The government budget is an annual statement showing item-wise estimates of receipts and expenditures during a fiscal year. Here are the government budget class 12 notes.
Topics Discussed
Components of Budget
There are two components of a budget namely budget receipts and budget expenditures which are as follows:
Budget Receipts
Budget receipts refer to the estimated money receipts of the government from all sources during a given fiscal year.
They are further classified as:
a) Revenue receipts
b) Capital receipts
Difference between Revenue and Capital Receipts
| Basis | Revenue Receipts | Capital Receipts |
| Meaning | They neither create any liability nor reduce any assets of the government. | They either create any liability or reduce any assets of the government. |
| Nature | Recurring or regular in nature. | They are irregular or non-recurring in nature. |
| Future Obligation | There is no future obligation to return the amount. | In the case of certain capital receipts(borrowings), there is a future obligation to return the amount along with interest on borrowings, recovery of loans, etc. |
| Example | Tax revenue like income tax, and GST. Non-tax revenue like fees, fines, penalties, etc. | Borrowings, recovery of loans, etc. |
Sources of Revenue Receipts
There are 2 sources of Revenue Receipts:
1) Tax Revenue
2) Non-Tax Revenue
Tax Revenue
It refers to the total of receipts from taxes & other duties imposed by the government.
Note: A tax is a compulsory payment made by people & companies to the government without any reference to any direct benefit in return.
There are two types of tax:
a) Direct Tax
b) Indirect Tax
Difference between Direct and Indirect Tax
| Basis | Direct Taxes | Indirect Taxes |
| Meaning | It refers to the taxes that are imposed on the income and property of individuals & companies which are directly paid to the govt. | It refers to those taxes which affect the income & property of individual & companies through their consumption expenditure. |
| Impact | Direct taxes are levied on the income & property of individuals & companies. | These are levied on goods & services. |
| Shift of Burden | The burden of direct tax cannot be shifted. | The burden of indirect taxes can be shifted. |
| Nature | These are generally progressive in nature. | These are generally proportional in nature. |
| Coverage | Direct taxes have limited reach as they do not reach all the sections of the society. | They have wide coverage as they reach all the sections of the society. |
| Example | Income tax, wealth tax. | GST. |
Non-Tax Revenue
These are those receipts that the government receives from all the sources other than tax receipts.
Sources of non-tax revenue are:
- Interest: The government receives interest on loans given by it to the state government, union territories, etc.
- Profit & Dividends: The government earns profit through PSU(Public sector undertakings) like Railway, LIC, etc.
- Fees: The government imposes various charges to cover the cost of recurring services provided by it for example- court fees, registration fees, etc.
- Escheats: It refers to the claim of the government on the property of a person who dies without living behind any legal heir or a will.
- Forfeitures: These are the forms of penalties that the court imposes for non-compliance with orders.
Capital Receipts
Capital receipts are those receipts that either create any liability or reduce the assets of the government.
Sources of Capital Receipts
1) Borrowings
Borrowings are the funds raised by the government to meet excess expenditure. The government borrows funds from the open market, RBI, foreign government, etc.
2) Recovery of Loans
The government grants various loans to state governments or union territories. Recovery of such loans is a capital receipt as it reduces the assets of the government.
3) Other Receipts
These include disinvestment and small savings.
- Disinvestment: It refers to the act of selling a part or whole of shares of a selected PSU held by the government.
- Small Savings: These refer to funds raised from the public in the form of post office deposits, kisan vikas patra, etc.
Budget Expenditures
Budget expenditure refers to the estimated expenditures of the government from every place during a given fiscal year.
They are further classified as:
a) Revenue expenditures
b) Capital expenditures
Difference between Revenue Expenditure and Capital Expenditure
| Basis | Revenue Expenditure | Capital Expenditure |
| Meaning | It is an expenditure that neither creates any assets nor reduces any liability of the government. | It is an expenditure that either creates any asset or reduces any liability of the government. |
| Nature | It is of recurring in nature. | It is non-recurring in nature. |
| Purpose | It is incurred for the normal running of government departments & provision of various services. | It is incurred for the acquisition of assets & repayment of borrowings. |
| Example | Salary, pension, interest, etc. | Repayment of borrowings, expenditure on acquisition of capital assets, etc. |
Types of Budgets
There are 3 types of government budgets:
- Balanced Budget: When estimated government receipts are equal to government expenditure.
- Surplus Budget: If estimated government receipts are more than estimated government expenditure.
- Deficit Budget: If estimated government receipts are less than estimated government expenditures.
Budgetary Deficit
It is defined as an excess of total estimated expenditure over total estimated revenue.
Concerning the budget of the Indian government, the budgetary deficit can be of three types:
1) Revenue Deficit
2) Fiscal Deficit
3) Primary Deficit
Revenue Deficit
It refers to excess revenue expenditure over revenue receipts during the given fiscal year.
Revenue deficit = Revenue expenditures-Revenue receipts
A revenue deficit signifies that the government’s revenue is not sufficient to meet the expenditures on normal functioning government departments & provision for various services.
Implications of Revenue Deficit
- It indicates the inability of the govt. to meet its regular & recurring expenditure in the proposed budget.
- It implies that govt. is dissaving i.e, govt. is using up the savings to finance its consumption expenditure.
- It also implies the govt. has to make up this deficit from capital receipts i.e., through borrowings or disinvestment.
- A high revenue deficit gives a warning signal to the govt. to either curtail its expenditures or increase its revenue.
- The use of capital receipts to meet the extra consumption expenditure leads to an inflationary situation in the economy.
Measures to Reduce Revenue Deficit
- Reduce Expenditure: The government should take steps to reduce its expenditure & avoid unproductive or unnecessary expenditure.
- Increase Revenue: Govt. should increase its receipts from various sources of tax & non-tax revenue.
Aggregate demand and related aggregate class 12 notes
Fiscal Deficit
Fiscal deficit refers to the excess of total expenditure over total receipts (excluding borrowings) during the given fiscal year.
Fiscal deficit = Total expenditure – Total Receipts (except borrowings)
The extent of the fiscal deficit is an indication of how far the government is spending beyond its means.
Implications of Fiscal Deficit
- Debt Trap: Fiscal deficit indicates the total borrowing requirements of the govt. 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 cycle of fiscal deficit & revenue deficit wherein govt. takes more loans to repay earlier loans.
As a result, the country is caught in a debt trap. - Foreign dependence: The government also borrows from the rest of the world which raises its dependence on other countries.
- Inflation: Govt. mainly borrows from RBI to meet its fiscal deficit. To meet the deficit requirements, RBI prints new currency which raises the money supply in the economy & creates inflationary pressures.
Sources of Financing Fiscal Deficit
- Borrowings: Fiscal deficit can be met by borrowings from internal sources (public, commercial banks) or external sources (foreign govt.).
- Deficit Financing: The government may borrow from RBI against its securities to meet the fiscal deficit.
RBI issues new currency for this purpose. This process is known as deficit financing.
Primary Deficit
It refers to the difference between the fiscal deficit of the current year & interest payments on the previous borrowings.
Primary deficit = Fiscal deficit-Interest
Implications of Primary Deficit
- It indicates how much of the govt. borrowings are going to meet expenses other than interest payments.
- The difference between fiscal & primary deficit shows the amount of interest payment.
- Zero primary deficit indicates that interest commitments have forced the govt. to borrow.
Note: Primary deficit is the main cause of fiscal deficit because, in India, interest payments have increased in recent years.
High interest payments on past borrowings have greatly increased the fiscal deficit.
To reduce the fiscal deficit, interest payments should be reduced through repayment of loans as early as possible.
Objectives of the Government Budget
1) Reallocation of Resources
Through the budgetary policy the govt. aims to reallocate the resources by the economic (profit maximization) & social (public welfare) priorities of the country.
Govt. can influence the allocation of resources through:
- Tax concession & subsidies: To encourage investment govt. can give tax concessions & subsidies to the producers. On the other hand, heavy taxes can be imposed on the production of harmful consumption goods like cigarettes, alcohol, etc.
- Directly producing goods & services: If the private sector does not take interest, govt. can directly undertake the production.
2) Reducing Inequalities of Income & Wealth
Economic inequality is an inherent part of every economic system. Govt. aims to reduce such inequalities of income & wealth through its budgetary policy.
The govt. aims to influence the distribution of income by imposing taxes on the rich and spending more on the welfare of the poor.
3) Economic Stability
The government budget is used to prevent business fluctuation of inflation or deflation to achieve the objective of economic stability.
- In case of inflation, govt. can bring down aggregate demand by reducing its expenditure.
- During deflation, govt. can increase its expenditure & give tax concessions & subsidies.
4) Reducing Regional Disparities
The government budget aims to reduce regional disparities through its taxation & expenditure policy for encouraging & setting up production units in economically backward areas.
5) Economic Growth
Economic growth implies a sustainable increase in the real GDP of the economy i.e. an increase in the volume of goods & services produced in an economy.
- If the govt. provides tax benefits for productive ventures, it can stimulate savings & investments in the economy.
- Spending on the infrastructure of the economy enhances the production activity in different sectors of an economy.
All Formulas
- Revenue Deficit = Revenue Expenditures-Revenue Receipts
- Fiscal Deficit = Total Expenditure – Total Receipts(except borrowings)
- Fiscal Deficit = Revenue Deficit + Capital Expenditure – Capital Receipts (Excluding Borrowings)
- Fiscal Deficit = Budgetary Deficit + Borrowings
- Primary Deficit = Fiscal Deficit – Interest Payments
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