Govt Budget & the Economy class 12 .pptx

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1. UNIT VIII : Government Budget And the Economy (Marks : 06) Ms S Chattopadhyay PGT Economics KV Ballygunge

2. Govt Budget & its Components Government Budget is an annual statement showing item wise estimates of receipts and expected expenditure of Government during a fiscal year. Two components : A. Revenue Budget and B. Capital Budget

3. Receipts Either Increases Liability OR Reduces assets …. Capital receipt Neither increases liability nor reduces assets … Revenue receipt

4. Revenue Receipt & its sources Revenue Receipt : The receipt which neither creates any liability nor causes reduction in the assets of the government is called revenue receipt. Two sources of revenue receipts : A. Tax revenue such as income tax, corporation tax, sales tax, custom duty etc. B. Non-tax revenue such as interest , dividend, external grants, fees, fines, escheats etc.

5. Tax & Its type Tax : Tax is a legally compulsory payment imposed by the government on the households and producers. Types : A. Direct Tax B. Indirect Tax

6. Direct & Indirect Tax Basis Direct Tax Indirect Tax Impact Taxes are levied on individuals & companies. Taxes are levied on goods & services. Shift of burden The burden of tax cannot be shifted i.e. impact & incidence are on the same person. The burden of tax can be shifted i.e. the impact & incidence are on different persons. Nature Generally progressive in nature Generally proportional in nature Coverage Limited coverage as they do not reach all sections of the society. Wide coverage as they reach all sections of the economy. Example Income tax, Corporation tax, Wealth tax etc. Sales tax, Excise duty, Custom duty, GST etc.

7. Capital Receipt & its components Capital Receipt : The receipt which either creates a liability or causes reduction in the asset of the government is called Capital receipt. Components of Capital Receipt : A. Recovery of loan ( as it reduces asset ) B. Borrowings ( as it increases liability ) C. Disinvestments ( as it reduces assets )

8. Revenue receipts vs Capital receipts Revenue receipts Capital receipts 1. Neither create liability nor lead to reduction in assets of the government. 1. Either create a liability for the government or reduces the assets of the government. 2. Receipts are regular & recurring in nature. 2. Receipts are generally non recurring in nature. 3 . Ex . Tax revenue such as Income tax etc and Non-tax revenue such as interest, fees, fines etc. 3. Ex. Public borrowing, recovery of loan, disinvestment etc.

9. Expenditure Either Reduces liability OR Increases assets …. Capital expenditure Neither Reduces liability nor Increases assets … Revenue expenditure

10. Revenue Expenditure Revenue Expenditure : Revenue expenditure refers to the expenditure which neither reduces the liability nor creates any asset of the government. Examples of Revenue expenditure : Payments of salaries, pensions, subsidies, payments of grants etc.

11. Capital Expenditure Capital Expenditure : Capital Expenditure is defined as the expenditure which either reduces the liability or creates an asset of the government. Examples of Capital expenditure : Loan, repayment of borrowings, expenditure of building roads, flyovers etc.

12. Revenue Expenditure vs Capital Expenditure Revenue Expenditure Capital Expenditure 1. Rev. expenditure neither creates any asset nor causes reduction in the liability of the government. 1. Cap. expenditure either creates an asset or causes reduction in liability of the government. 2. It is incurred on normal functioning of the government departments. 2. It is incurred on acquisition of assets, granting of loans, repayments of borrowings etc. 3. Ex. Payment of salaries, pension, interest payments etc. 3. Ex. Loan, expenditure for construction work etc.

13. Budget deficit Budget deficit : Budget deficit is the excess of total expenditures over total receipts of the government in a year. Budget deficit = Total Expenditure – Total Receipts. Revenue Deficit : Revenue deficit refers to excess of revenue expenditures over revenue receipts. Revenue Deficit = Revenue Expenditure – Revenue Receipt Fiscal Deficit : Fiscal deficit refers to the excess of total expenditure over total receipts excluding borrowing. Fiscal Deficit = Total Expenditure – Total Receipt excluding borrowing. Primary Deficit : Primary deficit refers to the difference between fiscal deficit and interest payments. Primary Deficit = Fiscal Deficit – Interest Payments .

14. Financing deficit .. The deficit in the budget can be financed by :- Monetary expansion – This amounts to printing of currency notes to the extent of deficit. Borrowing from the public – The government may raise loan from general public by issuing bonds of various types. Disinvestment – The govt may sale its existing shares in public sector or joint sector enterprises. Deficit financing is a process of financing the deficit in the budget by printing notes, public borrowing, issue of shares etc.

15. Objects of Government Budget Re-allocation of resources with a view to maximize social welfare. Re-distribution of income & wealth to reduce economic inequality through subsidy, taxation policy etc. Stabilization of economic activities & reduction in business fluctuation through revenue and expenditure policy. Management of public enterprises for the social welfare of the people & development of economic and social infrastructures .

16. Use of budgetary policy for allocation of resources in the economy The government of a country through its budgetary policy directs the allocation of resources in such a manner that there is a balance between the goals of profit maximization and social welfare. Production of goods which are injurious to health is discouraged through heavy taxation . On the other hand, production of socially useful goods is encouraged through subsidies .

17. Use of budgetary policy for economic stability in the economy Economic stability means controlling of inflationary and deflationary situation in the economy. The budget can be used as an important instrument to combat this situation. During the time of inflation the government should increase the direct tax as well as reduce unproductive expenditure. Similarly , during the time of deflation the government should design its policy in such a way that production and income in the economy be increased.

18. Use of budgetary policy in reducing inequality in income & wealth Government budgetary policy can help in reducing inequality in income through redistributing income & wealth in the economy. To achieve this objective, the government uses the fiscal instruments of taxation & subsidies . By imposing taxes on rich and giving subsidy to the poor, government redistributes income in the society. Equitable distribution of income and wealth is a sign of social justice which is achieved through government budget