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Governemnt and Budget
Governemnt and Budget
29
Notes
OBJECTIVES
After completing this lesson, you will be able to:
z understand the meaning of government budget;
z draw the structure of government budget;
z differentiate between revenue and capital receipts;
z differentiate between revenue and capital expenditure;
z differentiate between plan and non-plan expenditure;
z understand the meaning of revenue deficit, fiscal deficit and primary deficit;
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(1) Receipts and (2) Expenditures. Government Budget
(1) Receipts
The receipts of government show the different sources from which government
raises revenue. These receipts are of two kinds: (i) Revenue receipts and (ii)
Capital receipts.
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Notes It must be mentioned here that there is a similarity between the financing by an
individual and the financing by a government. An individual, generally, finances his
current expenditure from his current income. He borrows when his current income
is not sufficient for his current expenditure. Likewise, a government has two
sources to finance its expenditures: current income or revenue receipts and capital
receipts. It borrows when revenue receipts fall short of its current expenditures.
The dissimilarity between financing by an individual and that by a government is
that an individual first estimates his current income and then plans his expenditures
while a government plans its expenditures first and then finds the sources to finance
them.
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in case of sales tax, although the liability to pay tax lies with the seller of a good, Government Budget
the actual burden of tax falls on the buyer. The buyer and not the seller is the one
who finally pays the sales tax. The seller only collects the tax from the buyer by
increasing the price and pays it to the government. Thus, we find that incase of sales
tax, the burden of tax is shifted from the seller to the buyer. All taxes on production
are indirect taxes because producers recover these taxes from buyers by increasing
the price of the product.
Notes
Example of Direct Taxes
z Income tax: the tax on incomes of individuals
z Corporation tax : the tax on corporate profits
z Wealth tax: the tax on wealth of individuals
z Gift tax: the tax on gifts given
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1. Capital Receipts
As stated earlier, capital receipts are those receipts of the government which either
create liability or cause any reduction in the assets of the government.
The major sources of capital receipts of the central government are: (i) Borrowings
(ii) Recovery of Loans and (iii) Disinvestment - Resale of shares of public sector
undertakings.
(i) Borrowings: There are two sources from which the central government
borrows. They are:
(a) Domestic Borrowings: The government borrows from domestic
financial market by issuing securities and treasury bills. It also borrows
from people through various deposit schemes such as Public Provident
Fund, Small Savings Schemes, and National Savings Scheme etc. These
are borrowings of the government within the country.
(b) External Borrowings: In addition to domestic borrowings the
government also borrows from foreign governments and international
bodies like International Monetary Fund (IMF), World Bank etc.
Foreign borrowings by the government bring in foreign exchange into
the domestic economy.
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(ii) Recovery of Loans: Quite often state and local governments borrow from Government Budget
the central government. The loans recovered by the central government from
state and local governments are capital receipts in the budget because
recovery of loans reduces debtors (assets).
(iii) Disinvestment - Resale of shares of public sector undertakings: This is a
very recent source of capital receipts by which the central government has
been mobilizing financial resources since 1991. Prior to 1991, the central Notes
government owned 100 percent of the shares of public sector undertakings.
From 1991, the government adopted the policy of privatisation of public
sector undertakings. Consequently, it started selling its shares to general
public and to financial institutions. This selling of shares of public sector
undertakings by the government is known as ‘disinvestment of public
sector undertakings’.
2. Expenditure
Government expenditure is classified in two ways: capital expenditure and
revenue expenditure and (b) as plan expenditure and non-plan expenditure.
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29.4 TYPES OF BUDGET DEFICIT Government Budget
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The fiscal policy is concerned with the raising of government revenue and Government Budget
increasing expenditure. To generate revenue and to increase expenditures, the
government finance or policy called Budgeting policy or fiscal policy.
The major fiscal measures are:
1. Public Expenditure – Government spends money on a wide variety of things,
from the military and police to services like education and health care, as well
Notes
as transfer payments such as welfare benefits.
2. Taxation – Government imposes new taxes and change the rate of current
taxes. The expenditure of government is funded by the imposition of taxes.
3. Public Borrowing – Government also raises money from the population or
from abroad through bonds, NSC, Kisan Vikas Patra, etc.
4. Other Measure – Other measures adopted by the government are:
(a) Rationing and price control
(b) Regulation of wages
(c) Increase the production of goods and services.
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z Government expenditure is classified as (1) Revenue and Capital expenditure Government Budget
and as (b) Plan and Non-Plan expenditure.
z Budget deficit is the excess of total budgeted expenditure over total budgeted
receipts net of borrowings. It indicates the total borrowing requirement of
government.
z Three ways by which the central government finances deficit:
(i) Borrowings from public and from foreign governments. Notes
(ii) Withdrawing cash balances held with the Reserve Bank of India.
(iii) Borrowings from the Reserve Bank of India.
z The selection of items of expenditure and sources of financing them in tune
with policies and programmes of the government, is termed as the budgetary
policy of government.
z The main objectives of budget and budgetary policy are:
(i) to promote economic growth,
(ii) to reduce income and wealth inequalities,
(iii) to provide employment opportunities,
(iv) to ensure stability in prices,
(v) to correct balance of payments deficit and
(vi) to provide for effective administration.
TERMINAL EXERCISE
1. What is a government budget? What do you understand by the term ‘financial
year’?
2. Outline the structure of government budget and briefly explain its various
constituents.
3. Distinguish between revenue receipts and capital receipts.
4. Distinguish between revenue expenditure and capital expenditure.
5. Distinguish between plan and non-plan expenditure.
6. Distinguish between surplus budget and deficit budget. How do they limit the
economic activity?
7. State the difference between fiscal deficit and budgetary deficit.
8. Why fiscal deficit is a better measure of deficit as compared to budgetary
deficit?
9. What are the different ways to finance deficit in government budget? Explain
them.
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Notes
ANSWERS TO INTEXT QUESTIONS
29.1
1. (b) 2. (d) 3. (d)
29.2
1. (greater than) 2. (excludes) 3.(not a better) 4. (increases).
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