Government Budget and the Economy
Government Budget and the Economy tests budget terminology, deficit measures and fiscal-policy effects.
Budget concepts
A government budget is an annual statement of estimated receipts and expenditure. Revenue receipts are non-debt creating (tax and non-tax); capital receipts create liabilities or reduce assets (borrowing, disinvestment). Revenue expenditure does not create assets; capital expenditure does. Budgetary deficit = total expenditure − total receipts. Revenue deficit = revenue expenditure − revenue receipts. Fiscal deficit = total expenditure − total receipts excluding borrowings; it indicates borrowing requirement. Primary deficit = fiscal deficit − interest payments.
Deficits can finance public investment but may cause crowding out, inflation and debt burden. Fiscal policy aims at growth, redistribution and stabilisation.
Worked example
Revenue expenditure is ₹900 crore, revenue receipts ₹700 crore, capital expenditure ₹300 crore and capital receipts excluding borrowing ₹50 crore. Total expenditure=₹1,200 crore; total receipts excluding borrowing=₹750 crore; fiscal deficit=₹450 crore. Revenue deficit=₹200 crore. If interest payments are ₹120 crore, primary deficit=₹450−₹120=₹330 crore. The fiscal deficit shows the government must borrow ₹450 crore.
Traps
Fiscal deficit is not the same as revenue deficit. Borrowing is a capital receipt but is excluded from the fiscal deficit calculation. Disinvestment is a capital receipt, not revenue. A deficit is not always bad: it depends on whether it finances capital formation. Do not add interest payments to get primary deficit; subtract them.