Chapter 5: Government Budget and the EconomyClass 12 Economics — summary, notes, extra questions & MCQ quiz

Summary

The government budget is the annual financial statement of estimated receipts and expenditures, presented to Parliament under Article 112 of the Constitution. Through the budget the government performs three functions: allocation (providing public goods such as defence and roads, which are non-rival and non-excludable and so cannot be supplied by the market), redistribution (changing the distribution of income through taxes and transfers to make it fairer), and stabilisation (correcting fluctuations in output, employment and prices). The budget has two parts. The revenue budget covers revenue receipts (tax revenue from direct and indirect taxes, and non-tax revenue) and revenue expenditure. The capital budget covers capital receipts (borrowings, recovery of loans, disinvestment) and capital expenditure, which create or reduce assets and liabilities. The chapter defines several deficit measures: the revenue deficit (revenue expenditure minus revenue receipts), the fiscal deficit (total expenditure minus receipts excluding borrowing, which shows the government’s total borrowing requirement), and the primary deficit (fiscal deficit minus interest payments). It also covers fiscal policy and the multipliers — government-expenditure, tax, balanced-budget and transfer multipliers — automatic stabilisers, the issue of government debt and its burden, the Ricardian equivalence idea, the FRBM Act and the GST.

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