Government Budget and the Economy
Government Budget and the Economy tests the classification of receipts and expenditure and the meaning and implications of the three deficits.
Core rules
- Revenue receipts: tax revenue and non-tax revenue such as interest, dividends and fees; they create no liability and reduce no asset.
- Capital receipts: borrowings, disinvestment and recovery of loans; they create a liability or reduce an asset.
- Revenue expenditure: salaries, interest payments, subsidies and pensions; no asset is created.
- Capital expenditure: roads, repayment of loans, purchase of shares.
- Revenue deficit = revenue expenditure − revenue receipts.
- Fiscal deficit = total expenditure − total receipts other than borrowings = revenue deficit + capital expenditure − non-debt capital receipts.
- Primary deficit = fiscal deficit − interest payments.
- Fiscal deficit measures the government's borrowing requirement; a large revenue deficit means borrowing is financing consumption.
Worked example
Revenue receipts ₹500 crore, revenue expenditure ₹650 crore, capital expenditure ₹200 crore, non-debt capital receipts ₹50 crore. Revenue deficit = 650 − 500 = ₹150 crore. Fiscal deficit = (650 + 200) − (500 + 50) = ₹300 crore. If interest payments are ₹80 crore, primary deficit = 300 − 80 = ₹220 crore, so borrowing is not merely covering past interest.
Traps that cost marks
- Treating disinvestment as a revenue receipt; it is a capital receipt.
- Believing a fiscal deficit can coexist with a surplus budget; it cannot.
- Deducting interest from revenue deficit instead of from fiscal deficit when computing primary deficit.