Public Finance and Government Budget
Domain 9 covers public goods, externalities, taxation, the government budget, and deficits. The exam tests classification of receipts and expenditure and the calculation of revenue, fiscal, and primary deficits.
Core rules and concepts
- Public goods are non-rival and non-excludable; markets underprovide them, so government provision is needed. Externalities cause divergence between private and social cost.
- Direct taxes fall on income and wealth; indirect taxes fall on consumption. Progressive taxes take a larger proportion from higher incomes.
- Revenue receipts are taxes and non-tax revenue; capital receipts include borrowings and disinvestment. Revenue expenditure does not create assets; capital expenditure does.
- Revenue deficit = revenue expenditure − revenue receipts. Fiscal deficit = total expenditure − total receipts excluding borrowings. Primary deficit = fiscal deficit − interest payments.
Worked example
Revenue receipts are ₹500 crore and revenue expenditure ₹600 crore, so the revenue deficit is ₹100 crore. Non-debt capital receipts are ₹150 crore and capital expenditure is ₹200 crore. Total expenditure is ₹800 crore; total receipts excluding borrowings are ₹650 crore; the fiscal deficit is ₹150 crore. The same result comes from revenue deficit + capital expenditure − non-debt capital receipts = 100 + 200 − 150 = ₹150 crore. If interest payments are ₹40 crore, the primary deficit is ₹110 crore.
Traps that cost marks
Do not treat borrowings as a receipt that reduces the fiscal deficit. Do not call disinvestment revenue expenditure. Do not confuse the revenue deficit with the fiscal deficit. Remember that fiscal deficit includes capital expenditure.