Government Budget and the Economy
What this domain tests
This domain covers the budget, revenue and capital receipts and expenditure, revenue deficit, fiscal deficit, primary deficit, public debt, and fiscal policy. Numerical questions on deficits are common.
Core rules
- Revenue receipts are tax and non-tax receipts that do not create liabilities or reduce assets.
- Capital receipts create liabilities or reduce assets; borrowings and disinvestment are capital receipts.
- Revenue expenditure does not create assets; capital expenditure creates assets or reduces liabilities.
- Revenue deficit = revenue expenditure - revenue receipts.
- Fiscal deficit = total expenditure - total receipts excluding borrowings.
- Primary deficit = fiscal deficit - interest payments.
- Fiscal policy uses government spending and taxation to influence AD.
Worked example
Revenue expenditure = 500, capital expenditure = 300, revenue receipts = 400, non-debt capital receipts = 100. Total expenditure = 800. Total receipts excluding borrowings = 500. Fiscal deficit = 800 - 500 = 300. Revenue deficit = 500 - 400 = 100. If interest payments are 80, primary deficit = 300 - 80 = 220.
Traps that cost marks
Fiscal deficit is not the same as revenue deficit. Borrowings are capital receipts but are excluded from the fiscal deficit calculation because they finance it. Disinvestment is a non-debt capital receipt, not revenue. Primary deficit excludes interest payments. Do not count revenue receipts as capital receipts.