Public Finance and the Government Budget
Public finance studies government income, expenditure, borrowing and their effects on the economy. The KSEAB SSLC JTS paper tests budget receipts and expenditure, revenue and capital accounts, the three deficits, taxes, GST and fiscal discipline. Karnataka's state budget is a familiar example of these concepts.
Core rules and concepts
- Budget: annual statement of estimated receipts and expenditure of the government.
- Revenue receipts: taxes and non-tax income that do not create liabilities; capital receipts include borrowings and disinvestment.
- Revenue expenditure: routine spending such as salaries and interest; capital expenditure creates assets.
- Revenue deficit = revenue expenditure - revenue receipts.
- Fiscal deficit = total expenditure - total receipts excluding borrowings. It shows total borrowing need.
- Primary deficit = fiscal deficit - interest payments.
- Direct taxes are paid directly by persons (income tax); indirect taxes are passed on through prices (GST). GST is destination-based and shared between Centre and states.
Worked example
Revenue expenditure = ₹500 crore; revenue receipts = ₹420 crore; capital expenditure = ₹180 crore; non-debt capital receipts = ₹120 crore; interest payments = ₹60 crore. Revenue deficit = 500 - 420 = ₹80 crore. Total expenditure = 680; receipts excluding borrowings = 420 + 120 = 540; fiscal deficit = 680 - 540 = ₹140 crore. Primary deficit = 140 - 60 = ₹80 crore. Borrowing of ₹140 crore is needed, of which ₹60 crore merely pays interest.
Traps that cost marks
Borrowings are capital receipts, not revenue receipts. Fiscal deficit is not the same as revenue deficit. Interest payments are part of revenue expenditure and are subtracted only to get the primary deficit. Do not treat disinvestment as tax revenue. A deficit is not always bad; it depends on whether spending creates productive assets.