2nd PUC Economics Question Bank Chapter 11 Government Budget and the Economy

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Karnataka 2nd PUC Economics Question Bank Chapter 11 Government Budget and the Economy

2nd PUC Economics Government Budget and the Economy One Mark Questions and Answers

Question 1.
Write the meaning of budget.
Answer:
Budget is a financial statement. It is a statement which shows the estimated future incomes and expenditures of a Government. The estimated and anticipated revenue and expenditure of the Government for a financial year is called as budget.

Question 2.
What is deficit budget?
Answer:
When the anticipated income or revenue is less than its expenditure, it is known as deficit budget (Total Revenue is less than Total Expenditure). As in most of the State Government budgets, we find that its expenditure is more than its income.

Question 3.
Name the two accounts of a Government Budget.
Answer:
The two accounts of Government budget are Revenue Account and Capital Account.

Question 4.
Give any two examples for direct tax.
Answer:
The examples for direct tax are Income tax, Wealth tax, Property tax, Corporate tax.

Question 5.
Define Fiscal Policy.
Answer:
According to Arther Smithies, “Fiscal policy is a policy under which the Government uses its expenditure and revenue programmes to produce desirable effects and to avoid undesirable effects on the national income, output and employment”.

Question 6.
Write the meaning of progressive tax.
Answer:
When the tax is imposed according to the income of people, it is called Progressive tax. A progressive tax is a tax system in which the rate of tax increases as the income increases. Higher the income higher will be the tax and vice versa.

Question 7.
Mention any two sources of non-tax revenue.
Answer:
The sources of non tax revenue are Profits of public sector industries, grants in aid from foreign countries, Profits of RBI.

Question 8.
What is deficit financing?
Answer:
Deficit financing is one of the instruments of fiscal policy of Government for raising the level of output and employment.

Question 9.
How do you calculate Primary Deficit?
Answer:
Primary deficit is calculated as follows: Primary Deficit = Fiscal Deficit – Interest payments.

Question 10.
Write the meaning of fiscal deficit?
Answer:
It is that deficit which includes budget deficit plus borrowing from the market, other liabilities of the Government. Fiscal Deficit = Budget Deficit + market borrowings + other liabilities. It also refers to the excess of Government’s total expenditure over its total revenue.

Question 11.
What is Revenue deficit?
Answer:
It is the difference between revenue receipts and revenue expenditure. It is that deficit where Revenue Receipts are less than Revenue Expenditure.

2nd PUC Economics Government Budget and the Economy Two Marks Questions and Answers

Question 1.
State the objectives of the Government Budget.
Answer:
The major objectives of a Government Budget are as follows:

To re-allocate the resources for better socio-economic progress.
To redistribute the income and wealth and thereby to reduce inequalities through various social security schemes, public works, economic subsidies etc.
To prevent economic fluctuations for maintaining economic stability.
To manage public enterprises efficiently and to have control over monopoly firms and to attain social welfare.

Question 2.
Differentiate between surplus budget and deficit budget.
Answer:

Surplus Budget	Deficit Budget
(i) If the anticipated revenue of the Government exceeds it anticipated expenditure in a year, it is known an surplus budget.	(i) If the anticipated expenditure of the Government exceeds its anticipated revenue in a year, it is known as deficit budget.
(ii) Governments of developed countries usually plan for a surplus budget.	(ii) Governments of developed countries usually plan for a deficit budget.
(iii) It indicates the financial soundness of the economy	(iii) It indicates that the economy is not that healthy
(iv) This implies that the Government is giving preference to creating wealth from resources instead of spending for the welfare of the people	(iv) This indicates a deliberate excessive expenditure by the Government to set the economy on the path of progress and growth, keeping in mind the welfare of the people

Question 3.
State the differences between direct and indirect taxes.
Answer:

Direct Tax	Indirect Tax
(i) The Direct tax is the tax which is imposed by the Government on individuals and companies and which cannot be shifted to others.	(i) The Indirect tax is that tax which can be shifted to other persons by a person on whom it is imposed.
(ii) Here the incidence and impact of taxation falls on same person.	(ii) Here the incidence and impact of tax will be on two different parties.
(iii) Example- Income tax, Wealth tax, corporate tax etc.	(iii) Example central excise duties (tax), customs duties, service tax, value added tax etc.

Question 4.
What are the major components of non-plan revenue expenditure of the Governments in developing countries?
Answer:
The major components of non-plan revenue expenditure in developing countries are as follows:

Expenditure on defence services,
Interest payments on borrowings.
Subsidies on food, fertilizers, cooking gas etc.
and Law and order.

Question 5.
Mention the uses of tax system as an instrument of fiscal policy in India.
Answer:
The major uses of tax system as an instrument of fiscal policy are as follows:

Helps in mobilization of revenue and checking unwanted expenditure.
Brings favourable changes in redistribution of income and wealth.
Helpful to control inflation and deflation.

Question 6.
State the four objectives of fiscal policy.
Answer:
The major objectives of fiscal policy are as follows:

To mobilize the resources for development projects.
To achieve equality in distribution of income and wealth.
To encourage saving and investment.
To reduce regional disparities, poverty and unemployment.
For optimum utilisation of resources to attain full employment.

Question 7.
Give any four suggestions to reduce market loans in India.
Answer:
The following are a few suggestions to reduce market loans in India:

The RBI’s accounts should be integrated with the Government accounts.
The gold reserves should be auctioned and used to meet Public expenditure.
Proper utilisation of resources generated through disinvestment.
Utilisation of resources generated from the sale of vast real estate.

Question 8.
How can a deficit be reduced?
Answer:
The deficit can be reduced through the following ways:

By increasing direct tax collection more effectively.
By reducing public expenditure through efficient administration.
By undertaking disinvestment raising revenue through sale of shares/stocks of public sector undertakings.

Question 9.
State the difference between Balanced budget and Unbalanced Budget
Answer:
Balanced Budget: Here when the revenues from tax are equal with expenditure of the government, it is balance budget. (Total Revenue = Total Expenditure).

Unbalanced Budget: Here the Total anticipated Revenue is not equal to Total anticipated Expenditure. It could be either a Surplus or a Deficit Budget.

2nd PUC Economics Government Budget and the Economy Five Marks Questions and Answers

Question 1.
Write a note on the revenue account of the Government Budget.
Answer:

2nd PUC Economics Question Bank Chapter 11 Government Budget and the Economy 1

The revenue account of the Government consists of two categories viz., Revenue Receipts and Revenue Expenditure.

I. Revenue Receipts: The revenue receipts refer to revenue earned by the Government from both l ax and Non tax sources.
a) Tax revenue: – It is one of the main sources of revenue to the Government. Tax is a compulsory payment made by the people to the Government without expecting any direct benefits from the Government. Tax revenue can be classified as Direct tax and Indirect tax.

i) Direct tax: The direct tax is the tax levied by the Government which cannot be shifted by the person on whom it is levied. Here, the impact and incidence of tax will be on the same person. This tax is levied on the income and wealth of the people.. Personnel income tax, wealth tax, interest tax, expenditure tax are a few examples.

ii) Indirect tax: It is the tax levied on goods and services paid indirectly by the consumers. The impact and incidence of tax will be on different people. Indirect tax is a large source of revenue to the government. The various sources of indirect tax are Central excise duties, Custom duties etc.

b) Non-tax revenue: The revenue collected from sources other than the tax revenue is called non tax revenue. It consists of

Income from Public enterprises
Income from receipts
Revenue from administration
Income from railways

II. Revenue Expenditure: The revenue expenditure of Government is that expenditure incurred out of its current revenue receipts. These expenses are made by the Government on its various departments and services, interest payments on public debt, subsidies etc. The Revenue expenditure is classified as follows:

Plan Revenue Expenditure: The plan revenue expenditure is that expenditure spent by the Government on implementation of economic schemes, financial assistance to local Governments.
Non-Plan expenditure: This type of expenditure is related to the expenses incurred on internal and external securities like defence forces, law and order, subsidies, civil administration etc.

Question 2.
Explain the role of public expenditure as an instrument of fiscal policy.
Answer:
The public expenditure plays a vital role in developing countries like India. It has several effects on income, output and employment. Therefore, it is regarded as a very essential instrument in the determination of economic development of a country. In developing countries, the increased public expenditure is always desirable. The importance of public expenditure in any country is as follows:

The Government needs to fill deflationary gap (excess of output over consumption) and to restore full employment.
The Government expenditure is needed to development infrastructural facilities like roads, railways, bridges, irrigation facilities etc.
The Government is also expected to spend on civil administration.
The Government has to improve agricultural sector by providing subsidies.
For both internal and external securities the Government has to incur expenditure on law and order and defence forces.

Thus the role of public expenditure in overall development of an economy is very much needed for rapid economic development of a country.

Question 3.
Does Public Debt impose a burden? Discuss.
Answer:
The loan, borrowings made by the Government from public, organizations, institutions is known as public debt. When the expenditure of the Government is more than its revenue, Government will go for public borrowings.

Classification of Public Debt:
The public debt can be divided as follows :
a. Internal debt: It is debt borrowed by the Government from the sources available within the country. It includes internal borrowings, market loans, all treasury bills issued by RBI, State Governments, Commercial banks, etc. it is also known as loan taken on negotiable securities.

b. External debt: It refers to all those borrowings of Government from sources available outside the country. It includes loans taken by Government against non-negotiable instruments, non-interest bearing securities which are issued by international institutions like IMF, World Bank, IBRD, ADB, IDA, etc. Loans taken from IMF trust fund is also a part of external debt.

c. Other outstanding liabilities: It includes short term loans, loans taken against small savings schemes, Public provident fund, State provident contributions, Income tax annuity deposit schemes, interest bearing reserve funds, etc.

Public Debt as a burden: When the Government borrows more money, the public debt increases and the burden of payment of interest falls on the Government. Then the Government has to impose more taxes on the people. When more tax is levied on people, the disposable personal income of consumers falls and this will lead to reduction in consumption, savings and also national income at the end. As a result, the growth rate of an economy will be affected. So, public debt is regarded as a burden on the Government and people.

Question 4.
Explain the types of budget deficits.
Answer:
Revenue Deficit: It is the difference between revenue receipts and revenue expenditure. It is that deficit where Revenue Receipts are less than Revenue Expenditure. It is the excess of Government’s expenditure over its revenue.
It can be expressed as follows:

Revenue Deficit = Revenue Expenditure – Revenue Receipts.

Fiscal Deficit:
It is that deficit which includes budget deficit plus borrowing from the market and other liabilities of the Government. It is the excess of Government’s total expenditure over its total revenue. It can be expressed as follows:

Fiscal Deficit = Total Expenditure – Revenue Receipts + Non-Debt receipts.

Primary Deficit:
It is that deficit which is the difference between fiscal deficit and interest paid by the Government. It is calculated by finding the difference between Government’s total income and expenditure (interest earned and interest paid is excluded). Revenue deficit and capital deficits are two types of primary deficits. The Primary deficit indicates the borrowing requirements of the Government to meet fiscal deficit excluding interest payments. It can be expressed as follows:

Primary Deficit = Fiscal Deficit – Interest payments.

Deficit reduction: The deficit can be reduced through the following ways:

By increasing direct tax collection more effectively.
By reducing public expenditure through efficient administration.
By undertaking disinvestment (raising revenue through sale of shares/stocks of public sector undertakings).

Question 5.
What are the Causes for Increase in Public Expenditure in India?
Answer:
In 1950, public expenditure was Rs. 900 crores and in 2004 it was around Rs.5,05,000 crores. This drastic increase in public expenditure is due to following main reasons. They are:

Rapid growth of population.
Serious effects of urbanization.
Increase in defence expenditure.
Increase in subsidies, grants and aids.
Increase in administration expenditure.
More developmental and constructive projects undertaken.
Inflation to a certain extent.
Natural and manmade calamities.
Poverty and unemployment.
Effects of democracy.

2nd PUC Economics Government Budget and the Economy Ten Marks Questions and Answers

Question 1.
Explain the various components of Government Budget.
Answer:

2nd PUC Economics Question Bank Chapter 11 Government Budget and the Economy 2

The Government Budget can be classified as Revenue Account and Capital Account.
A) Revenue Account: The revenue account of the Government consists of two categories viz., Revenue Receipts and Revenue Expenditure.

I. Revenue Receipts: The revenue receipts refer to revenue earned by the Government from both Tax and Non tax sources.
(a)Tax revenue: – It is one of the main sources of revenue’to the Government. Tax is a compulsory payment made by the people to the Government without expecting any direct benefits from the Government. Tax revenue can be classified as Direct tax and Indirect tax.

i) Direct tax- The direct tax is the tax levied by the Government which cannot be shifted by the person on whom it is levied. Here, the impact and incidence of tax will be on the same person. This tax is levied on the income and wealth of the people. Personnel income tax, wealth tax, interest tax, expenditure tax are a few examples.

ii) Indirect tax: – It is the tax levied on goods and services paid indirectly by the consumers. The impact and incidence of tax will be on different people. Indirect tax is the largest source of revenue to the Government. Tlie various sources of indirect tax are Central excise duties, Custom duties etc.

b) Non-tax revenue: The revenue collected from sources other than the tax revenue is called non tax revenue. It consists of

Income from Public enterprises,
Income from receipts,
Revenue from administration and
Income from railways.

a) Plan Revenue Expenditure: The plan revenue expenditure is that expenditure spent by the Government on implementation of economic schemes, financial assistance to local Governments.
b) Non-Plan expenditure: This type of expenditure is related to the expenses incurred on internal and external securities like defence forces, law and order, subsidies, civil administration etc.

B. Capital Account: This account shows the capital requirements of Government and its way of financing various categories. The capital account of Budget of Government consists of two divisions viz., Capital Receipts and Capital expenditures.

i) Capital Receipts: The capital receipts refer to those receipts of Government which create liability or reduce financial assets. These are obtained through raising loans from the market, central Bank and foreign sources. It also includes loans raised through issuing indemnity bonds, debentures etc. The other sources of this kind are loans recovered from local Governments, small savings, public provident fund etc.

ii) Capital Expenditures: It is that expenditure of Government which is spent on acquisition of assets like land, building, tools, machines, investment on shares, stocks, loans and advances made etc. The capital expenditure is also categorized as Plan capital expenditure and non-plan capital expenditure.

Plan capital expenditure: This expenditure is made to create permanent revenue yielding assets. For example for construction of roadways, irrigation projects, power stations, education, public health, housing, etc. This expenditure is incurred on creation of economic and social infrastructures.
Non-plan capital expenditure: This type of expenditure is spent to provide rehabilitation facilities to the people who are affected by natural calamities, compensation paid to the victims of accidents and payment of interest on loans borrowed.

Question 2.
Discuss the various instruments of fiscal policy.
Answer:
Fiscal policy is the policy of the Government in respect of public revenue, public expenditure and public borrowings. The major instruments of fiscal policy are

(a) Public Expenditure
(b) Public Revenue
(c) Public Debt and
(d) Deficit Financing

a) Public Expenditure: Public expenditure is nothing the expenses of Government incurred to promote economic and social welfare. It plays a vital role in developing countries like India. It has several effects on income, output and employment. Therefore, it is regarded as a very essential instrument in the determination of economic development of a country. In developing countries, the increased public expenditure is always desirable.

According to Wagner’s Law, there is a tendency of increasing public expenditure in respect of the following activities:

To undertake material production.
Provision of social services like public health, literacy programmes etc.
Maintenance of internal and external security law and order.

b) Public Revenue: Public revenue is the income of the Government from various sources , both tax and non-tax sources of revenue. In order to bring economic stability a suitable taxation policy is always desired.

The various sources of tax revenue are income tax, corporate tax, customs duties, wealth tax, service tax, excise duties etc. Similarly, the non-tax revenue sources are interest on loans, income from public enterprises, fees, fines, penalties, profits of RBI etc. The major uses of tax system as an instrument of fiscal policy are as follows:

Helps in mobilization of revenue and checking unwanted expenditure.
Brings favourable changes in redistribution of income and wealth.
Helpful to control inflation and deflation.

c) Public Debt: The loan, borrowings made by the Government from public, organizations, institutions is known as public debt. When the expenditure of the Government is more than its revenue, Government will go for public borrowings.

Classification of Public Debt:
The public debt can be divided as follows:
i) Internal debt: It is debt borrowed by the Government from the sources available within the country. It includes internal borrowings; market loans, etc. All treasury bills issued by RBI, State govt.’s, commercial banks, etc. It is also known as loan taken on negotiable securities.

ii) External debt: It refers to all those borrowings of Government from sources available outside the country. It include loans taken by Government against non-negotiable instruments, non-interest bearing securities which are issued by international institutions like IMF, World Bank, IBRD, ADB, IDA, etc. Loans taken from IMF trust fund is also a part of external debt.

Public Debt as a burden:
When the Government borrows more money, the public debt increases and burden of payment of interest falls on the Government. Then the Government has to impose more taxes on the people. When more tax is levied on people, the disposable personal income of consumer’s falls and this will lead to reduction in consumption, savings and also national income at the end. As a result, the growth rate of an economy will be affected. So, public debt is regarded as a burden on the Government and people.

In fact, the internal debt does not create any serious problem in country as the citizens of the country owe the debt to themselves. But external debt is a serious problem. In case of external debt, we borrow from other countries. This will transfer our purchasing power to other countries through payment of interests and reduce the money value of debtor country. So it advisable to reduce market debt:

The following are few suggestions to reduce market loans in India:

The RBI’s accounts should be integrated with the Government accounts.
The gold reserves should be auctioned and used to meet Public expenditure.
Proper utilisation of resources which are generated through disinvestment.
Utilisation of resources generated from the sale of vast real estate.

d) Deficit Financing: Deficit financing is one of the instruments of fiscal policy of Government for raising the level of output and employment. It refers to higher expenditure over receipts. It is used to finance economic planning. The major methods adopted by the Government to raise funds for deficit financing are Post Office savings, Provident fund, Public borrowings and printing of new currencies etc.

The deficit financing as an instrument of Fiscal policy leads to an increase in aggregate demand, aggregate investment, production, employment and income. A moderate deficit financing is always desirable in a developing country like India as it contributes to growth of an economy.