Government Budget and the Economy
What this domain tests
Government Budget and the Economy tests budget components, revenue and capital receipts and expenditure, the three deficits, and fiscal policy.
Core rules
- Budget receipts: revenue receipts (tax and non-tax, non-debt) and capital receipts (borrowings, disinvestment, recoveries of loans). Revenue expenditure does not create assets or reduce liabilities; capital expenditure does.
- Revenue deficit = revenue expenditure − revenue receipts. Fiscal deficit = total expenditure − total receipts excluding borrowings; it equals the borrowing requirement. Primary deficit = fiscal deficit − interest payments.
- Fiscal policy uses government spending, taxation, and borrowing to influence AD, distribution, and stabilisation. Expansionary policy raises demand; contractionary policy cools inflation.
- Deficits can finance public investment, but persistent fiscal deficits risk crowding out, debt traps, and inflation.
Worked example
Revenue expenditure = ₹800; capital expenditure = ₹400; revenue receipts = ₹600; non-debt capital receipts = ₹100; interest payments = ₹100. Total expenditure = 1,200. Total non-debt receipts = 700. Fiscal deficit = 1,200 − 700 = 500. Revenue deficit = 800 − 600 = 200. Primary deficit = 500 − 100 = 400. Reasoning: borrowing is the residual, not a receipt netted in the fiscal deficit; interest is already inside revenue expenditure, so it is removed only for the primary deficit.
Traps
Treating borrowings as revenue receipts; calling disinvestment revenue expenditure; confusing revenue deficit with fiscal deficit; adding interest instead of subtracting it for primary deficit; and assuming all deficits are bad.