Please refer to Government Budget and The Economy Notes for Class 12 Economics provided below. These revision notes have been prepared to help you understand and learn all important topics given in your NCERT Book for Class 12 Economics. We have provided Notes for Class 12 Economics for all chapters provided in your textbooks. These concepts, notes, and solved questions have been prepared for Standard 12 Economics by our expert teachers to help you gain more marks in exams and class tests.

Class 12 Economics Chapter 5 Government Budget and The Economy Notes

Please carefully read the Government Budget and The Economy Notes for Class 12 Economics provided below. Use them prior to your exams as this will help you to revise the entire chapter easily. We have also provided MCQ Questions for Class 12 Economics which will be asked in the upcoming exams.

KEY CONCEPTS:

• Meaning of the Budget
• Objectives of the Budget
• Components of the Budget
• Budget Receipts
• Budget Expenditure
• Balanced, Surplus and Deficit Budgets
• Types of Deficits

GOVERNMENT BUDGET – A FLOW CHART

One Marks Questions

Question. Define Surplus Budget.
Answer : A Surplus Budget is one where the estimated revenues are greater than the Estimated expenditures.

Question. Name the two types of Revenue Receipts.
Answer : i) Tax Revenue
ii) Non-tax Revenue

Question. Define a Budget.
Answer : It is an annual statement of the estimated Receipts and Expenditures of the Government over the fiscal year which runs from April –I to March 31.

Question. What are the main items of Capital Receipts?
Answer : a) Market Loans (loans raised by the government from the public)
b) Borrowings by the Government
c) Loans received from foreign governments and International financial Institutions.

Question. Name the two broad divisions of the Budget.
Answer : i) Revenue Budget
ii) Capital Budget

Question. Give two examples of Developmental Expenditure.
Answer : Plan expenditure of Railways and Posts

Question. What are the four different concepts of Budget Deficits?
Answer : a) Budget Deficit
b) Revenue Deficit
c) Primary Deficit and
d) Fiscal Deficit

Question. What are the two types of taxes?
Answer : a) Direct Taxes:
i) Income Tax,
ii) Interest Tax,
iii) Wealth Tax
b) Indirect Taxes:
i) Customs duties,
ii) Excise duties,
iii) Sales Tax

Question. Give two examples of Non-Developmental expenditures.
Answer : i) Expenditure on defence
ii) Interest payments

Question. What are the two Budget Receipts?
Answer : i) Revenue Receipts
ii) Capital Receipts

Three/Four Marks Questions

Question. Define Direct Taxes and Indirect taxes and give two examples each.
Answer : i) Direct Tax: – These are those taxes levied immediately on the property and Income of persons, and those that are paid directly by the consumers to the state.
Examples: Income Tax, Wealth Tax, Corporation Tax etc.
ii) Indirect Taxes: These are those taxes that affect the income and property of persons through their consumption expenditure. Indirect taxes are those taxes levied on one person but paid by another person.
Examples: Customs duties, excise duties, sales tax, service tax etc.

Question. What do you mean by Revenue Expenditure and Capital Expenditure?
Answer : i) Revenue Expenditure:- It is the expenditure incurred for the normal running of government departments and provision of various services like interest charges on debt, subsidies etc.,
ii) Capital Expenditure:- It consists mainly of expenditure on acquisition of assets like land, building, machinery, equipment etc., and loans and advances granted by the Central Government to States & Union Territories.

Question. Explain the objectives of the Government Budget.
Answer : These below are the main objectives of the Government Budget.
a) Activities to secure reallocation of resources: – The Government has to reallocate resources with social and economic considerations.
b) Redistributive Activities: – The Government redistributes income and wealth to reduce inequalities.
c) Stabilizing Activities: – The Government tries to prevent business fluctuations and maintain economic stability.
d) Management of Public Enterprises: – Government undertakes commercial activities that are of the nature of natural Monopolies, heavy manufacturing etc., through its public enterprises.

Question. What are the Non-Tax Revenue receipts?
Answer : These below are the Non-tax revenue receipts:
a) Commercial Revenue: Examples-Payments for postage, toll, interest on funds borrowed from government credit corporations, electricity, Railway services.
b) Interest and dividends
c) Administrative revenue: Examples: Fees, fines, penalties etc.

Question. Explain the four different concepts of Budget deficit.
Answer : These are the four different concepts of Budget Deficit.
a) Budget Deficit:- It is the difference between the total expenditure, current revenue and net internal and external capital receipts of the government.
Formulae: B.D = B.E > B.R (B.D= Budget Deficit, B.E. Budget Expenditure B.R = Budget Revenue
b) Fiscal Deficit:- It is the difference between the total expenditure of the government, the revenue receipts PLUS those capital receipts which finally accrue to the government.
Formulae: F.D = B.E – B.R (B.E > B.R. other than borrowings) F.D=Fiscal Deficit, B.E= Budget Expenditure, B.R. = Budget Receipts.
c) Revenue Deficit: – It is the excess of governments revenue expenditures over revenue receipts.
Formulae: R.D= R.E – R.R., When R.E > R.R., R.D= Revenue Deficit, R.E= Revenue Expenditure, R.R. = Revenue Receipts.
d) Primary Deficit: – It is the fiscal deficit MINUS Interest payments.
Formulae: P.D= F.D – I.P, P.D= Primary Deficit, F.D= Fiscal Deficit, I.P= Interest Payment.

Question. What are the components of the Budget?
Answer : These below are the main components of the Government Budget. They are –
a) Budget Receipts
b) Budget Expenditure
Budget receipts may be classified as:
i) Revenue Receipts and
ii) Capital Receipts
Revenue Receipts may be classified as:
i) Tax Revenue and
ii) Non-tax Revenue
Budget Expenditure may be classified as –
a) Revenue Expenditure and Capital Expenditure
b) Plan Expenditure and Non-Plan Expenditure
c) Developmental and Non-Developmental Expenditure

Question. Define Balanced, Surplus and Deficit Budgets.
Answer : a) Balanced Budget:- It is one where the estimated revenue EQUALS the estimated expenditure.
b) Surplus Budget:- It is one where the estimated revenue is GREATER THAN the estimated expenditures.
c) Deficit Budget:- It is one where the estimated revenue is LESS THAN the estimated expenditure.

Question. What are the three major ways of Public Expenditure?
Answer : These below are the three ways of Public Expenditure—-
a) Revenue Expenditure and Capital Expenditure
b) Plan Expenditure and Non-Plan Expenditure
c) Development and Non-developmental Expenditure.

Six Marks Questions

Question. What is a balanced government budget? Explain the multiplier effect of a balanced budget.
Answer : a) Balanced Budget: – It is one where the estimated revenue of the government equals the estimated expenditure.
b) Effect of Multiplier on the Balanced Budget:-
i) If only source of revenue is a lump sum tax, a balanced budget will then mean that the amount of tax equals the amount of expenditure (T=E)
ii) A balanced budget has an expansionary effect on the economy.
iii) Under balanced budget, the increase in income is equalent to the amount of government expenditure financed by tax revenue (i.e., Δ Y =ΔG/ΔT)
iv) The multiplier effect of a balanced budget is ONE (Unitary)
v) A balanced budget is a good policy to bring the economy, which is under employment to a full employment equilibrium.

Question. How is tax revenue different from administrative revenue?
Answer : a) Tax Revenue:-
i) It is the main source of revenue of the government
ii) It is the revenue that arises on account of taxes levied by the government.
iii)Taxes of two types i.e., Direct and Indirect.
iv) Direct taxes are those taxes levied immediately on the property and income of persons. Examples: Income Tax, Corporate Tax, Wealth Tax etc., Incidence and impact falls on same person.
v) Indirect taxes are those taxes levied on the production and sale of the goods.
Examples: Sales Tax, Excise Duty etc. Tax paid by one person but burden taken by another person.
b) Administrative Revenue:-
i) It is the revenue that arises on account of the administrative function of the Government.
ii) It includesa)
a) Fees
b) License fees
c) Fines and penalties
d) Forfeitures of surety by courts
e) Escheat – means claim of the government on the property of a person who dies without having any legal heirs.

HIGHER ORDER THINKING SKILLS (HOTS)

Question. What are the three levels at which the budget impacts the economy?
Answer : These below are the three levels at which the budget impacts the economy.
a) Aggregate fiscal discipline:- This means having control over expenditures, given the quantum of revenues. This is necessary for proper macro-economic performance.
b) Allocation of resources: – The allocation of resources based on social priorities.
c) Effective and efficient provision of programmes:- Effectiveness measures the extent to which goods and services the government provides its goals.

NUMERICALS

Question. From the following data about a government budget find
a) Revenue Deficit
b) Fiscal Deficit and
c) Primary Deficit.

Answer : a) Revenue Deficit = Revenue expenditure – (Tax revenue + Non-tax revenue)
= 80 – (47+10) = 80 – 57 = 23 (cr.)
b) Fiscal Deficit = Borrowings = 32 (cr.)
c) Primary Deficit = Borrowings – Interest Payments = 32 – 20 = 12 (cr.)

Question. The following figures are based on budget estimates of Government of India for the year 2001 – 2002. Calculate
i) Fiscal Deficit
ii) Revenue Deficit and
iii) Primary deficit.

Answer : i) Fiscal Deficit = Total expenditure – Revenue receipts – Non-debt capital receipts
= 3,75,223 – 2,31,745 – 15,164 – 12,000
= Rs. 1,16,314 billion.
ii) Revenue Deficit = Revenue expenditure – Revenue receipts
= 3, 10,566 – 2, 31,745
= Rs. 78,821 billion.
iii) Primary deficit = Fiscal deficit – Interest payments
= 1, 16,314 – 1, 12,300
= Rs. 4,014 billion.