We have given these Economics Class 12 Important Questions Macroeconomics Chapter 5 Government Budget and the Economy to solve different types of questions in the exam. Go through these Government Budget and the Economy Class 12 Important Questions and Answers Solutions & Previous Year Questions to score good marks in the board examination.
Important Questions of Government Budget and the Economy Class 12 Macroeconomics Chapter 5
Question 1.
What do you mean by direct tax? (All India 2019)
Or
What is a direct tax? (Delhi (C) 2014)
Or
Define a direct tax. (All India 2012)
Answer:
Direct taxes are those taxes for which the incidence and impact of tax falls on the same person, i.e. actual burden of these taxes cannot be shifted, e.g. income tax, corporation tax etc.
Question 2.
State any two examples of non-tax revenue receipts of the government. (All India 2019)
Or
Give two examples of non-tax revenue receipts. (All India (C) 2014)
Or
State any two sources of non-tax revenue receipts. (Delhi (C) 2011)
Answer:
Two sources of non-tax revenue receipts are
- Fees
- Grants/donations
Question 3.
What do you mean by an indirect tax? (All India 2019)
Or
Define an indirect tax. (All India (C) 2014)
Answer:
An indirect tax is one in which the burden of the tax can be shifted to another person.
Question 4.
Define the term ‘tax’. (Delhi 2019)
Or
What is a tax? (All India (C) 2014; Delhi (C) 2012)
Or
Define tax. (Delhi 2012: All India 2010)
Answer:
Tax is a compulsory payment made by an individual, household or a firm to the government without reference to anything in return.
Question 5.
Define government budget. (All India (C) 2017,2014; Delhi 2014)
Or
What is government budget? (Delhi 2014,2013, All India (C) 2012)
Answer:
Government budget is a statement of expected receipts and expenditures of the government over the period of a financial year, i.e. from 1st April to 31st March.
Question 6.
What are revenue receipts in a government budget? (Delhi, All India 2016)
Or
Define revenue receipts in a government budget. (All India 2010)
Answer:
The receipts which neither create any corresponding liability for the government nor create any reduction in assets, are termed as revenue receipts, e.g. tax receipts of government.
Question 7.
What is revenue expenditure? (Delhi 2016)
Or
What is revenue expenditure in government budget? (Delhi (C) 2010)
Answer:
The expenditure of the government which neither cause any increase in the government assets nor cause any reduction in government liabilities, are termed as revenue expenditures, e.g. expenditure on old age pensions, salaries etc.
Question 8.
Give two examples of indirect taxes. (Delhi (C) 2014, 2013)
Answer:
Sales Tax and Value Added Tax
Question 9.
Give two examples of revenue expenditure. (All Indio (C) 2014)
Answer:
Salaries of government employees and administration expenses.
Question 10.
Give two examples of capital receipts in a government budget. (All India 2012)
Answer:
Two examples of capital receipts are
- Proceeds from disinvestment of public sector units.
- Loan from World Bank.
Question 11.
Give two examples of direct tax.AII India 2010
Answer:
Two examples of direct tax are
- Income tax
- Corporation tax
Question 12.
Define capital expenditure. (Delhi (C) 2010)
Answer:
The expenditure of the government which leads to an increase in government assets or reduction in government liabilities, is termed as capital expenditure, e.g. expenses on the construction of national highways, dams and re-payment of loans etc.
Question 13.
Explain the basis of classifying taxes into direct and indirect tax. Give examples. (Delhi 2017)
Or
Explain the basis of classifying taxes into direct and indirect tax. Give two examples of each. (All India (C) 2016)
Answer:
The basis of classifying taxes into direct and indirect taxes is ‘shifting the impact of tax’. Direct taxes are those taxes for which the incidence and impact of tax falls on the same person, i.e. actual burden of taxes cannot be shifted, e.g. income tax, corporation tax etc. Whereas indirect taxes are those taxes for which the incidence and impact fall on separate persons, i.e. burden of these taxes can be shifted to others, e.g. service tax, entertainment tax etc.
Question 14.
Distinguish between direct taxes and indirect taxes. Give an example of each. (All India 2017)
Or
Distinguish between direct tax and indirect tax. (All India 2011)
Or
Explain the distinction between direct tax and indirect tax. Give one example of each. (Delhi (C) 2012)
Answer:
Differences between direct tax and indirect tax are
| Basis | Direct Tax | Indirect Tax |
| Meaning | A direct tax is one in which the burden of tax cannot be shifted. | An indirect tax is one in which the burden of tax can be shifted. |
| Nature | Progressive nature | Regressive nature |
| Example | Income tax and corporation tax are examples of direct tax. | Value Added Tax and Goods and Service Tax are examples of indirect tax. |
Question 15.
Is the following a revenue receipt or a capital receipt in the context of government budget and why?
(i) Tax receipts
(ii) Disinvestment (All India 2014)
Answer:
(i) Tax receipts are revenue receipts for the government because neither they create a liability nor they lead to reduction in any assets.
(ii) Disinvestment refers to the withdrawal of existing investment, e.g. the government of ‘ India is undertaking disinvestment by selling its shares in Maruti Udyog Ltd. It is a capital receipt for the governments as it reduces the assets of the government.
Question 16.
Is the following revenue expenditure or capital expenditure in the context of government budget? Give reason.
(i) Expenditure on collection of taxes.
(ii) Expenditure on purchasing computers. (Delhi 2014)
Answer:
(i) Expenditure on collection of taxes is a revenue expenditure for the government as it neither adds to the assets nor reduces the liabilities.
(ii) Expenditure on purchasing computers is a capital expenditure for the government as it results in increase in assets.
Question 16.
Giving reason, state whether the following is a revenue expenditure or a capital expenditure in a government budget
(i) Expenditure on scholarships
(ii) Expenditure on building a bridge (Foreign 2014)
Answer:
(i) Expenditure on scholarships is a revenue expenditure because neither it leads to decrease in liabilities nor leads to an increase in assets.
(ii) Expenditure on building a bridge is a capital expenditure because it increases the assets of the country.
Question 17.
State three sources each of revenue receipts and capital receipts in government budget. (All India 2013)
Answer:
Sources of revenue receipts are
- Income from public enterprises
- Tax revenue
- Fees and fines
Sources of capital receipts are
- Recovery of loans
- Borrowings
- Disinvestment
Question 18.
Explain any one objective of government budget. (Delhi 2013)
Answer:
One of the objectives of government budget is ‘Generation of Employment’. Government takes steps to promote labour intensive technology, public works programme like construction of roads, dams, canals, bridges etc. to promote employment generation in the economy. Several programmes are initiated through budget to reduce the problem of poverty and unemployment. MNREGA is one such example.
Question 19.
Distinguish between revenue expenditure and capital expenditure in a government budget. Give an example of each. (Delhi 2013; All India 2013)
Or
Distinguish between revenue expenditure and capital expenditure in a budget. Give examples. (Delhi 2012)
Or
Distinguish between revenue expenditure and capital expenditure. (All India 2010)
Or
Distinguish between the following Revenue receipts and capital receipts.
Answer:
Differences between revenue expenditure and capital expenditure are
| Basis | Revenue Expenditure | Capital Expenditure |
| Meaning | Revenue expenditure is the expenditure of government which neither cause increase in government assets nor cause any reduction in government liabilities. | Capital expenditure is the expenditure of government which leads to increase in government assets or reduction in government liabilities. |
| Purpose | Revenue expenditure is spent on normal functioning of government departments and for providing various provisions for social welfare. | Capital expenditure is spent on acquisition of assets, re-payment of borrowings and granting of loans and advances. |
| Example | Expenditure on old age pensions, expense on administrative services, expense on national security, expense on health and education etc. | Expenditure on the construction of national highways, re-payment of government loans, establishment of factories etc. |
Question 20.
Distinguish between revenue receipts and capital receipts in a government budget. (All India 2013, Delhi (C) 2010)
Or
Distinguish between revenue receipts and capital receipts in a government budget. Give example in each case. (All India 2012)
Or
How are capital receipts different from revenue receipts? Discuss briefly. (Delhi 2019)
Or
Distinguish between revenue receipts and capital receipts. Give two examples of each. (All India 2011)
Answer:
Differences between revenue receipts and capital receipts are
| Basis | Revenue Receipts | Capital Receipts |
| Meaning | The receipts which neither create any corresponding liability for the government nor do they create any reduction in assets, are termed as revenue receipts. | The receipts which create corresponding liability for the government or which lead to reduction in assets of the government are termed as capital receipts. |
| Nature | Revenue receipts are recurring in nature. | Capital receipts are non-recurring in nature. |
| Example | Tax receipts and non-tax receipts, i.e. fees, grants, donations etc. | Loans taken by the government and disinvestment of PSUs etc. |
Question 21.
Explain the basis of classifying government receipts into revenue receipts and capital receipts. Which type of these receipts are ‘borrowings by government’ and why? (All India 2013)
Answer:
The basis of classifying government receipts into capital and revenue receipts is ‘reduction in assets’ or ‘increase in liabilities’.
The receipts which result in reducing the assets of the government or increasing its liabilities are referred to as capital receipts. The receipts which neither reduce government’s assets or increase it’s liabilities are revenue receipts. Borrowings by government are capital receipts as they increase the liability of the government.
Question 22.
State three objectives of a government budget. (Delhi (C) 2011)
Answer:
Objectives of a government budget are as follows
- Re-distribution of income and wealth.
- Re-allocation of resources.
- Economic stability.
Question 23.
On what basis is government expenditure classified into capital expenditure and revenue expenditure? Give an example of each. (Delhi (C) 2011)
Answer:
Government expenditures are aimed at providing benefits to the people and enhancing the development of the country. On the basis of causing a change in the assets and liabilities position of the country, these expenditures can be classified as
(i) 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, e.g. expenses on the construction of national highways, dams and re-payment of loans etc.
(ii) Revenue expenditure: The expenditure of the government which neither cause any increase in the government assets nor cause any reduction in government liabilities, are termed as revenue expenditures, e.g. expenditure on old age pensions, salaries etc. Payment of salaries to government employees is revenue expenditure as it neither results in increase in assets or reduction in liabilities.
Question 24.
Explain how the government can use the budgetary policy in reducing inequality of income in the economy? (All India 2019)
Answer:
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.
Government uses its financial tools of taxation and subsidies to enhance equal distribution of income and wealth. In order to ensure equity of income, progressive tax structure is followed in India, which imposes higher burden of taxes on higher income group and 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 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 re-distribution of income.
Question 25.
Discuss briefly the role of the government budget in influencing “allocation of resources” in the economy. (All India 2019)
Answer:
The government of a country, through its budgetary policy, directs the allocation of resources in a manner such that there is a balance between the goals of profit maximisation and social welfare by ensuring that there should be production of necessity goods as well .as comfort and luxury goods and the goods which cannot be provided through market mechanism e.g. roads, parks, street lights (public goods) etc are provided by the government.
So, the government levies tax on the richer sections of society. The money collected from taxes is spent on providing public goods and giving subsidies on necessary goods to the poorer section of society.
So, the government re-allocates resources by collecting taxes from the rich and giving subsidies to the poor, and tries to achieve equitable distribution of income.
Question 26.
(a) How are tax receipts different from non-tax receipts? Discuss briefly.
(b) State any two items of revenue expenditure in a Government budget. (Delhi 2019)
Answer:
(a) Differences between tax receipts and non-tax receipts are
| Basis | Tax Receipts | Non-tax Receipts |
| Nature | It is recurring in nautre. | It is non-recuring in nature. |
| Examples | Goods and Service | Registration fees, penalties and fines etc. |
(b) Two items of revenue expenditure in a government budget are as follows
- Salaries of government officials
- Expenditure on defence.
Question 27.
Explain the basis of classifying government expenditure into revenue and capital expenditures. (All India (C) 2012)
Answer:
The basis of classifying government expenditure into revenue and capital is as follows:
- If an expenditure results in increase in the value of assets or decrease in the value of liability, then it is classified as capital expenditure.
- If an expenditure results neither in increase in the value of assets, nor in decrease in the value of liability, then it is classified as revenue expenditure.
Question 28.
Classify the following receipts into revenue receipts and capital receipts. Give reasons in support of your answer.
(i) Recovery of loans.
(ii) Interest received on loans. (Delhi (C) 2012)
Answer:
(i) Recovery of loans is a capital receipt as it will lead to decline in financial assets of government.
(ii) On the other hand, interest received on loans are revenue receipts as they neither create liability nor any reduction in assets of the government.
Question 29.
Giving reasons, classify the following into direct and indirect tax. (Delhi 2010)
(i) Wealth tax
(ii) Value added tax
Answer:
(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 It is a kind of indirect tax as it is imposed on one person and its burden shifts to other person.
Question 30.
Explain the following objectives of government budget:
(a) Allocation of resources
(b) Reducing income inequalities (March 2018)
Answer:
(a) The government of a country, through its budgetary policy, directs the allocation of resources in a manner such that there is a balance between the goals of profit maximisation and social welfare by ensuring that there should be production of necessity goods as well .as comfort and luxury goods and the goods which cannot be provided through market mechanism e.g. roads, parks, street lights (public goods) etc are provided by the government.
So, the government levies tax on the richer sections of society. The money collected from taxes is spent on providing public goods and giving subsidies on necessary goods to the poorer section of society.
So, the government re-allocates resources by collecting taxes from the rich and giving subsidies to the poor, and tries to achieve equitable distribution of income.
(b) Reducing income inequalities 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.
Government uses its financial tools of taxation and subsidies to enhance equal distribution of income and wealth. In order to ensure equity of income, progressive tax structure is followed in India, which imposes higher burden of taxes on higher income group and 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 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 re-distribution of income.
Question 31.
What is government budget? Explain its major components. (April re-exam 2018)
Or
Explain the role of government budget in influencing allocation of resources. (All India 2016)
Answer:
Government budget is a financial statement of estimated receipts and expenditure of the government during a financial year (i.e. 1st April to 31st March).
Components of government budget:
1. Budget receipts It refers to estimated money receipts of the government from all sources during the fiscal year.
These are classified as
(i) Revenue receipts Government receipts which neither create liabilities nor reduce assets are known as revenue receipts. Constituents of revenue receipts
- Tax receipts, i.e. income tax, GST, etc.
- Non-tax receipts, i.e. fees, grants, fines, etc.
(ii) Capital receipts Government receipts which either create liabilities or reduce assets are called capital receipts.
Constituents of capital receipts
- Recovery of loan
- Borrowing
- Dis-investment
2. Budget payment/expenditure:
It refers to estimated expenditure of the government during the fiscal year.
These are classified as:
(i) Revenue expenditure Government expenditure which does not create assets or causes a reduction in liabilities, e.g. interest payment, defence purchases, subsidies, etc.
(ii) Capital expenditure Government’s expenditure which creates assets or causes a reduction in liabilities, e.g. purchase of machine, loans to state government, etc.
(iii) Plan and non-plan expenditure: Government’s expenditure can be planned or non-planned. These are as follows
- Planned expenditure Refers to the expenditure on planned programmes.
- Non-planned expenditure Refers to the expenditure which is not related to specific plan or programmes, e.g. relief funds given to rail accident victims.
Question 32.
Explain
(a) allocation of resources and
(b) economic stability as objectives of government budget. (April re-exam 2018)
Answer:
(a) The government of a country, through its budgetary policy, directs the allocation of resources in a manner such that there is a balance between the goals of profit maximisation and social welfare by ensuring that there should be production of necessity goods as well .as comfort and luxury goods and the goods which cannot be provided through market mechanism e.g. roads, parks, street lights (public goods) etc are provided by the government.
So, the government levies tax on the richer sections of society. The money collected from taxes is spent on providing public goods and giving subsidies on necessary goods to the poorer section of society.
So, the government re-allocates resources by collecting taxes from the rich and giving subsidies to the poor, and tries to achieve equitable distribution of income.
(b) Economic stability Government budget can be helpful in bringing economic stabilisation in the economy by checking inflationary and deflationary tendencies.
To curb the inflationary tendency, the government can prepare a surplus budget. Such a budget reduces the money supply in the economy. With a fall in the money supply, the purchasing power of people also fall, leading to a fall in the level of aggregate demand. As aggregate demand falls, the price level or the rate of inflation also falls. To curb the deflationary tendency, the government can prepare a deficit budget. Such a budget increases the money supply in the economy. With increase in money supply, the purchasing power of people also rise, leading to an increase in the level of aggregate demand. As aggregate demand rises, the price level also rises and rate of deflation begins to fall.
Question 33.
Define revenue receipts in a Government Budget. Explain how Government Budget can used to bring in price stability in the economy? (Delhi 2016)
Answer:
Receipts which do not create a liability for the government or do not lead to reduction in assets, are known as revenue receipts. Revenue receipts are receipts of the government which are non-redeemable, i.e. they cannot be re-claimed from the government. These are divided into tax and non-tax revenues
(i) Tax revenue It consists of the proceeds of taxes and other duties levied by the Central and the State Governments. Tax revenues comprise of direct taxes and indirect taxes.
(ii) Non-tax revenue Non-tax revenue of the government mainly consists of interest receipts on account of loans by the government, dividends and profits on investments made by the government, fees and other receipts for services rendered by the government. Grants-in-aid from foreign countries and international organisations are also a part of non-tax revenue.
The Government Budget is a statement of estimated receipts and expenditures of the government during the financial year. One of the objective of the Government Budget is to achieve ‘economic stability’. Government tries to establish economic stability by its budgetary policies related to income and expenditure. Economic stability refers to a situation without fluctuations in price levels and stability of exchange rate in an economy. Economic stability is achieved by protecting the economy from harmful effects of various trade cycles and its phases, i.e. boom, recession, depression and recovery.
Question 34.
What is government budget? Explain how taxes and subsidies can be used to influence allocation of resources? (Delhi 2016)
Answer:
Government budget is a statement of the estimates of the government’s expected receipts and government’s expected expenditure during the financial year or fiscal year which runs from 1st April to 31st March. One of the important objective of the government budget is ‘re-allocation of resources’.
Allocation of resources:
The government of a country, through its budgetary policy, directs the allocation of resources in a manner such that there is a balance between the goals of profit maximisation and social welfare by ensuring that there should be production of necessity goods as well .as comfort and luxury goods and the goods which cannot be provided through market mechanism e.g. roads, parks, street lights (public goods) etc are provided by the government.
So, the government levies tax on the richer sections of society. The money collected from taxes is spent on providing public goods and giving subsidies on necessary goods to the poorer section of society.
So, the government re-allocates resources by collecting taxes from the rich and giving subsidies to the poor, and tries to achieve equitable distribution of income.
Question 35.
What is the difference between revenue expenditure and capital expenditure? Explain how taxes and government expenditure can be used to influence distribution of income in the society? (All India 2016)
Answer:
Difference between revenue expenditure and capital expenditure:
| Basis | Revenue Expenditure | Capital Expenditure |
| Meaning | Revenue expenditure is the expenditure of government which neither cause increase in government assets nor cause any reduction in government liabilities. | Capital expenditure is the expenditure of government which leads to increase in government assets or reduction in government liabilities. |
| Purpose | Revenue expenditure is spent on normal functioning of government departments and for providing various provisions for social welfare. | Capital expenditure is spent on acquisition of assets, re-payment of borrowings and granting of loans and advances. |
| Example | Expenditure on old age pensions, expense on administrative services, expense on national security, expense on health and education etc. | Expenditure on the construction of national highways, re-payment of government loans, establishment of factories etc. |
Distribution of income in society:
Reducing income inequalities 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.
Government uses its financial tools of taxation and subsidies to enhance equal distribution of income and wealth. In order to ensure equity of income, progressive tax structure is followed in India, which imposes higher burden of taxes on higher income group and 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 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 re-distribution of income.
Question 36.
Explain the budgetary measures for achieving the following objectives
(i) Setting up of production units in backward regions.
(ii) Reducing inequalities of income and wealth. (Delhi 2016)
Answer:
(i) The possible budgetary incentives that a government might decide to give to investors for making investments in backward region are as follows:
(a) The government might give a tax-holiday for a stipulated period for such investors The reason behind this is that the incentive of tax-holiday might motivate the investors to invest in backward region.
(b) The government may offer subsidy on loans for such investors The provision of subsidy implies that the investors will not be required to pay back a certain percentage of the loan taken by them. This might induce them to invest.
(c) The government might waive-off the excise duty on goods manufactured by investors in these regions Excise duty is levied on goods manufactured or produced in India. Waiving of the excise duty will ensure that the price of the good is less and this will increase the demand for the good and ensure a ready market for the product. This will motivate the investors to invest in backward region.
(ii) For reducing inequalities of income and wealth, the government can initiate the following budgetary measures:
(a) High taxes on higher income: The government may levy higher taxes on people with higher incomes.
(b) Providing subsidies to lower income groups: To reduce inequalities, the government may provide subsidies on necessary consumption items to lower income groups.
(c) Improving social infrastructure: The government can increase it’s expenditure on social infrastructure, such as construction of schools and hospitals, so that the lower income group can avail of such facilities and improve their standard of living.
Question 37.
Classify the following taxes into direct and indirect tax. Give reasons for your answer.
(i) Corporation tax
(ii) Entertainment tax
(iii) Excise duty
(iv) Income tax (All India (C) 2016)
Answer:
(i) Corporation tax It is a direct tax as its impact and incidence is on the same person (Company).
(ii) Entertainment tax It is an indirect tax as its impact and incidence are on different people.
(iii) Excise duty It is an indirect tax as the burden of its payment can be shifted to another person.
(iv) Income tax It is a direct tax as its impact and incidence are on the same person.
Question 38.
Suppose you are a member of the “Advisory Committee of the Finance Minister of India”. The Finance Minister is concerned about the rising revenue deficit in the budget.
Suggest any one measure to control the rising revenue deficit of the government. (All India 2019)
Answer:
Measures to control revenue deficit are (any one)
- Increased emphasis on tax-based revenues and appropriate measures to reduce tax evasion.
- Disinvestment should be done where assets are not being used effectively.
Question 39.
What is meant by fiscal deficit? (Delhi 2019)
Or
What is fiscal deficit? (Delhi (c) 2017,2012)
Or
Define fiscal deficit. (All India 2016,2014)
Answer:
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
Question 40.
What is meant by primary deficit? (Delhi 2019)
Or
What is ‘primary deficit’? (Delhi (C) 2017,2012; Foreign 2014)
Or
How is primary deficit calculated? (Delhi (C) 2010)
Answer:
The difference between fiscal deficit and interest payment is known as primary deficit.
Primary Deficit = Fiscal Deficit – Interest Payments
Question 41.
What is ‘revenue deficit’? (Delhi 2017: All India 2013)
Or
What is meant by revenue deficit? (All India 2010)
Answer:
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
Question 42.
What is revenue deficit in government budget? (Delhi 2016)
Answer:
Revenue deficit is defined as the excess of government’s revenue expenditure over revenue receipts. The revenue deficit includes only such transactions that affect the current income and expenditure of the government. It is calculated as
Revenue Deficit = Revenue Expenditure – Revenue Receipts
Question 43.
Distinguish between fiscal deficit and revenue deficit. (Delhi 2013: All India (C) 2012)
Or
Explain the distinction between fiscal deficit and primary deficit. Delhi to 2013
Answer:
Differences between fiscal deficit and revenue deficit are
| Basis | Fiscal Deficit | Revenue Deficit |
| Meaning | It is the difference between total revenue and total expenditure of the government (excluding borrowings). | It results when revenue receipts are less than the revenue expenditure. |
| Indicator | It is an indicator of the total borrowings needed by the government. | It indicates the dependency on loans in near future. |
| Arises | It arises due to hike in capital expenditure. | It arises when the government’s actual net receipts are lower than the projected receipts. |
Question 44.
Explain the meaning and implications of revenue deficit. (All India 2011)
Answer:
When the revenue receipts are less than the revenue expenditures in the government budget, this short-fall of receipts is known as revenue deficit.
Implications of revenue deficit are as follows:
- High revenue deficit shows accumulated and recurring expenses of government such as expenses on defence, payment of interest etc.
- The revenue deficit is managed by borrowing or by disinvestment. Hence, high revenue deficit either increases government liability or reduces government assets.
- High revenue deficit leads to inflationary situation in the economy, as high government expenditure increases the aggregate demand of the economy.
- High revenue deficit implies high future burden of loan and interest payments on the government.
Question 45.
Distinguish between fiscal deficit and primary deficit. (All India 2010)
Or
Revenue deficit and fiscal deficit. (All India (C) 2014: Delhi (C) 2014)
Answer:
Differences between fiscal deficit and primary deficit are
| Basis | Fiscal Deficit | Primary Deficit |
| Meaning | It is the excess of total budget expenditure over the total budget receipt excluding borrowing. | It is the difference between fiscal deficit and interest payments by the government. |
| Calculation | It is calculated as, Fiscal Deficit = Total Budget Expenditure – Total Budget Receipt (excluding borrowings) | It is calculated as, Primary Deficit = Fiscal Deficit – Interest Payments |
| Scope | It is broad or wide in scope. | Primary deficit is the part of fiscal deficit hence, narrow in scope. |
Question 46.
Explain revenue deficit in a government budget. What does it indicate? (Delhi 2012)
Or
What is revenue deficit? Explain its implications. (Delhi 2012)
Answer:
When the revenue receipts are less than the revenue expenditures in the government budget, this short-fall of receipts is known as revenue deficit.
Implications of revenue deficit are as follows:
- High revenue deficit shows accumulated and recurring expenses of government such as expenses on defence, payment of interest etc.
- The revenue deficit is managed by borrowing or by disinvestment. Hence, high revenue deficit either increases government liability or reduces government assets.
- High revenue deficit leads to inflationary situation in the economy, as high government expenditure increases the aggregate demand of the economy.
- High revenue deficit implies high future burden of loan and interest payments on the government.
Two measures to reduce revenue deficit are as follows
- Reduction in expenditure The government should take measures to reduce unnecessary and wasteful expenditure.
- Increase in revenue The government should try to increase its revenue by expanding its tax base.
Question 47.
Explain the concept of fiscal deficit in a government budget. What does it indicate? (All India 2012)
Answer:
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
Implications of fiscal deficit are:
- Borrowing requirements of government.
- High interest payments by government.
- High level of inflation due to high government expenditure.
- Increased foreign dependence of the economy.
Question 48.
From the following data about a government budget, find out the following:
(i) Revenue deficit
(ii) Fiscal deficit
(iii) Primary deficit (Delhi 2011)
| Contents | ₹ (in Arab) |
| (a) Capital Receipts Net of Borrowings | 95 |
| (b) Revenue Expenditure | 100 |
| (c) Interest Payments | 10 |
| (d) Revenue Receipts | 80 |
| (e) Capital Expenditure | 110 |
Answer:
(i) Revenue Deficit = Revenue Expenditure – Revenue Receipts
= 100 – 80 = ₹ 20 Arab
(ii) Fiscal Deficit = (Revenue Expenditure + Capital Expenditure) – (Revenue Receipt + Capital Receipt Net of Borrowing) = (100 + 110) – (80 + 95)
= 210 – 175 = ₹ 35 Arab
(iii) Primary Deficit = Fiscal Deficit – Interest Payments = 35 – 10 = ₹ 25 Arab
Question 49.
From the following data about a government budget, find
(i) Revenue deficit
(ii) Fiscal deficit
(iii) Primary deficit (All India 2011)
| Contents | ₹ (in Arab) |
| Tax Revenue | 47 |
| Capital Receipts | 34 |
| Non-tax Revenue | 10 |
| Borrowings | 32 |
| Revenue Expenditures | 80 |
Answer:
(i) Revenue Deficit = Revenue Expenditure – (Tax Revenue + Non-tax Revenue)
= 80 – [47 + 10]
= 80 – 57
= ₹ 23 Arab
(ii) Fiscal Deficit = Borrowings Borrowings = ₹ 32 Arab So, Fiscal Deficit = ₹ 32 Arab
(iii) Primary Deficit = Fiscal Deficit – Interest Payments = 32 – 20 = ₹ 12 Arab
Question 50.
Define a government budget. Give meanings of revenue deficit, fiscal deficit and primary deficit. (Delhi 2011)
Or
What is a government budget? Explain the meanings of fiscal deficit and primary deficit. (All India (C) 2010)
Answer:
Government budget is a statement of expected/estimated receipts and expenditure of the government over a period of one financial year, i.e. from 1st April to 31st March. (1)
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 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 Deficit – Interest Payments
Question 51.
Explain the meaning of the following:
(a) Revenue deficit
(b) Fiscal deficit
(c) Primary deficit (March 2018)
Answer:
(a) 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
(b) Fiscal deficit:
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
(c) Primary deficit:
The difference between fiscal deficit and interest payment is known as primary deficit.
Primary Deficit = Fiscal Deficit – Interest Payments
Question 52.
Distinguish between Primary deficit and revenue deficit (All India (C) 2014)
Answer:
Differences between primary deficit and revenue deficit are:
| Basis | Primary Deficit | Revenue Deficit |
| Meaning | Primary deficit is the difference between fiscal deficit and interest payments. | Revenue deficit is the difference between revenue expenditure and revenue receipts. |
| Implications | Primary deficit indicates the borrowing requirement of the government. | Revenue deficit shows the inefficiency of the government to meet its current expenditure. |
| Scope | It has a narrow scope. | It has a wide scope. |
Multiple Choice Questions
Question 1.
Dividends received from Public Sector Undertakings (PSUs) are a part of the governmental (Choose the correct alternative) (All India 2019)
(a) non-tax revenue receipts
(b) tax receipts
(c) capital receipts
(d) capital expenditure
Answer:
(a) non-tax revenue receipts
Question 2.
Which of the following sources of receipts in government budget increases its liabilities? (Delhi (C) 2016)
(a) Direct taxes
(b) Recovery of loans
(c) Borrowings
(d) Dividend from public sector undertakings
Answer:
(c) Borrowings
Question 3.
Which of the following is a direct tax? (Delhi (C) 2016)
(a) Corporation tax
(b) Entertainment tax
(c) Excise duty
(d) Service tax
Answer:
(a) Corporation tax
Question 4.
Which of the following is a source of capital receipt? (All India (C) 2016)
(a) Foreign donations
(b) Dividends
(c) Disinvestment
(d) Indirect taxes
Answer:
(c) Disinvestment
Question 5.
Direct tax is called direct because it is collected directly from ………. (All India 2015)
(a) the producers on goods produced
(b) the sellers on goods sold
(c) the buyers of goods
(d) the income earners
Answer:
(d) the income earners
Question 6.
The non-tax revenue in the following is…….. (Delhi 2015)
(a) export duty
(b) import duty
(c) dividends
(d) excise
Answer:
(c) dividends
Question 7.
Which one of these is a revenue expenditure? (Foreign 2015)
(a) Purchase of shares
(b) Loans advanced
(c) Subsidies
(d) Expenditure on acquisition of land
Answer:
(c) Subsidies
Question 8.
Which of the following is not a revenue receipt? (Choose the correct alternative) (All India (C) 2015)
(a) Recovery of loans
(b) Foreign grants
(c) Profits of public enterprises
(d) Wealth tax
Answer:
(a) Recovery of loans
Question 9.
Which one of the following is a combination of direct taxes? (Choose the correct alternative) (Delhi (C) 2015)
(a) Excise duty and Wealth tax
(b) Service tax and Income tax
(c) Excise duty and Service tax
(d) Wealth tax and Income tax
Answer:
(d) Wealth tax and Income tax
Question 10.
Primary deficit in a government budget will be zero, when ………………….. (All India 2019) (Choose the correct alternative)
(a) revenue deficit is zero
(b) net interest payments are zero
(c) fiscal deficit is zero
(d) fiscal deficit is equal to interest payment
Answer:
(d) fiscal deficit is equal to interest payment
Question 11.
Fiscal deficit equals (Delhi 2016) (Choose the correct alternative)
(a) interest payments
(b) borrowings
(c) interest payments less borrowings
(d) borrowings less interest payments
Answer:
(b) Borrowings
Question 12.
Primary deficit equals (Choose the correct alternative) (All India 2016)
(a) borrowings
(b) interest payments
(c) borrowings less interest payments
(d) both borrowings and interest payments
Answer:
(c) Borrowings less interest payments
Question 13.
Primary deficit is the difference between _________. (All India (C) 2016)
(a) fiscal deficit and revenue deficit
(b) revenue deficit and interest payments
(c) total expenditure and total revenue receipts
(d) fiscal deficit and interest payments
Answer:
(d) Fiscal deficit and interest payments
Question 14.
Primary deficit in a government budget is _________ (All India 2015)
(a) revenue expenditure – revenue receipts
(b) total expenditure – total receipts
(c) revenue deficit – interest payments
(d) fiscal deficit – interest payments
Answer:
(d) fiscal deficit – interest payments
Question 15.
Borrowings in government budget are _________ (Delhi 2015)
(a) revenue deficit
(b) fiscal deficit
(c) primary deficit
(d) deficit in taxes
Answer:
(b) Fiscal deficit
Question 16.
Primary deficit in a government budget equals (Choose the correct alternative) (Foreign 2015)
(a) interest payments
(b) interest payments less borrowings
(c) borrowings less interest payments
(d) None of these
Answer:
(c) Borrowings less interest payments
Question 17.
Which of the following is a correct measure of primary deficit? (All India (C) 2015)
(a) Fiscal deficit minus revenue deficit
(b) Revenue deficit minus interest payments
(c) Fiscal deficit minus interest payments
(d) Capital expenditure minus revenue expenditure
Answer:
(c) Fiscal deficit minus interest payments
Question 18.
Which of the following statements is true? (Delhi (C) 2015)
(a) Fiscal deficit is the difference between total expenditure and total receipts
(b) Primary deficit is the difference between total receipt and interest payments
(c) Fiscal deficit is the sum of primary deficit and interest payments
(d) Primary deficit is the difference between revenue deficit and interest payments
Answer:
(c) Fiscal deficit is the sum of primary deficit and interest payments.
Question 19.
Following are the impacts of government budget on the economy excluding
(a) brings better allocation of resources
(b) implement government welfare programmes
(c) brings aggregate fiscal indiscipline level
(d) better access of public goods
Answer:
(c) brings aggregate fiscal indiscipline level
Question 20.
Goods and Service Tax (GST) is an example of under government receipts.
(a) indirect tax
(b) direct tax
(c) non-tax revenue
(d) income tax
Answer:
(a) indirect tax
Question 21.
An expenditure which is of recurring or non-recurring in nature, and which is based on five year economic plan is called
(a) revenue expenditure
(b) capital expenditure
(c) plan expenditure
(d) non-plan expenditure
Answer:
(c) plan expenditure
Question 22.
Which of the following is capital expenditures?
(a) Subsidies
(b) Interest payments
(c) Purchase of shares
(d) Defince purchases
Answer:
(c) Purchase of shares
Question 23.
The expenditure incurred for smooth functioning of government departments and for day-to-day expenses of the government is called
(a) capital expenditure
(b) non-plan expenditure
(c) revenue expenditure
(d) All of the above
Answer:
(c) revenue expenditure
Question 24.
Which of the following does not form the part of capital receipts of the Union Government?
(a) Non-tax revenue
(b) Loan recoveries
(c) Net external assistance
(d) Net market borrowings
Answer:
(a) Non-tax revenue
Question 25.
Cost of tax collection, cost of audit and printing notes, pension, expenditure on defence and law and order are treated as of the government.
(a) government expenditure
(b) revenue expenditure
(c) non-development expenditure
(d) plan expenditure
Answer:
(c) non-development expenditure
Question 26.
Which of the following budget is more suitable for developing economies like India?
(a) Deficit Budget
(b) Balanced Budget
(c) Surplus Budget
(d) None of these
Answer:
(a) Deficit Budget
Question 27.
Zero primary deficit means that the government has to resort to borrowings only to make
(a) interest payment
(b) fiscal payment
(c) capital payment
(d) primary payment
Answer:
(a) interest payment
Question 28.
From the following, which is not an implication of fiscal deficit?
(a) It determine total borrowing requirements to the government
(b) It increase liability of the government
(c) It increase foreign dependence
(d) Repayment of loan together with interest further decreases the fiscal deficit
Answer:
(d) Repayment of loan together with interest further decreases the fiscal deficit
Question 29.
The government starts selling its securities to private sector. What is this process called?
(a) Open market operation
(b) Disinvestment
(c) Monetary expansion
(d) All of the above
Answer:
(b) Disinvestment
Question 30.
If fiscal deficit is ₹ 550 crore and interest payment is ₹ 200 crore, then primary deficit.
(a) ₹ 200 crore
(b) ₹ 550 crore
(c) ₹ 765 crore
(d) ₹ 350 crore
Answer:
(d) ₹ 350 crore
Question 31.
If government borrowings = ₹ 800 crore and interest payments = ₹ 155 crore, then find fiscal deficit and primary deficit.
(a) Fiscal deficit = ₹ 155 crore and Primary deficit = ₹ 800 crore
(b) Fiscal deficit = ₹ 800 crore and Primary deficit = ₹ 155 crore
(c) Fiscal deficit = ₹ 155 crore and Primary deficit = ₹ 645 crore
(d) Fiscal deficit = ₹ 800 crore and Primary deficit = ₹ 645 crore
Answer:
(d) Fiscal deficit = ₹ 800 crore and Primary deficit = ₹ 645 crore
Question 32.
Primary Deficit = Fiscal Deficit-
(a) Borrowings
(b) Subsidies
(c) Interest payments
(d) Transfer payments
Answer:
(c) Interest payments