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

4. 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

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

8. 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.

10. 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

11. 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.

12. 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)

14. 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.

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

16. 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.

17. 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.

18. 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.

22. 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 .

24. 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.

26. 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.

27. 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.

28. 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.

29. 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