the difference between private budget and public budget.
 It restricts the role of the government.
 It reduces the aggregate demand and level of employment.
 It creates deflationary pressure in the economy.
3. Deficit Budget- Deficit budget is a budget where total receipts/revenues of government
are less than total expenditures of government. In modern economics, most of the
budgets are of this type. A country like India, it is not possible to raise huge resources
through taxation for the economic development and growth. So, deficit budget is the
only option. It is used for financing planned development and as a stabilizing tool to
control fluctuation in the economy. Keynes has advocated the deficit budget is an
instrument to pull the economy out of depression.
Merits-
 It allows freedom to the policy, adjusts revenue and expenditures as per
need of the country.
 It allows the government to undertake welfare schemes.
 It helps in reducing the unemployment.
 It improves the productivity of the economy.
Demerits-
 It increases money supply and invites inflation.
 It reduces purpose to increase tax income.
 It leads to misallocation of resources.
 It increases reckless spending by the government.
2. Explain the objectives of a budget.
Ans- The objectives of a budget are as follows-
a. Economic Stability- It a major policy objectives in both developing and developed countries.
It aims at maximizing incomes and employment without undue rise in price.
b. Economic growth- It is an overriding objective in the developing. It is possible to achieve
through the budget by promoting industries in rural and backward areas and providing
incentives for saving and investment.
c. Economic Equality- It becomes the duty of the government to transfer a part of increased
incomes to the poor by fiscal measures. The budget may provide for high taxes on the rich
and high expenditure tor providing facilities to the poor in the form of food, clothing,
housing, education, health care, etc.
d. Accountability- A budget is presented to the parliament as an annual financial statement by
the executive branch of the government. The budget gives the authority to spend the
money and authority to tax. This makes the government accountable to the people.
e. Management Tool- The budget gives the government a tool to control the functioning of
various departments as per the expenditure programmes laid down in the budget.

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f. Functional Role- The government budget is an important policy tool. Hence, its economic
and functional classification provides an idea about its role in the economy.
g. Evaluation of Performance- The budget provides funds for all ministries and departments
of the government. So it becomes an easy task for comparison and evaluation of these
departments.
h. Economic analysis- it helps a systematic economic analysis of the various programmes of
the government. The programmes chosen can be justified on the basis of an economic
analysis of its benefits.
i. Plan Goals- A government budget having its own short term objectives should also aim at
achieving long term objectives of the economic plan of the country.
j. Fiscal policy- The budget is an instrument of fiscal policy. Therefore it helps in achieving
better income distribution, economic stability and economic growth.
3. Discuss the main components of budget.
Ans- The main components of budget are as follows-
A] REVENUE BUDGET- Revenue budget shows all the receipts- both tax revenue and non-tax
revenue and the expenditure met out of these receipts on revenue accounts in the current
accounting year.
1) Revenue receipts- Revenue receipts are composed of receipts of the government which
neither create a liability nor lead to reduction in assets. They are as follows-
 Tax Receipts- Government’s revenue receipts are mainly composed of various taxes i.e.
direct taxes and indirect taxes and customs i.e. taxes on exports and imports.
 Non-tax Receipts- Non-tax receipts include incomes from profits of state-owned
enterprises, earnings from public services like police, judiciary, etc. interest on loans and
sale of services.
2) Revenue Expenditure- Revenue expenditures are composed of payments for services
received and transfer payments as-
 Transfer Payments- Transfer payments are those payments paid to the past services
rendered or for charity, pensions to retired persons, unemployment benefits and a part
of defence expenditure.
 Consumption expenditure- Government spends on direct consumption on services such
as administration, law and order and legislation.
B] CAPITAL BUDGET- Capital budget shows all capital receipts and payments on capital account
projected for the next financial year. They involves-
1) Capital Receipts- Capital receipts consist of all capital receipts such as-
 Government borrowings from the market,
 Sale proceeds of treasury bills,
 Repayment of loans given by the union government,
 Borrowing from the central bank and
 Foreign debt.
2) Capital Expenditure- Capital expenditure consists of all capital payment which is incurred for
creating asset such as-
 Acquisition of land, buildings, plants and equipment,
 Investment in shares ,

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 Grant of loans and advances to state governments, public corporations, government

companies and other parties and
 A part of defence expenditure.

D] Write Explanatory notes-

1. Revenue deficit-
 Revenue deficit is the difference between the revenue receipts and revenue
expenditures projected in the budget for the year. Thus, Revenue deficit = Revenue
receipts – Revenue Expenditure
 Receipts include tax and non-tax receipts such as direct taxes and indirect taxes and
taxes on exports and imports, incomes from profits of state-owned enterprises, earnings
from public services, interest on loans and sale of services.
 Expenditures include consumption expenditures and transfer payments such as
payments paid to the past services rendered or for charity, pensions to retired persons,
unemployment benefits and a part of defence expenditure, direct consumption on
services such as administration, law and order and legislation.
 Revenue deficit shows the degree of indebtedness faced by the government on the
account of excess of expenditure over the revenue receipts in the budget.
 It is made up by borrowing or through sale of assets.
2. Fiscal deficit-
 Fiscal deficit is the difference between total expenditure and revenue receipts including
some capital receipts. Thus, Fiscal deficit = Total expenditure – Revenue receipts
(include borrowing and liabilities).
 Total expenditure includes consumption expenditures and transfer payments such as
payments paid to the past services rendered or for charity, pensions to retired persons,
unemployment benefits and a part of defence expenditure, direct consumption on
services such as administration, law and order and legislation.
 Revenue receipts include tax and non-tax receipts such as direct taxes and indirect taxes
and taxes on exports and imports, incomes from profits of state-owned enterprises,
earnings from public services, interest on loans and sale of services.
 Some capital receipts also include borrowing from the central bank, foreign debt and
other liabilities.
 Fiscal deficit is harmful to the economy as it brings about burden of interest payments
on government.
 Measures should be taken to reduce the fiscal deficit such as improve tax structure,
reduce unproductive government expenditure, reduce subsidies and burden of
expenditure on pensions, etc.
3. Tax-
 Tax can be defined as a levy imposed by the government on the income, wealth and
capital gains of persons and business.
 It is a compulsory payment made by an individual, household or a firm to government.
Taxes are of two types- Direct Taxes and Indirect Taxes.

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 Direct taxes are those taxes which are paid by consumers to the government directly in
form of income tax, wealth tax, property tax, etc.
 Indirect taxes are those taxes which are paid indirectly on consumption of goods and
services by people in form of excise duty, services tax, sales tax, custom tax, etc.
 Direct taxes and indirect taxes are as an instrument of fiscal policy in order to raise the
revenue.

E] Distinguish the following-

1. Balanced budget and Surplus budget.

Features Balanced budget Surplus budget
1. Meaning When the government makes When the government makes
total receipts equals to its more receipts than its
expenditure, the budget becomes expenditure, the budget becomes
balanced budget. surplus budget.
2. Stability It maintains stability in economy. It does not maintain stability in
economy.
3. Financial It imposes financial discipline on It imposes strict financial
discipline government but not strictly. discipline on government.
4. Effect on It does not create any adverse It creates deflationary pressure in
economy effect on economy. economy.

2. Revenue budget and Capital budget.

Features Revenue budget Capital budget
1. Meaning Revenue budget shows all Capital budget shows all receipts
receipts and payments on and payments on Capital account.
Revenue account.
2. Components The components of Revenue The components of Capital budget
budget are Revenue receipts and are Capital receipts and Capital
Revenue expenditures. expenditures.
3. Creation of It neither creates a liability nor It creates creation of assets like
assets lead to reduction in assets. land, machinery, etc. and lead to
reduction in assets.
4. Examples It includes tax receipts, non-tax It includes acquisition of assets,
receipts, transfer payments and repayments of loan, treasury bills,
consumption expenditures. etc.

3. Direct taxes and Indirect taxes.

Features Direct taxes Indirect taxes
1. Meaning Direct taxes are those taxes which Indirect taxes are those taxes
are paid by consumers to which are paid by consumers to
government directly on property government indirectly on goods
and income. and services.

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2. Escape Sometimes people can escape People cannot escape from

from paying direct taxes by paying indirect taxes while
showing less income or less purchasing goods and services.
property.
3. Burden The burden of direct taxes cannotThe burden of indirect taxes can
be shifted to any other person. be shifted to any other person.
4. Nature Direct taxes are just and equitable
Indirect taxes are unjust and
and they have narrow tax base. inequitable and they have broad
tax base.
5. Examples Examples of direct taxes are Examples of indirect taxes are
income tax, property tax, wealth sales tax, services tax, custom
tax, etc. duty, excise duty, etc.

4. Budgetary deficit and Fiscal deficit-

Features Budgetary deficit Fiscal deficit
1. Meaning Budgetary deficit is defined as the Fiscal deficit is defined as the over
excess of total expenditure over and above the budgetary deficit.
the total revenue.
2. Formula Budgetary deficit = Total Fiscal deficit = Budgetary deficit +
Expenditures – Total Receipts Borrowing + Other liabilities.
(Revenue expenditure + Capital
expenditure – Revenue receipts +
Capital receipts)
3. Concept It is a narrower concept. It is a broader concept.
4. Implications Its implications are- rise in Its implications are- growing
inflation, rise in money, rise in inflation, more rise in money
income inequalities, etc. supply, growing inequalities, etc.

F] State, with reasons, whether you Agree or Disagree with the following statements:-
1. Budget is both a backward looking and forward looking.
Ans- Yes, I agree with the statement “Budget is both a backward looking and forward looking”
because-
 The budget refers to financial proposals in the form of government revenue and
expenditure. Each government undertakes various economic and non economic
activities. These activities involve expenditures and necessary revenue collection in
order to meet these expenditures.
 Thus, the budget reflects both item of revenue and expenditure. It carries detailed
information on the systematic analysis of the activities of the various departments.
 The government budget is both a backward looking and forward looking document
because-
Financial accounts of the previous year.
The budget and revised estimates of the current year and
The budget estimates of the coming year.

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 The estimates of budget are more of a theoretical importance and more relevant which
are based upon the proposed changes in taxes and their rates and expenditure policy.
 Budget of the government indicates next year’s expenditure plans and programmes and
attempts to find resources for the same.
 An individual tries to match his expenditure to available income; government attempts
to match its planned income to expenditure.
 Budget is a document that gives projections for revenue and capital expenditures and
the revenue and capital receipts. In this sense reflects the economic condition of the
economy.
2. Budget is a mirror of an economy.
Ans- Yes, I agree with the statement “Budget is a mirror of an economy” because-
a. A mirror reflects the existing reality. If reality is clear, the reflection will be clear. The
mirror is not partial as it shows what the condition is. A budget reflects the economic
condition of the economy.
b. The objectives of budget are the stability, growth and equality in the distribution of
income. Budget influences the economic activities of government.
c. The budget is an instrument of fiscal policy. Therefore it helps in achieving better
income distribution, economic stability and economic growth.
d. During recession or depression, the budget would provide for more expenditure by
exceeding revenues, so as to increase effective demand. Thus, Taxes would be reduced.
e. During inflation, the budget would aim at reducing government expenditure wherever
possible by increasing direct taxes and providing incentives for more production.
f. It becomes the duty of the government to transfer a part of increased incomes to the
poor by fiscal measures.
g. The budget gives the government a tool to control the functioning of various
departments as per the expenditure programmes laid down in the budget.
h. Thus, budget is prepared with the objectives of management tool, economic analysis,
evaluation of performance, plan goals and as an instrument of fiscal policy.
Therefore, it has both a backward looking and forward looking.

G] Objectives-
A) Fill in the blanks-
1. A government budget shows the ___ of the coming year. (estimates/accounts)
2. A government budget shows the ___ of the previous year. (estimates/accounts)
3. revenue account covers those items which are of ____ nature. (recurring/non-recurring)
4. The classical economists stressed on ____ budget. (balanced/unbalanced)
5. J.M.Keynes stressed on _____ budget. (balanced/unbalanced)
6. A ____ budget is necessary to control inflation. (surplus/deficit)
7. A ____ budget will boost up production and employment. (surplus/deficit)
8. Funds which do not belong to the government are placed in the ____ fund.
(public/contingency)
9. ____ policy plays a significant role in government budget. (Fiscal/Monetary)
10. _____deficit is a fiscal deficit minus Interest payment. (Primary/budgetary)
11. Deposits of PPF are a part of ____ receipts. (capital/revenue)

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12. When government revenue is more than expenditure is called ___ budget. (surplus/deficit)
13. ____ of the constitution ensures a budget for the country. (Article 112/Article 202)
14. ____ of the constitution ensures a budget for the states. (Article 112/Article 202)
15. All consumption items are included in the ___. (revenue/capital)
B) Complete the following statements-
1) A government budget shows the budget ____. a. estimates of the current year b. estimates
of the coming year c. estimates of the previous year d. a & b
2) Balanced budget is ____. a. Revenue = Expenditure b. Revenue < Expenditure c. Revenue >
Expenditure d. Revenue = Tax revenue
3) Deficit budget is ____. a. Revenue = Expenditure b. Revenue < Expenditure c. Revenue >
Expenditure d. Revenue = Tax revenue
C) State the following statements are True or False-
1. In under developed countries, budgetary policy is necessary.
2. Fiscal policy is first emphasized by Marshall.
3. It is necessary to raise purchasing power in deficit budget.
4. Government budget is essential for economic stability and growth.
5. Increase in government expenditure in short period is possible.
6. Revenue from indirect taxes is the best sources of public income.
7. Capital expenditure lends to the creation of assets.
8. Economic growth is the only objective of the fiscal policy.
9. Budget is a systematic account of government expenditure.
10. The government budget is an instrument of its fiscal policy.
True- 1, 3, 4, 7, 9 & 10; False- 2, 5, 6 & 8
D) Match the following-
Group A Group B
1. Government budget a. No sanction needed
2. Fiscal policy b. Parliament sanction needed
3. Indirect tax c. Excise duty
4. Public account d. Personal income
5. Public fund e. One year
6. Contingency fund f. Instrument of economic control
7. Direct tax g. Provident fund
Ans- 1-e, 2-f, 3-c, 4-g, 5-a, 6-b & 7-d