Government Budget and the Economy
What the domain tests
Government Budget and the Economy tests budget structure, revenue and capital receipts and expenditure, deficit measures, and fiscal policy effects. You must classify receipts correctly and calculate the three main deficits.
Core rules
- Revenue receipts: taxes and non-tax revenue; they do not create liabilities or reduce assets.
- Capital receipts: borrowings, disinvestment, and recoveries of loans; they create liabilities or reduce assets.
- Revenue expenditure: salaries, subsidies, and interest; it does not create assets. Capital expenditure creates assets or reduces liabilities.
- Deficits: fiscal deficit = total expenditure − total receipts excluding borrowings; revenue deficit = revenue expenditure − revenue receipts; primary deficit = fiscal deficit − interest payments.
Worked example
Total expenditure = ₹1,200 crore; revenue receipts = ₹700 crore; non-debt capital receipts = ₹100 crore; interest payments = ₹150 crore. Fiscal deficit = 1,200 − (700 + 100) = ₹400 crore. Primary deficit = 400 − 150 = ₹250 crore. Borrowings of ₹400 crore finance the fiscal deficit.
Traps that cost marks
Do not treat disinvestment as a revenue receipt; it is a capital receipt. Do not include borrowings in total receipts when calculating fiscal deficit. Do not confuse revenue deficit with fiscal deficit. Interest payments are revenue expenditure but are excluded from primary deficit. A fiscal deficit can be expansionary but may crowd out private investment.