Solution

GOVERNMENT BUDGET & ECONOMY

Class 12 - Economics
1. In a government budget, the receipts which neither create any reduction in assets nor create any corresponding liability for the
government are called as revenue receipts. For e.g. Tax receipts of government.
2. When the revenue receipts are less than the revenue expenditures in a government budget, this shortfall is called a revenue deficit.
This means that the government’s own earnings are not sufficient to meet the day-to-day functioning of its departments and other
provisions of services.
Revenue Deficit = Revenue Expenditure - Revenue Receipts.
3. Increase in public expenditure on welfare schemes for the poor people.
4. Non-development expenditure is the expenditure on essential general services of the government like law and order.
5. Fiscal deficit = Primary deficit + Interest payment
= 4,400 + 400 = ₹ 4,800 crore
6. Salaries of government employees and administration expenses are revenue expenditure as it neither creates assets nor reduces the
liability of the government.
7. No, grants are treated as revenue expenditures because these receipts do not create any corresponding liability for the government.

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8. It refers to excess of revenue expenditure over revenue receipts during the given fiscal year. High revenue deficit leads to an

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inflationary situation.
Indian government faces revenue deficit because government has only few sources of revenue whereas government need to spend
a lot. DO
9. The fiscal deficit represents the borrowing requirements of the government from all sources.
10. Subsidies, Grants given to social organisations are revenue expenditure.
11. The government can check inflation by reducing its expenditure. By taking such step the government can check inflation that is
causing hardships to the people.
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12. Borrowing is treated as capital receipt because it creates liability of returning loans.
13. Disinvestment of public sector undertakings is a capital receipt because it reduces financial assets.
14. The excess of government's revenue expenditure over revenue receipts is called as Revenue Deficit. The revenue deficit includes
only such transactions that affect the current income and expenditure of the government.
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Revenue Deficit = Revenue Expenditure - Revenue Receipts.

15. 1. Primary Deficit is the difference between fiscal deficit and payment of interest.
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2. Primary Deficit = Fiscal Deficit - Interest Payments.

16. Government can reduce inequalities through taxes and expenditure. It can tax the rich or the goods consumed by the rich. It can
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spend the amount so collected on providing free services to the poor.

17. Balanced budget is that budget in which estimated government receipts are equal to the estimated government expenditure, i.e.
taxes are equal to government spending.
or
Balanced budget = estimated expenditure = estimated Receipts.
18. i. Revenue budget
ii. Capital budget
19. Plan expenditure is the expenditure to be incurred during the year in accordance with the plan for the year.
20. Measure to Control Revenue deficit: (any one)
a. To reduce government administrative expenses.
b. To reduce the burden of subsidy.
c. To increase taxation.
21. Direct tax
22. Budget is a statement of expected receipts and expenditure of the Government over the period of financial years (April Ist to 31st
March).
23. The Central Government or Union Government alone is empowered to tax incomes.
24. Development expenditure is the expenditure on activities which are directly related to economic and social development.

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25. The implication of the fiscal deficit is that it is the measure of total borrowing requirements of the government to meet its
expenditures.
26. Imposition of a high tax on the harmful product by the government. Imposition of tax will increase the product's price and because
of this consumers will reduce their consumption.
27. Government can directly undertake the production of public goods and services. it can encourage private sector by giving tax
concessions and subsidies.
28. Public revenue means receipts of the government from all sources to finance public expenditures.
29. Two examples of capital receipts which either creates liability or causes reduction of assets of government:
i. Proceeds from disinvestment of public sector units.
ii. Borrowings from World Bank.
30. Revenue receipts may be defined as the receipts which neither create a liability nor reduce any asset.
31. The tax multiplier is smaller in absolute value than the government expenditure multiplier, as the government expenditure affects
the total expenditure and taxes through the multiplier. The tax multiplier also influences disposable income that affects the overall
consumption level. The negative tax multiplier implies an increase in taxes leads to falling in output. It is smaller in absolute value
than the spending multiplier we can say higher taxes reduces the people’s disposable income, thereby reducing their consumption
The reason is explained through the following example:
Let's assume MPC be to 0.80

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Then, the government expenditure multiplier = 1

1 − c

= 1

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1−0.80

= 100

20

=5
Tax multiplier =
=
−80

1−0.80
−c

1 − c
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−0.80
= 0.20

=-4
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This shows that the government expenditure multiplier is more than the tax multiplier.
32. Debt trap:-
Debt trap refers to a situation in which government borrows new funds to pay previous loan or to pay interest on previous loans,
this creates a trap for the government and burden of future payments mounts up. In order to solve the problem of debt trap,
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government may resort to disinvestment or may reduce wasteful expenditures like unnecessary subsidies, etc.
33. i. Economic stability: Free play of market forces are bound to generate trade cycles, also called business cycles. Please refer to
the phases of recession, depression, recovery and boom in the economy. A government budget is used to prevent business
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fluctuations of inflation or deflation to achieve the objective of economic stability. The government aims to control the
different phases of business fluctuations through its budgetary policy. Policies of the surplus budget during inflation and
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deficit budget during deflation helps to maintain the stability of prices in the economy.
ii. Re-distribution of income: Reducing inequality is a major objective of government's budget especially in developing country
like India, where inequality of income and wealth is very high. The government uses its financial tools of taxation and
subsidies to enhance equal distribution of income and wealth. In order to ensure equity of income, the progressive tax
structure is followed in India, which imposes a higher burden of taxes on higher income group and a lesser burden on lower
income group. Also, those who earn below a substantial limit are exempted from payment of taxes. The additional income
generated from the higher income group is re-distributed by the government in the form of subsidies to the poor sections of the
society, to ensure the objective of welfare. LPG subsidy is a good example of such redistribution of income.
34. One of the primary purposes of budgeting is to provide control over the revenues and expenditures of the government. The
importance of government budget are as follows:
i. It reflects the Fiscal policy that is the expenditure and receipts of the government. It is a part of overall economic and social
policy of the government.
ii. It shows how much and on what items government is going to get money (mainly out of taxation) to finance its expenditure.
35. Fiscal deficit refers to the excess of total expenditure over total receipts. During the given fiscal year. Implications : 1. Debt Trap :
Fiscal deficit indicates the total borrowing requirements of the government. Borrowings not only involve repayment of principal
amount, but also require payment of interest. Interest payments increase the revenue expenditure, which leads to revenue deficit. It
creates a vicious circle of fiscal deficit and revenue deficit, wherein government takes more loans to repay the earlier loans. As a
result, country is caught in a debt trap. 2. Inflation : Government mainly borrows from Reserve Bank of India (RBI) to meet its

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 fiscal deficit. RBI prints new currency to meet the deficit requirements. It increases the money supply in the economy and creates
inflationary pressure. (ii) By paying our taxes regularly. (iii) Expenditure on education and social sector. (iv) It is a capital
expenditure as it will cause a reduction in the labilities of the government.
36. i. We know that Revenue Deficit = Revenue Expenditure - Revenue Receipts = 100 - 80 = Rs. 20 Arab.
ii. Fiscal Deficit = (Revenue Expenditure + Capital Expenditure) - (Revenue Receipt + Capital Receipt Net of Borrowing) = (100
+ 110) - (80 + 95) = 210 - 175 = Rs. 35 Arab.
iii. Primary Deficit = Fiscal Deficit - Interest Payments. Here Fiscal Deficit is equal to 35 Arab and Interest Payments are equal to
10, therefore Primary Deficit = 35 - 10 = 15 Arab.
37. The deficit in budget can be beneficial for the economy if the borrowing so made under such situation is used to finance the
capital spending that would further lead to increase in stock of national assets. For example, expenditure incurred on health and
education would lead to rise in productivity of labour and would have qa positive impact on employment avenues. All the benefits
of the expenditure so incurred can be easily ascertained with the help of cost benefit analysis. So, we can say that deficit in budget
can be beneficial for the economy if the money so raised by the government is spent wisely.
38. An indirect tax refers to a tax that is paid by the persons other than the persons on whom it is imposed. The burden of an indirect
tax can be shifted to others. The body that collects the tax will then remit it to the Government. Following are four examples of
indirect tax:
i. Sales tax

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ii. Excise duties
iii. Custom duties

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iv. Service tax
39. Yes, a large fiscal deficit will leads to a higher revenue deficit in the future.
Reason for this: DO
A large fiscal deficit means large amount of borrowings. This creates a large burden of repayment of loans in future and interest
payments. More interest payments will increase revenue expenditure. Hence, revenue deficit in future will increase.
40. A person claims that he should be exempted from tax payment as he does not use any government services in general. No, as tax
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is a compulsory payment that each capable person must pay, without expecting any benefit to be received in return from
government. Hence the person has to pay tax (if capable of, based on income level) regardless of the fact that whether be is using
the government services or not.
41. Differences between revenue expenditure and capital expenditure are
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Basis Revenue Expenditure Capital Expenditure

Capital expenditure is the expenditure of

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An expenditure that neither creates assets nor reduces a liability is government which leads to an increase in
Meaning
categorised as revenue expenditure. government assets or reduction in
government liabilities.
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The purpose of such expenditure is not to build up any capital asset, Capital expenditure is spent on acquisition
Purpose but to ensure normal functioning of government machinery and to of assets, repayment of borrowings and
provide various provisions for social welfare. granting of loans and advances.

Expenditure on old age pensions, expense on administrative services,

Expenditure on the construction of national
expense on national security, expense on health and education,
Example highways, re-payment of government loans,
expenditure on salaries of government employees, expenditure on rural
establishment of factories etc.
development etc.
42. Loan granted by the Central Government to a State Government is a capital expenditure, as it creates assets for the Central
Government in the form a source of regular income. However, grants given to the State Government is a revenue expenditure as it
neither reduces liabilities nor creates assets.
43. Revenue deficit is concerned with the revenue expenditures and revenue receipts of the government. It refers to an excess of
revenue expenditure over revenue receipts during the given fiscal year.
Revenue Deficit = Revenue Expenditure – Revenue Receipts
Revenue deficit signifies that government’s own revenue is insufficient to meet the expenditures on the normal functioning of
government departments and provisions for various services.
Implications of revenue deficit are as follows:

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 i. High revenue deficit shows accumulated and recurring expenses of government such as expenses on defence, payment of
interest etc.
ii. The revenue deficit is managed by borrowing or by disinvestment. Hence, high revenue deficit either increases government
liability or reduces government assets.
iii. High revenue deficit leads to an inflationary situation in the economy, as high government expenditure increases the aggregate
demand of the economy.
iv. High revenue deficit implies a high future burden of loan and interest payments on the government.
44. i. Recovery of loans: It is a capital receipt because it causes a reduction in assets. It is not of recurring nature.
ii. Corporation tax: It is a revenue receipt because it neither creates liability nor leads to a reduction in assets.
iii. Dividends on investment made by government: It is a revenue receipt, as it does not add to liability or reduction in assets.
iv. Sale of public sector undertaking: It is a capital receipt as it involves a reduction in assets.
45. India is suffering from the problem of fiscal deficit for the last many years. Two measures to deal with the problem of fiscal deficit
are:
i. The curtailment of capital expenditure which is measured in projects of capital formation and other developmental activities.
ii. To raise revenue receipts by mobilising resources through taxation.
46. Subsidies are treated as revenue expenditure by the government because of this expenditure:
i. does not reduce the liability of the government.

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ii. does not add to the assets of the govt.
47. Revenue deficit: When the revenue receipts are less than the revenue expenditures in a government budget, this shortfall is
termed as revenue deficit. Revenue Deficit = Revenue Expenditure - Revenue Receipts
Fiscal deficit: Fiscal deficit in the budget is an important measure of deficit. IMF and World Bank generally prescribe targets for
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the budget deficit in terms of fiscal deficit. The Fiscal deficit is the difference between the government's total expenditure and
total receipts excluding borrowings. Fiscal Deficit = Total Budget Expenditure - Total Budget Receipts ( Excluding borrowings )
or Fiscal Deficit = Borrowings.
Primary deficit: The difference between fiscal deficit and interest payment is known as primary deficit. Primary Deficit = Fiscal
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Deficit - Interest Payments. Interest Payments on public debt are transfer payments made by the government.
48. The objective was not to only earn revenue for the government.
Both the proposals put by the Finance Minister have the objective of promotion of social welfare:
i. The proposal of raising the excise duty on cigarettes aims to reduce the consumption of cigarettes which is harmful to the
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health of smokers as well as non-smokers. Raising of excise duty on cigarettes will increase the price of cigarettes resulting in
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lesser consumption.
ii. The proposal to increase income tax on individuals earning more than ₹ one crore per annum aims to reduce inequality of
income in the society and to generate resources for the welfare of poor people.
49. Government budget can be used as an effective tool in the process of employment generation in various ways. Some of such ways
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are : Investment in infrastructural projects like construction of flyovers, bridges, expansion of roads etc. creates jobs for different
sections of the workforce. In rural/urban areas, government can provide jobs through various employment generation schemes like
MGNREGA, SJSRY, PMRY etc.
50. A tax is a compulsory payment to the government by the households, firms or other institutional units. We should pay taxes
because these are the main sources of revenue of the government and the revenue of the government is used for public welfare.
People can be encouraged to pay more taxes :
i. By making the tax procedure simplified.
ii. By lowering the rate of tax.
51. Lack (non maintenance) of fiscal discipline in an economy is a cause of excess money supply. In other words, it leads to increase
in money supply more than the level of production in an economy. It creates a situation in the economy where price rises is
followed by wages, again price rises and the process goes on. Also, high production cost and low Aggregate Demand causes fall
in the capital formation in the economy.

52. Reducing inequalities in income and wealth, one of the objectives of government budget:

Economic inequality is an inherent part of every economic system. Government aims to reduce such inequalities of income and
wealth, through its budgetary policy. Government aims to influence the distribution of income by imposing taxes on the rich and
spending more on the welfare of the poor. It will reduce the income of the rich and raise the standard of living of the poor, thus
reducing inequalities in the distribution of income.

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53. Following measures may be taken to reduce revenue deficit:
i. Raising more tax revenue- The government should rely on progressive rates of direct taxes. Direct taxes are more productive
because its cost of collection is quite lower. Taxes should be levied in such a manner that people should spend less.
ii. Reduction in revenue expenditure- The government should cut down its expenditure on non productive activities such as
law and order. The government should make its activities more efficient through better planning.
iii. Disinvestment- by way of selling its ownership of public enterprises.
54. Capital budget deficit refers to the situation in which capital expenditure exceed capital receipts. To reduce this gulf (deficit),
government may resort to the disinvestment (i.e. reduction in assets).
55. Through its Budgetary policy the government directs the allocation of resources in a manner such that there is a balance between
the goal of profit maximisation and social welfare. Government can provide subsidy and reduction in tax rate to motivate
investment into areas where private sector initiative is not coming.The government allocates the resources in accordance with the
social and economic priorities of the country. Government encourages the production of certain commodities by giving tax reliefs
and providing necessary infrastructural requirements. On the other hand, it discourages production of hazardous and harmful
goods by imposing heavy taxes, e.g. government imposes tax on liquors and cigarettes.
56. Primary deficit: Primary deficit is equal to fiscal deficit less of interest payments.
Primary Deficit = Fiscal Deficit - Interest Payments
Implications of primary deficit are as follows:

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i. It indicates borrowing requirements of the government to meet fiscal deficit net of interest payments.
ii. It enables us to see the way, the government is currently conducting its financial affairs.

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57. i. Price- A modem state undertakes commercial activities very much akin to those of the private enterprises. The revenue
received by the government from the sale of goods and services by the public enterprises is called price. The payments for the
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services of railways, post and telegraph, electricity, etc. are included in this category.
ii. Gifts and grants- Gifts and grants are not a regular source of revenue. Gifts and grants are voluntary contributions from
private individuals or international agencies for specific purposes such as relief funds, etc. It is very common for the people to
offer donations and grants to the government when there are natural calamities like earthquake, floods and famines.
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iii. Escheat- Under the rights of escheat, the state may acquire the properties of a person who dies without any legal heirs or
claimants. Again, this amount forms an insignificant part of the total revenue of the state.
58. i. Personal income tax is a direct tax because it falls directly on individuals. Its impact (liability to pay) and incidence (actual
burden) falls on the same person, i.e., its burden cannot be shifted.
ii. Goods and service tax is an indirect tax because its impact (liability to pay) and incidence (actual burden) lie on different
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persons, i.e., payer and bearer of the tax are different people.
iii. Corporate tax is a direct tax because it falls directly on firms. Its impact (liability to pay) and incidence (actual burden) falls on
the same person, i.e., its burden cannot be shifted.
59. Fiscal deficit = Revenue deficit + Capital expenditure - Non-debt creating capital receipts
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= 40 + 220 - 190 = ₹ 70 arab

Therefore, Primary deficit = Fiscal deficit - Interest payments = 70 - 20 = ₹ 50 arab
primary deficit is Rs.50 arab
60. Revenue Deficit = Revenue Expenditure - Revenue Receipts = [(i) + (iii)] - [(ii) + (iv)]
= (1,070 + 2,630) - (1200 + 2000)
= 3700 - 3200 = ₹ 500 crores
Fiscal Deficit = Revenue Deficit + Capital Expenditure - Non-debt creating capital receipts
= Revenue Deficit + (vi) - [(v) + (vii)]
= 500 + 500 - (145 + 120) = 1000 - 265 = ₹ 735 crores
Thus revenue deficit is Rs.500 crores and fiscal deficit is Rs.735 crores
61. Revenue expenditure is that expenditure that neither creates any assets nor cause reduction of liability. Aids given to states and
others is an example of revenue expenditure. Capital expenditure is that expenditure of the government which either creates
physical or financial assets or reduction of its liability. Acquisition of assets like land, machinery, equipment, its loans and
advances to state governments etc. are its examples.
62. The basis of classifying government receipts into capital and revenue receipts is 'reduction in assets' or 'increase in liabilities'. The
receipts which reduce the assets of the government or increase its liabilities are referred to as capital receipts, on the other hand,
the receipts which neither reduce government's assets nor increase its liabilities are revenue receipts.
Borrowings by the government increase the liability of the government, therefore these are capital receipts because we know that
all those items which increase the liability to the government are capital receipts.

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63. i. Revenue Deficit:
Revenue deficit = Revenue expenditure - Revenue receipts
Revenue expenditure = 10
Revenue receipts = 80
Revenue Deficit = 100 - 80 = Rs 20 arab
ii. Fiscal deficit:
Fiscal deficit = Revenue Expenditure + Capital Expenditure - Revenue Receipts - Capital Receipts net of Borrowings
= 100 + 110 - 80 - 95 = Rs 35 arab
iii. Primary Deficit:
Primary deficit = Fiscal deficit - Interest payment
= 35 - 10 = Rs 25 arab.
64. i. Expenditure on scholarships is a revenue expenditure because it neither leads to a decrease in liabilities nor leads to an
increase in assets.
ii. Expenditure on building a bridge increases the assets of the country therefore it is a capital expenditure.

65. Revenue Receipts Capital Receipts

1. The receipts which neither create any liability for 1. The receipts which create liability for the Government or which
government nor any reduction in the assets, are termed as lead to the reduction of the assets of the government are termed as

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revenue receipts. capital receipts.

2. These receipts are recurring in nature. 2. These receipts are non-recurring in nature.

3. Example : Tax receipts. 3. Example : Loan by Government.

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66. Government budget is a statement showing estimated receipts and expenditure of the government during a financial year.
i. Revenue deficit means a situation where the total revenue expenditure of the government exceeds its total revenue receipts.
Thus,
Revenue deficit = Total revenue expenditure - Total revenue receipts
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ii. A fiscal deficit may be defined as a situation where the total expenditure of the government is more than its sum total of
revenue receipts and non-debt capital receipts. It is equal to Borrowings. Thus,
Fiscal deficit = Total expenditure - Total revenue receipts - Non-debt capital receipts
67. i. Recovery of loans will lead to the decline in financial assets of the government therefore it is a capital receipt as capital
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receipts always lead to the decline in financial assets of the government.

ii. On the other hand, interest received on loans is revenue receipts as they neither create any liability nor any reduction in assets
of the government.
68. a. Receipts from sale of shares of public sector undertaking is a capital receipt because it results in a reduction of assets.
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b. Borrowing from public is a capital receipt because borrowing creates a liability.

c. Profits of public sector undertaking is a revenue receipt because it neither creates a liability nor reduces any asset.
d. Income tax received by the government is a revenue receipt as it neither creates a liability nor reduces any asset.
69. i. Wealth tax: It is a kind of direct tax as it is paid by the same person on which it is levied or imposed, i.e. burden of this tax is
not possible to shift to the other person.
ii. Value added tax: Value added tax is imposed on one person and its burden shifts to another person therefore it is an indirect
tax because in case of indirect taxes burden is shifted to another person.
70. Progressive tax structure can help in reducing inequality of income. Progressive tax system is the one which puts greater burden
on higher income group and lesser burden on lower income group. In other words, the rate of tax increases with increase in
income. It is an effective tool to reduce inequality as lower income groups are required to pay less tax and vice-versa.
71. Capital receipts refer to the government receipts which either create a liability for the government or cause a reduction in its
assets.
Following are the characteristics of capital receipts:
i. Capital receipts are the receipts of non-recurring nature.
ii. The purpose of capital receipts is to create liability or to reduce financial assets.
iii. Capital receipts include non-tax receipts only.
Following are the examples of capital receipts:
i. Loan from public

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 ii. Foreign Debt
72. Revenue receipts: The receipts of the government which neither create any corresponding liability to the government nor do they
create any reduction in assets are termed as revenue receipts, e.g. tax receipts of the government, sale proceeds of goods, interest
received etc.
Capital expenditure: The expenditure of the government which leads to an increase in government assets or reduction in
government liabilities is termed as capital expenditure. Capital expenditures include large purchases of fixed assets that can be
used for a longer duration. e.g. expenses on the construction of national highways, dams and re-payment of loans etc.
73. Revenue expenditure: The expenditure of the government which neither cause an increase in the government assets nor cause
any reduction in government liabilities are termed as revenue expenditures, e.g. salaries of government employees, interest
payment on loans taken by the government, pensions, subsidies, grants, rural development, education and health services, etc.
Capital receipts: The receipts which create corresponding liability for the government or lead to a reduction in assets of the
government are termed as capital receipts, eg. disinvestment of PSUs.
74. i. We know that Revenue Deficit = Revenue Expenditure - (Tax Revenue + Non-tax Revenue), here Revenue Deficit = 80 - [47
+ 10] = 80 - 57 = Rs. 23 Arab.
ii. Fiscal Deficit = Borrowings Borrowings = Rs. 32 Arab
therefore Fiscal Deficit = Rs. 32 Arab.
iii. Primary Deficit = Fiscal Deficit - Interest Payments. Fiscal Deficit = 32, Interest Payments = 20 Therefore Primary Deficit =

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32 - 20 = 12 Arabs.
75. Capital expenditure means the expenditure which leads to the creation of financial assets or reduction of liabilities.

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Following are the characteristics of capital expenditures:
i. Capital expenditures are the expenditures of non-recurring nature.
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ii. Its purpose is to add capital stock of the economy and to raise production capacity.
Its examples are as under:
i. Expenditure on land and building
ii. Purchase of shares
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