Government Budget And The Economy Class 12

Rating:
0
(0)
Government Budget and Economy

Every new year, the whole country eagerly waits for the new fiscal or the nation’s budget that the government presents in the parliament. Almost every news channel covers and telecasts this important day before the country. Class 12 Macroeconomics covers many such new topics that we have never discussed before in earlier classes. The chapter of Government Budget and the Economic is one such chapter that will make you understand the importance and need of government budget. It is an important part of class 12 economics. This blog will cover the study notes on the chapter Government Budget and the economy class 12. 

What is the Government Budget? 

According to the chapter government budget and the economy class 12, the government budget is basically an annual final statement which shows item wise expenditures of the government or a ruling entity during a fiscal year. It also presents the anticipated tax revenues and proposed spending or expenditures in areas like Healthcare, Defence, Education, Infrastructure, Banks, State Benefits, etc. The fiscal year is taken into account from 1st April to 31st March. 

Objectives of the Government Budget

As per the chapter on Government Budget and the Economy class 12, the main purpose or the main objectives of the government budget is as follows:

  • Reallocation of resources 
  • Redistribution of activities 
  • Stabilizing economic activities 
  • Management of public enterprises 
  • Economic growth 
  • Generation of employment 

Components of Government Budget 

According to Government Budget and the Economy class 12, there are 2 components of the budget. These are:

  • Revenue Budget: this deals with the revenue generation aspect of the government budget. It further has 2 parts or components:
    1. Revenue Receipts 
    2. Revenue Expenditure 
  • Capital Budget: the other feature is the capital budget, which deals with the budget’s capital aspect, which the government prepares. It also has 2 components:
    1. Capital Receipts 
    2. Capital Expenditure 
Government Budget And The Economy Class 12
Image Source: LearnCBSE.in
Component of Government Budget
Image Source: Studyadda.com

Budget Receipts 

According to the chapter government budget and the economy class 12, the budget receipts refer to the estimated receipts/revenue or money receipts that the government may earn from all the sources during a fiscal year. Receipts can be of 2 types, i.e. revenue receipts and capital receipts. 

Revenue Receipts vs Capital Receipts 

Government budget and the economy class 12 chapter gives the various differences between revenue receipts and capital receipts. They are tabulated below: 

Basis of Comparison  Revenue Receipts Capital Receipts 
Meaning  Revenue receipts refer to the receipts that the government receives and that is generated from the operating activities of the business. Revenue receipts are further divided into 2 categories i.e. Receipts from tax revenueReceipts from non-tax revenue  Capital receipts are those receipts which the government receive via or from the investments and financing activities such as Borrowings and Other liabilities, Recovery of Loans, Other receipts(Disinvestments)
Nature  Recurring in nature  Non-recurring 
Term  Short term  Long term 
Shown in  Income Statements  Balance sheet 
Value of asset or liability  Increases or decreases the value of asset or liability. Decreases the value of assets or increases the value of the liability.

Tax Revenues vs Non-Tax Revenues 

As we have discussed above in this blog of Government Budget and the Economy class 12 study notes, the revenue receipts are divided into 2 categories which are tax revenue receipts and non-tax revenue receipts. The tax revenue receipts can further be divided into 2 categories:

  • Direct taxes 
  • Indirect taxes 
Direct Taxes  Indirect Taxes 
These are taxes that are levied on
individuals and companies.
These taxes are imposed on
goods and services. 
These taxes are paid by the same person
on whom it is imposed 
It is not paid by the same person
on whom it is imposed.
The burden of direct taxes can not be
shifted to any other person.
Indirect taxes burden can be shifted
onto another person. 
Examples: income tax, property tax Examples: sales tax, GST

On the other hand, the non-tax revenues, which is the second type of revenue receipts which government may receive from all other sources other than taxes are:

  • Commercial Revenue
  • Interests
  • Dividends and Profits
  • External Grants
  • Administrative Revenues
  • Fees
  • License Fee
  • Fines and/or Penalties
  • Cash grants-in-aid from foreign countries and international organisations or the World Bank

Budget Expenditure 

The second component of the government budget is, of course, the government budget expenditure. As we have discussed above, these are of two types, the revenue expenditure and the capital expenditure. Let us understand the difference between these two according to Government Budget and the Economy class 12. 

Basis of Difference  Revenue Expenditure  Capital Expenditure 
Meaning  The revenue expenditures are those expenditures of government which neither cause increase in government assets nor any reductions in the government liabilities.  Capital expenditures are those expenditures of the government which leads to increase in the government assets or reduction in the government liabilities. 
Purpose  It is spent on normal functioning of the government departments and various provisions.  It is spent on the acquisition of assets, prepayment of borrowings and granting of loans and advances. 
Example  Examples of such expenditures can be old age pensions, expenses incurred on administrative services, national security, health and education etc.  Examples of such expenditures can be construction of new roads, highways, repayment of government loans, establishment of factories and companies etc. 
Budget Expenditure - Government Budget And The Economy Class 12
Image Source: Zigya.com

Plan Expenditure VS Non-Plan Expenditure

According to the chapter on Government Budget and the Economy class 12, expenditures can be of 2 types:

  • Plan expenditures: all those expenditures of the government that are to be incurred during the fiscal or the financial year on things like development and investment programs are termed as plan expenditures. 
  • Non-plan expenditures: all those expenditures of the government that are not included in the current five year plan are termed as non-plan expenditures. 

Types of Budget

According to the chapter on Government Budget and the Economy class 12, we can bifurcate the government budget into 3 major types:

  • Balanced Budget: when estimated receipts are equal to the government estimated expenditures. 
  • Surplus Budget: when government estimated receipts are shown more than the government estimated expenditures.
  • Deficit Budget: when government estimated receipts are shown less than the government estimated expenditures. This implies an increase in the government liabilities and fall in the reserves. 

Deficit can be of 3 types:

  • Revenue Deficit: Total Revenue Expenditure – Total Revenue Receipts
  • Fiscal Deficit: Total Budget Expenditure – Total Budget Receipts excluding borrowings

Or

Fiscal Deficit = Borrowings

  • Primary Deficit: Fiscal Deficit Interest Payment

Implications of Revenue Deficits and Fiscal Deficits

Moving further in the government budget and the economy class 12, it mentions the implications of revenue deficits and fiscal deficit. They are tabulated below.

Revenue Deficits (Total revenue expenditure > Total revenue receipts) Fiscal Deficits (Total expenditures > Total Receipts excluding borrowing)
A high revenue deficit shows fiscal indiscipline It leads to inflationary pressure
It implies that government is using up savings of other sectors of the economy to finance its consumption expenditure A country facing fiscal deficit has to face a situation of the debt trap.
It shows wasteful expenditures of the government on administration It further reduces future growth and development of the country and economy
It reduces the assets of the government due to disinvestment It increases foreign dependence
A high revenue deficit gives a warning signal to the government to either reduce or decrease its expenditures or increase its revenues It increases liability of the government

Measures to Reduce or Correct Different Deficits

As per the chapter on Government Budget and the Economy class 12, the measures that can be adopted to reduce or correct different deficits in the economy are:

  • Borrowing from international monetary institution and other countries
  • Lowering government expenditure
  • Increasing government revenue
  • Monetary expansion
  • deficit financing
  • Borrowing from public
  • Disinvestment

So we end this blog on Government Budget and the Economy class 12 chapter of macroeconomics hoping that this may prove to be helpful for that last moment revision for your exams. If you want to study abroad after 12th commerce or want to know more about the courses after 12th commerce, reach out to our experts at Leverage Edu. Sign up for a free session today! 

You May Also Like

MEC Courses
Read More

MEC Courses

What is the Full Form of MEC? What is the full form of MEC? MEC stands for commerce…