The Government: Budget and the Economy Class 12 Notes Economics Part B Chapter 5

Lesson at a Glance

• Government Budget: Government budget is an annual statement, showing itemwise estimates of receipts and expenditures during a fiscal year. In other words, a government budget is a statement showing estimated receipts and estimated expenditure for a financial year i.e. 1 April to 31 March. In the beginning of every year, government presents before the Lok Sabha an estimate of its receipts and expenditure for the coming financial year. The government plans expenditure according to its objectives and then tries to raise resources to meet the proposed expenditure.

• Objectives of Government Budget:

1. Redistribution of Income and Wealth / Reduction of inequalities: Government through fiscal tools of taxation, subsidies and transfer payments makes an effort to make income distribution equitable in the economy. Equitable distribution of income and wealth is a way to bring social justice. Government levies high rate of tax on rich people reducing their disposable income and lowers the rate on lower income group. Government also provides subsidies and amenities to people whose income level is low.

2. Reallocation of resources: the government through budgetary policy reallocates resources so as to achieve social and economic objectives. Government produces those goods which may not be economically beneficial but are extremely useful in terms of social benefits like public sanitation, rural electrification, education, health etc. It also levies high taxes on commodities that are undesirable socially or ethically. It provides essential goods to the poor at subsidized rates. Government draws away resources from some other areas to promote balanced economic growth of regions by allocating more funds to production of socially useful goods.

3. Economic Stability/Price Stability: The government tries to prevent business fluctuations and to maintain price and employment stability through taxes, subsidies and expenditure. Economic stability increases the inducement to invest and increase the rate of growth and development.

4. Managing Public Enterprise: The budgetary policy of the government shows interest of the government to increase the rate of growth through public enterprises. Often, government undertakes such activities which are of utmost importance or which have monopoly advantage. Budget is prepared with the objective of making various provisions for managing such enterprises and providing them financial help.

5. Economic growth: Economic growth implies a sustained increase in real GDP of the economy, i.e., a sustained increase in volume of goods & services. For this purpose,budgetary policy aims to mobilize sufficient resources for investment in the public sector.
•Revenue Budget: It consists of revenue receipts and revenue expenditure of the government.
•Capital Budget: It consists of capital receipts and capital expenditure
•Revenue Receipts: Revenue receipts are those receipts which does not create a liability or lead to reduction in asset. Revenue receipts are of recurring nature. Revenue receipts can be further classified into tax revenue and non tax revenue.

• Tax Revenue: Tax revenue refers to sum total of receipts from taxes and other duties imposed by the government. A tax is a legally compulsory payment imposed by the government. Government imposes tax on income, manufacturing, services, wealth etc. Tax revenue is the main source of regular receipts of the government. Taxes are of two types:

• Direct Tax: These refer to taxes that are imposed by the government on property & income of individuals & companies and are paid directly to the government. The liability to pay a tax and the burden of that tax cannot be shifted and the burden of the tax is borne by the same person on whom the tax is levied. Examples are Income tax, Wealth tax, Gift tax,corporation tax, Death duty etc.

• Indirect tax: When the burden of a tax can be shifted on other persons, it is called an indirect tax. They are imposed on goods & services. Examples are Sales Tax, Service Tax, Entertainment tax, Excise duty etc.

• Direct Taxes: A tax is a direct tax, if its burden can’t be shifted. Its liability to pay and burden falls on the same person. For example: income tax, corporate tax, wealth tax, gift tax, estate duty etc.

• Indirect Taxes: A tax is an indirect tax, if its burden can be shifted. Its liability to pay and burden falls on different persons. For example: sales tax (paid by the shopkeeper but recovered from the customer), excise duty (paid by the producer but recovered from wholesalers & retailers), custom duty (paid by the importer but recovered from retailers & customers), entertainment tax (paid by cinema owners but recovered from customers) etc.

• Non Tax Revenue: Non Tax revenue refers to receipts of the government from sources other than tax. Its main sources are:

I. Fees: It refers to the charges imposed by the government to cover the cost of recurring services provided by it. It gives a special advantage to the fee payer. Example college fee, license fee, registration fee.

II. Fines and penalties: A payment for the violation of law. It is levied to maintain law and order. For example: fine for jumping red light etc.

III. Forfeitures: A penalty imposed by the court for non compliance with orders or non-fulfillment of contracts.

IV. Escheat: A claim of the government on the property of a person who dies without having a legal heir or without leaving a will.

V. Interest: Government receives interest on the funds advanced to states, union territories, railways, post & telegraph etc.

VI. Profits & Dividends: The government earns profits through public sector undertakings like Indian Railways,
LIC, and BHEL etc. It also gets dividend from its investment in other companies.

VII. License Fee: It is a payment charged by the government to grant permission for something. For example: license fee paid for permission of keeping gun or to obtain permission for driving.

VIII.Gifts & Grants: Government received gifts and grants from foreign governments and international organizations like World Bank. These are generally received during national crisis such as war, flood etc.

• Revenue Expenditure: Revenue expenditure is an expenditure which does not result in creation of an asset or reduction in a liability. Such expenses are incurred on running of government departments and maintenance of public services. These are financed out of revenue receipts. It is recurring in nature which is incurred every year. For example, salaries, pensions, interest payments, subsidies, grants, education & health services etc.

• Capital Receipts: Those receipts which either create a liability or reduce an asset are called capital receipts. Capital receipts are receipts under capital account. When government raises funds either by incurring a liability or by disposing off its assets, it is called a capital receipt. These include market borrowings, external loans and advances made by the government and provident fund. The main sources of capital receipts are:

(a) Recoveries of loans: Loans offered by government to others are government assets because it owns money that it lends. Recovery of such loan is capital receipt as it reduces the assets of the government.

(b) Borrowings and other liabilities: These are the funds raised by government to meet excess expenditure. These are treated as capital receipts because they create a liability of returning loans. These funds are borrowed from (i) open market, (ii) RBI, (iii) foreign governments and (iv) international organizations like World Bank, IMF etc.

(c) Disinvestment: It is withdrawal of government investment. It refers to selling whole or a part of the shares of selected PSUs held by the government to private sector. As a result of this, government assets are reduced. Disinvestment is also termed as privatization because it involves transfer of ownership from public sector to private sector.

(d) Small Savings: It refers to the funds raised from the public in the form of post office deposits, NSC, Kisan Vikas Patras etc.

• Capital expenditure: An expenditure which leads to either creation of assets or reduction in liability is a part of capital expenditure. These expenditures are met out of capital receipts.Its main sources are:
(a)Expenditure on purchase of assets like land, buildings,machinery etc.
(b)Investment in shares
(c)Repayment of loan

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