Please refer to Economics Government Budget and The Economy Class 12 Economics Notes and important questions below. The Class 12 Economics Chapter wise notes have been prepared based on the latest syllabus issued for the current academic year by CBSE. Students should revise these notes and go through important Class 12 Economics examination questions given below to obtain better marks in exams
Government Budget and The Economy Class 12 Economics Notes and Questions
The below Class 12 Government Budget and The Economy notes have been designed by expert Economics teachers. These will help you a lot to understand all important topics given in your NCERT Class 12 Economics textbook.
Question. What is government budget?
Ans. Government budget is an annual financial statement showing item wise estimated receipts and expenditure of the government in a financial year.
Question. What do you mean by budgetary receipts? What are its types?
OR
Discuss the basis on which budgetary receipts are classified into revenue and capital receipts.
Ans. Budgetary receipts refers to estimated receipts of the government from various sources to finance public expenditure in a fiscal year. It is also called public revenue.
Budgetary receipts are classified into 2 parts: –
1. Revenue receipts: Those budgetary receipts which neither creates any liabilities nor cause reduction in the assets, are called revenue receipts. It has following two components: –
(i) Tax revenue: It includes all taxable income of the government like income tax, GST, custom duty, etc.
(ii) Non-tax revenue: It includes all the revenue receipts other than tax revenue like fees and fines, profits and dividends, interest received, grants from abroad, etc.
2. Capital receipts: Those budgetary receipts which either creates liabilities or cause reduction in the assets of the assets of the government, are called capital receipts.
Eg. Borrowing, disinvestment, recovery of loans, etc
Question. Define tax.
Ans. Tax is a legal compulsory payment given to the government without any direct benefit to tax payer.
Question. Distinguish between direct and indirect taxes.
Ans. Direct tax: When liability to pay a tax and actual burden of that tax falls on the same person then it is called direct tax. Thus, burden of such taxes can’t be shifted from one person to another.
These taxes are generally imposed on income and property. Eg., Income tax, property tax, profit tax, etc.
Indirect tax: When liability to pay a tax is on one person but actual burden of the same tax falls on the other person is called indirect tax. Thus, burden of such taxes can be shifted from one person to another.
These taxes are generally imposed on goods and services. Eg., GST, custom duty, etc.
Question. What are the types of budget?
Ans. 1. Surplus budget: When estimated budgetary receipts are more than estimated budgetary expenditure of the government in a year.
2. Deficit budget: When estimated budgetary receipts are less than estimated budgetary expenditure of the government in a year.
3. Balanced budget: When estimated budgetary receipts are equal to estimated budgetary expenditure of the government in a year.
Question. What is budgetary deficit and how is it financed?
Ans. It refers to excess of total budgetary expenditure over total budgetary receipts of the government during a year.
Budgetary Deficit = Total Budgetary Expenditure-Total Budgetary Receipts
Budgetary deficit is financed by government through RBI. The central bank prints new currency and lends to government which is called deficit financing.
Question. What is revenue deficit and what are its implication?
Ans. It refers to excess of revenue expenditure over revenue receipts of the government during a year.
Revenue Deficit=Revenue Expenditure-Revenue Receipts
Implications
1. Revenue deficit indicates that government is unable to meet its recurring nature expenditure proposed in the budget.
2. Revenue deficit measures dissaving of government which is financed through use of capital receipts i.e. either by borrowings or from sale of assets.
3. If government borrow to meet consumption expenditure, then it may lead to inflation in the economy.
Question. What do you mean by fiscal deficit? What is its implication? How is it financed?
Ans. It refers to excess of total budgetary expenditure over total budgetary receipts other than borrowings of the government in a year.
Fiscal Deficit=Total Budgetary Expenditure-Total Budgetary Receipts
(Excluding borrowings)
Fiscal deficit can be financed from following two sources: –
1. Fiscal deficit can be financed either through internal borrowings like public, banks, etc. or from external borrowings like foreign banks, world bank, etc.
2. Government may also borrow from central bank to finance fiscal deficit. For this, central bank prints new currency and offer loan to the government.
Implications
1. Debt Trap: Fiscal deficit measures total borrowings required by the government for budgetary expenditure. But it increases liability of repayment of loan along with interest in future. So, payment of interest increases revenue expenditure which will further increase deficits and may increase need of loan for such deficit. Thus, economy may have to face the problem of debt trap.
2. Inflation: If government borrow from central bank by printing new currency to incur budgetary expenditure then, it will lead to inflationary situation in the economy.
3. Foreign dependence: Borrowings by government from other countries will increase foreign dependence of domestic country.
Question. What do you mean by primary deficit and its implications?
Ans. Primary deficit refers to fiscal deficit less interest payment on previous borrowings.
Primary Deficit=Fiscal Deficit-Interest payment on previous borrowings
Implications
1. Primary deficit measures that how much part of borrowings government will use to meet the expenditure other than interest payment on previous borrowings.
2. If primary deficit is zero, it means government needs to borrow only for interest payment on past borrowings.
Question. Distinguish between planned and non-planned expenditure.
Ans. Planned Expenditure: Those public expenditure which are included in the budget to be incurred during the year on various projects and programmes detailed in five-year plan. These expenditures are related with current five-year plan.
Eg., central plan capital projects like construction of schools, roads, metro, etc.
Non-Planned Expenditure: Those public expenditure which directly contribute in economical and social development expenditure. These expenditures add in the flow of goods and services. Eg., expenditure on agriculture and industrial development, power generation, scientific research, etc.
Those public expenditure which are incurred on general essential services of the government, are called non-development expenditure. These expenditure does not directly affect economic and social development of the country like expenditure on administrative services, defence, police, jail, etc.
Question. Explain various objectives of government budget.
Ans. 1. To reallocate resources: One of the main objectives of government budget is to reallocate the resources in accordance with economic priority i.e. profit maximization and social priority i.e. public welfare. Government can influence the allocation of resources through tax concession or subsidies.
Eg., To encourage the investment in necessary goods, government can provide subsidies but to discourage production of harmful goods like cigarette or liquor, government imposes heavy taxes.
2. To redistribute income and wealth: Through budgetary policy, government also aims for redistribution of income and wealth. Government has the objective to reduce inequalities of the income and wealth between rich and poor people. So, government impose high taxes on rich people through progressive tax system and spends on the welfare of worker section of society to increase the living standard.
3. To maintain economic stability: Government also try to prevent business fluctuation of inflation or deflation and aims to maintain economic stability along with full employment. So, government may surplus budget in case of inflation and deficit budget in case of deflation in the economy.
4. To attain high economic growth rate: Economic growth rate of a nation i.e. increase in GDP depends upon rate of savings and investment. Thus, government ensure enough resource for investment in public sector. So, through budgetary policy, government encourage people to increased rate of savings.
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