Public Finance and Fiscal Policy
Domain 9 deals with government revenue, expenditure, debt and the budget documents that record them, plus the classification rules on which deficit questions turn.
Budget structure
- Revenue receipts: taxes and non-tax revenue (fees, interest, dividends); they create no liability and reduce no asset.
- Capital receipts: borrowings, disinvestment, recovery of loans - they create liabilities or reduce assets.
- Revenue expenditure: salaries, subsidies, interest - no asset creation. Capital expenditure: roads, repayment of loans - creates assets or reduces liabilities.
- Budgets may be balanced, surplus or deficit.
Deficits
- Revenue deficit = revenue expenditure - revenue receipts.
- Fiscal deficit = total expenditure - total receipts excluding borrowings; it measures the total borrowing requirement.
- Primary deficit = fiscal deficit - interest payments.
- Budget deficit = total expenditure - total receipts.
Taxes and debt
- Direct taxes cannot be shifted (income tax); indirect taxes can (GST, excise).
- Progressive, proportional and regressive rates; impact is the first incidence, incidence is the final resting place.
- Public debt: internal versus external, productive versus unproductive, redeemable versus irredeemable.
Worked example
Revenue expenditure = 800; revenue receipts = 600; capital expenditure = 400; capital receipts excluding borrowing = 50. Revenue deficit = 200. Total expenditure = 1,200. Total receipts excluding borrowing = 650. Fiscal deficit = 550. If interest payments are 150, primary deficit = 550 - 150 = 400.
Traps
- Counting disinvestment as a revenue receipt; it is a capital receipt.
- Including borrowings in receipts when computing the fiscal deficit.
- Reporting primary deficit as larger than fiscal deficit; interest payments make it smaller.
- Saying GST is a direct tax; it is indirect.