Government Budget and the Economy
Government Budget and the Economy
This domain explains the budget as an annual statement of receipts and expenditure and its macroeconomic role. The exam tests revenue and capital receipts, revenue and capital expenditure, balanced, surplus and deficit budgets, and the meaning of fiscal, revenue and primary deficits.
Core rules
- Budget receipts are revenue receipts (tax and non-tax) and capital receipts (borrowings, disinvestment, recoveries of loans). Revenue receipts do not create liabilities or reduce assets; capital receipts do one or the other.
- Budget expenditure is revenue expenditure (salaries, interest, subsidies) and capital expenditure (creating assets or reducing liabilities).
- Fiscal deficit = total expenditure − total receipts excluding borrowings. It equals the government borrowing requirement.
- Revenue deficit = revenue expenditure − revenue receipts. Primary deficit = fiscal deficit − interest payments.
- A balanced budget has receipts equal to expenditure. A surplus budget has receipts greater than expenditure; a deficit budget has expenditure greater than receipts.
- Fiscal policy uses taxation and spending to influence aggregate demand. Deficit spending can raise demand but may cause crowding out and inflation.
Worked example
Total expenditure = ₹1,200 crore; revenue receipts = ₹700 crore; capital receipts excluding borrowings = ₹100 crore; interest payments = ₹150 crore. Total receipts excluding borrowings = 700 + 100 = ₹800 crore. Fiscal deficit = 1,200 − 800 = ₹400 crore. If revenue expenditure is ₹900 crore, revenue deficit = 900 − 700 = ₹200 crore. Primary deficit = 400 − 150 = ₹250 crore. The fiscal deficit of ₹400 crore must be financed by borrowing.
Traps
Do not treat all capital receipts as revenue. Borrowings are capital receipts but are excluded from the fiscal deficit calculation. Interest payments are revenue expenditure. Primary deficit can be smaller than fiscal deficit but is not necessarily zero. Do not say a deficit budget is always bad; distinguish capital expenditure from consumption spending.