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Questions and Answers
What does the primary deficit represent?
What does the primary deficit represent?
Which of the following statements about fiscal deficit is true?
Which of the following statements about fiscal deficit is true?
What does a revenue deficit indicate about government's financial management?
What does a revenue deficit indicate about government's financial management?
How does a high percentage of revenue or fiscal deficit affect governmental efficiency?
How does a high percentage of revenue or fiscal deficit affect governmental efficiency?
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What does crowding out of private investments by public borrowing mean?
What does crowding out of private investments by public borrowing mean?
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What is the implication of continuous fiscal deficit over the years?
What is the implication of continuous fiscal deficit over the years?
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Which type of deficit reflects the government's shortfall in managing its finances?
Which type of deficit reflects the government's shortfall in managing its finances?
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What is typically not a consequence of a high fiscal deficit?
What is typically not a consequence of a high fiscal deficit?
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What characterizes a regressive income tax system?
What characterizes a regressive income tax system?
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Which of the following accurately defines the primary deficit?
Which of the following accurately defines the primary deficit?
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What principle suggests that individuals should be taxed according to the benefits they receive from the government?
What principle suggests that individuals should be taxed according to the benefits they receive from the government?
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Which of the following represents a progressive tax system?
Which of the following represents a progressive tax system?
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What best represents vertical equity in tax systems?
What best represents vertical equity in tax systems?
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Which of these tax types is generally easier to manage from the government's perspective?
Which of these tax types is generally easier to manage from the government's perspective?
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Which statement accurately describes the Laffer Curve?
Which statement accurately describes the Laffer Curve?
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Which taxation principle aims to ensure that those with equal ability are taxed equally?
Which taxation principle aims to ensure that those with equal ability are taxed equally?
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Which of the following describes an indirect tax?
Which of the following describes an indirect tax?
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What aspect of taxation does the Ability to Pay Principle emphasize?
What aspect of taxation does the Ability to Pay Principle emphasize?
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What type of tax would likely be classified as regressive?
What type of tax would likely be classified as regressive?
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Which of the following taxes is an example of applying the Benefit Principle?
Which of the following taxes is an example of applying the Benefit Principle?
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What is the overarching goal of the principles of taxation discussed?
What is the overarching goal of the principles of taxation discussed?
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What is the timing of the budget presentation in India?
What is the timing of the budget presentation in India?
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Which part of the Finance Minister's speech includes the economic survey?
Which part of the Finance Minister's speech includes the economic survey?
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What account is used to manage loans and revenues raised by the government?
What account is used to manage loans and revenues raised by the government?
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Which fund is utilized by the President of India for unforeseen expenditures?
Which fund is utilized by the President of India for unforeseen expenditures?
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What was the total value of the budget receipts in 2010-11?
What was the total value of the budget receipts in 2010-11?
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How does the government financing in the economy relate in 2010-11?
How does the government financing in the economy relate in 2010-11?
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Which of the following is not part of the budget presented by the Finance Minister?
Which of the following is not part of the budget presented by the Finance Minister?
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What does the Public Account consist of?
What does the Public Account consist of?
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Which fiscal year recorded the highest revenue deficit?
Which fiscal year recorded the highest revenue deficit?
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What was the effective revenue deficit in FY 2012?
What was the effective revenue deficit in FY 2012?
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In which fiscal year did the primary deficit drop to its lowest point?
In which fiscal year did the primary deficit drop to its lowest point?
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Which fiscal year saw a fiscal deficit of 9.20?
Which fiscal year saw a fiscal deficit of 9.20?
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What was the trend in the effective revenue deficit from FY 2011 to FY 2014?
What was the trend in the effective revenue deficit from FY 2011 to FY 2014?
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Real GDP is equivalent to nominal GDP adjusted for inflation.
Real GDP is equivalent to nominal GDP adjusted for inflation.
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A revenue deficit occurs when government revenue exceeds its total expenditure.
A revenue deficit occurs when government revenue exceeds its total expenditure.
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Fiscal deficit measures the government's total expenditure without considering interest payments on prior debts.
Fiscal deficit measures the government's total expenditure without considering interest payments on prior debts.
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Crowding out of private investments occurs when high levels of government borrowing stimulate private sector growth.
Crowding out of private investments occurs when high levels of government borrowing stimulate private sector growth.
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A primary deficit indicates the government is borrowing for immediate expenditures and not for long-term asset creation.
A primary deficit indicates the government is borrowing for immediate expenditures and not for long-term asset creation.
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Continuous fiscal deficits can be sustainable if the funds are used solely for asset creation.
Continuous fiscal deficits can be sustainable if the funds are used solely for asset creation.
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Negative impacts of heavy fiscal deficits include increased efficiency in government operations.
Negative impacts of heavy fiscal deficits include increased efficiency in government operations.
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A high percentage of revenue deficit suggests effective management of government finances.
A high percentage of revenue deficit suggests effective management of government finances.
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The Benefit Principle states that individuals should pay taxes in proportion to their benefit received from the government.
The Benefit Principle states that individuals should pay taxes in proportion to their benefit received from the government.
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Indirect taxes are characterized as progressive, where the wealthy pay a higher proportion compared to the poor.
Indirect taxes are characterized as progressive, where the wealthy pay a higher proportion compared to the poor.
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Ceteris Paribus, increased government borrowing may lead to a necessity for external financing.
Ceteris Paribus, increased government borrowing may lead to a necessity for external financing.
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The Horizontal Equity Principle indicates that unequal individuals should be taxed similarly.
The Horizontal Equity Principle indicates that unequal individuals should be taxed similarly.
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Taxes on essential food must be minimal to ensure horizontal equity.
Taxes on essential food must be minimal to ensure horizontal equity.
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Direct taxes, such as income tax, are easier for the government to charge compared to indirect taxes.
Direct taxes, such as income tax, are easier for the government to charge compared to indirect taxes.
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The Ability to Pay Principle suggests that individuals should be taxed based on their income and wealth.
The Ability to Pay Principle suggests that individuals should be taxed based on their income and wealth.
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Progressive tax systems ensure that the rich pay lower proportions of their income compared to the poor.
Progressive tax systems ensure that the rich pay lower proportions of their income compared to the poor.
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The fiscal deficit target is set at 4% of GDP.
The fiscal deficit target is set at 4% of GDP.
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Capital expenditure includes spending on public goods such as bridges and roads.
Capital expenditure includes spending on public goods such as bridges and roads.
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Revenue deficit is concerned with asset creation and is targeted at 1% of GDP.
Revenue deficit is concerned with asset creation and is targeted at 1% of GDP.
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Direct taxes are imposed on consumption rather than income.
Direct taxes are imposed on consumption rather than income.
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The Ability to Pay Principle suggests taxes should be proportionate to income and wealth.
The Ability to Pay Principle suggests taxes should be proportionate to income and wealth.
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The public account is primarily used for generating new public borrowing.
The public account is primarily used for generating new public borrowing.
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Laffer Curve illustrates the relationship between taxation and government revenue as a linear function.
Laffer Curve illustrates the relationship between taxation and government revenue as a linear function.
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Fiscal deficit is defined as the difference between government’s total expenditure and total non-debt receipts.
Fiscal deficit is defined as the difference between government’s total expenditure and total non-debt receipts.
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The Laffer Curve represents a linear relationship between tax revenue and tax rate.
The Laffer Curve represents a linear relationship between tax revenue and tax rate.
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Proportional income tax means that taxpayers with higher incomes pay a larger percentage of their income in taxes.
Proportional income tax means that taxpayers with higher incomes pay a larger percentage of their income in taxes.
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Vertical equity suggests that individuals with greater income should be taxed at the same rate as those with lower income.
Vertical equity suggests that individuals with greater income should be taxed at the same rate as those with lower income.
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Revenue deficit is defined as the difference between revenue receipts and revenue expenditure.
Revenue deficit is defined as the difference between revenue receipts and revenue expenditure.
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A primary deficit occurs when fiscal deficit exceeds the interest on the previous government's debt.
A primary deficit occurs when fiscal deficit exceeds the interest on the previous government's debt.
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Low revenue receipts relative to expenditure indicates a high efficiency in government revenue collection.
Low revenue receipts relative to expenditure indicates a high efficiency in government revenue collection.
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Capital Expenditure includes spending on projects that create valuable assets for public use.
Capital Expenditure includes spending on projects that create valuable assets for public use.
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Tax receipts are classified under Capital Receipts in the government budget.
Tax receipts are classified under Capital Receipts in the government budget.
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Borrowing from the central bank is generally viewed as a standard practice for managing fiscal deficits.
Borrowing from the central bank is generally viewed as a standard practice for managing fiscal deficits.
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Grants received by the government are considered Capital Receipts.
Grants received by the government are considered Capital Receipts.
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Revenue Expenditure contributes to the creation of new government assets.
Revenue Expenditure contributes to the creation of new government assets.
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External borrowing can lead to a high level of external exposure for a country's economy.
External borrowing can lead to a high level of external exposure for a country's economy.
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Non-tax receipts include revenues generated from divesting public sector units.
Non-tax receipts include revenues generated from divesting public sector units.
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According to the Benefit Principle, individuals should pay taxes in proportion to the ______ received from the government.
According to the Benefit Principle, individuals should pay taxes in proportion to the ______ received from the government.
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The Ability to Pay Principle indicates that taxes should be paid in proportion to one's ______ and wealth.
The Ability to Pay Principle indicates that taxes should be paid in proportion to one's ______ and wealth.
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The principle of Horizontal Equity states that those who are ______ must be taxed equally.
The principle of Horizontal Equity states that those who are ______ must be taxed equally.
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Direct taxes, such as income tax, are considered ______ as they are based on the taxpayer's ability to pay.
Direct taxes, such as income tax, are considered ______ as they are based on the taxpayer's ability to pay.
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Indirect taxes, like sales tax, are often characterized as ______ since they tend to take a larger percentage of income from lower earners.
Indirect taxes, like sales tax, are often characterized as ______ since they tend to take a larger percentage of income from lower earners.
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Toll roads represent an application of the Benefit Principle and ______ equity.
Toll roads represent an application of the Benefit Principle and ______ equity.
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The overarching goal of taxation principles is to ensure minimal impact on free market ______ and production decisions.
The overarching goal of taxation principles is to ensure minimal impact on free market ______ and production decisions.
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Government typically uses a combination of tax principles to achieve ______ in its fiscal policy.
Government typically uses a combination of tax principles to achieve ______ in its fiscal policy.
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GDP is also referred to as the ______ GDP.
GDP is also referred to as the ______ GDP.
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The ______ Curve illustrates the relationship between tax revenue and tax rates.
The ______ Curve illustrates the relationship between tax revenue and tax rates.
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A ______ Income Tax system means that individuals with higher incomes pay a larger percentage of their income in taxes.
A ______ Income Tax system means that individuals with higher incomes pay a larger percentage of their income in taxes.
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Revenue expenditure includes functioning of judiciary, maintaining law, administration, salaries, subsidies and ______.
Revenue expenditure includes functioning of judiciary, maintaining law, administration, salaries, subsidies and ______.
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The difference between revenue expenditure and revenue receipts results in a ______ deficit.
The difference between revenue expenditure and revenue receipts results in a ______ deficit.
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Capital expenditure includes asset creation expenditures for providing public goods such as dams, bridges, and ______.
Capital expenditure includes asset creation expenditures for providing public goods such as dams, bridges, and ______.
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Those who are equal should be taxed equally, a principle known as ______ Equity.
Those who are equal should be taxed equally, a principle known as ______ Equity.
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Low revenue compared to expenditure doesn't necessarily imply low government interference in the economy; it may indicate inefficiency in ______.
Low revenue compared to expenditure doesn't necessarily imply low government interference in the economy; it may indicate inefficiency in ______.
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To cover deficits, borrowing options include domestically from the public, external financial institutions, or borrowing from the ______.
To cover deficits, borrowing options include domestically from the public, external financial institutions, or borrowing from the ______.
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Examples of non-tax receipts include stamp duty and dividends from ______.
Examples of non-tax receipts include stamp duty and dividends from ______.
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Capital receipts include funds from grants received, loans recovered, and occasional ______ proceeds.
Capital receipts include funds from grants received, loans recovered, and occasional ______ proceeds.
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A low percentage of revenue means government inefficiency in balancing expenses and ______.
A low percentage of revenue means government inefficiency in balancing expenses and ______.
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Borrowing from external financial institutions can result in increased ______ exposure for the government.
Borrowing from external financial institutions can result in increased ______ exposure for the government.
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The budget is usually presented in ______ to allow for enough time for approval and implementation.
The budget is usually presented in ______ to allow for enough time for approval and implementation.
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The Finance Minister's speech has two parts: Part A is the ______ of the year gone by.
The Finance Minister's speech has two parts: Part A is the ______ of the year gone by.
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The budget consists of estimated receipts and spending operated through three separate accounts: the Consolidated fund, the Contingency fund, and the ______.
The budget consists of estimated receipts and spending operated through three separate accounts: the Consolidated fund, the Contingency fund, and the ______.
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The Contingency fund is managed by the ______ of India for unforeseen expenditures.
The Contingency fund is managed by the ______ of India for unforeseen expenditures.
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In the fiscal year 2010-11, the size of the budget was over ______ thousand crores.
In the fiscal year 2010-11, the size of the budget was over ______ thousand crores.
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In 2010-11, the government receipts were only ______ thousand crores.
In 2010-11, the government receipts were only ______ thousand crores.
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Government participation in the economy was noted to be small, only ______ percent in 2010.
Government participation in the economy was noted to be small, only ______ percent in 2010.
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The consolidated fund requires ______ approval for spending.
The consolidated fund requires ______ approval for spending.
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The fiscal deficit in FY 2010 was ______.
The fiscal deficit in FY 2010 was ______.
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The effective revenue deficit was recorded at ______ in FY 2012.
The effective revenue deficit was recorded at ______ in FY 2012.
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In FY 2019, the primary deficit was ______.
In FY 2019, the primary deficit was ______.
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The revenue deficit for FY 2020 stood at ______.
The revenue deficit for FY 2020 stood at ______.
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In FY 2016, the fiscal deficit reached ______.
In FY 2016, the fiscal deficit reached ______.
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Study Notes
Nominal v. Real GDP
- Nominal GDP reflects the value of goods and services at current market prices
- Real GDP accounts for inflation, providing a more accurate picture of economic growth
Budget Deficits
-
Revenue Deficit:
- Occurs when government revenue expenditure exceeds revenue receipts
- Signifies poor financial management, as the government must borrow to fund administrative activities that don't generate assets
-
Fiscal Deficit:
- Difference between total government expenditures and total non-debt receipts
- Represents the government's total borrowing needs
- Justified if expenditures are for asset creation
- Becomes concerning if incurred year after year, leading to potential debt control issues
-
Primary Deficit:
- Calculated by subtracting interest payments on past debt from the fiscal deficit
- Can be used by current governments to highlight that interest payments are a result of past financial decisions
Crowding Out of Private Investments
- Occurs when the government's excessive borrowing increases interest rates, making it more expensive for businesses to borrow funds for investment
- This can stifle private investment and economic growth, as the government effectively "crowds out" private sector activity
Principles of Taxation
-
Benefit Principle:
- Individuals should pay taxes in proportion to the benefits they receive from government services
-
Ability to Pay Principle:
- Individuals should pay taxes based on their income and wealth
-
Horizontal Equity:
- Individuals with equal incomes should pay the same amount of taxes
-
Vertical Equity:
- Individuals with higher incomes should pay a greater proportion of their income in taxes
Types of Taxes
-
Direct Taxes:
- Levied on income and wealth
- Generally progressive, meaning higher earners pay a larger percentage of their income in taxes
- Examples: income tax, wealth tax
-
Indirect Taxes:
- Charged on goods and services
- Can be regressive, meaning lower earners pay a higher percentage of their income in taxes
- Examples: sales tax, excise duty, property tax
Indian Budget
- Timing: Presented in February, allowing for parliamentary approval and implementation by April
- Railway Budget: Presented separately
-
Finance Minister's Speech: Consists of two parts:
- Part A: Economic survey of the previous year
-
Part B: Budget presentation, including:
- Annual Financial Statement: Outlines projected receipts and expenditures
- Consolidated Fund: Includes all government revenues and loans
- Contingency Fund: Used for unforeseen expenses
- Public Account: Holds funds collected from individuals and organizations
Indian Budget Size
-
2010-11:
- Over 1100 thousand crore rupees ($246 million)
- Receipts: 682 thousand crore rupees
- GDP: 7800 thousand crore rupees
Key Terms
- GDP: The total value of goods and services produced within a country's borders at current market prices
- Laffer Curve: A theoretical relationship between tax rates and tax revenue, suggesting an optimal tax rate that maximizes revenue
- Primary Deficit: The difference between the Fiscal Deficit and the interest on the previous government's debt
- Progressive Income Tax: A tax system where higher earners pay a greater percentage of their income in taxes
- Horizontal Equity: Requires individuals with equal incomes to pay the same amount of taxes
- Indirect Tax: A tax levied on goods and services rather than income or wealth
Appendix
- Provides data on fiscal deficit, revenue deficit, primary deficit, effective revenue deficit for fiscal years FY 2010-FY 2024
Real vs Nominal GDP
- Real GDP is the value of goods and services produced in a country, adjusted for inflation. It gives a better picture of economic growth than nominal GDP, which is not adjusted for inflation.
- Nominal GDP is the value of goods and services produced in a country at current prices. It can be affected by inflation, which can overstate economic growth.
Types of Deficits
- Revenue Deficit is the difference between the government's revenue expenditure and revenue receipts. It indicates that the government is borrowing money to finance its everyday activities.
- Fiscal Deficit is the difference between the government's total expenditure and total non-debt receipts. It indicates that the government has exhausted all options for financing its spending. This deficit can be justified if the spending is used to create national assets, but it can be problematic if it occurs year after year.
- Primary Deficit is the difference between the fiscal deficit and interest payments incurred in past years. It can be used to show that the current government is not responsible for all of the interest payments.
Crowding Out of Private Investments
- Crowding Out occurs when government borrowing pushes up interest rates, making it more expensive for businesses to borrow money and invest.
- Heavy fiscal deficit can lead to crowding out because the government needs to borrow money from the credit market. This can force the government to turn to external sources for funding.
Principles of Taxation
- Benefit Principle states that individuals and firms should pay taxes in proportion to the benefits they receive from the government.
- Ability to Pay Principle states that individuals and firms should pay taxes in proportion to their income and wealth.
- Horizontal Equity means that those who are equal should be taxed equally.
- Vertical Equity means that those who are unequal should be taxed unequally.
Types of Taxes
- Direct Taxes are taxes charged directly on individuals and firms, including income tax and wealth tax. Direct taxes are progressive because wealthy individuals pay a higher proportion of their income in taxes.
- Indirect Taxes are taxes charged on goods and services. These taxes are typically regressive because they affect lower-income individuals more than higher-income individuals.
Composition of Taxes
- India traditionally had a higher proportion of indirect taxes due to a large informal sector and a lower income base. There has been a gradual increase in the share of direct taxes through measures like the PAN card.
Budget Components
-
Budget has two parts:
- Economic Survey, which analyzes the past year's economic performance.
- Annual Financial Statement, which outlines the government's revenue and expenditure plans for the coming year.
- The Consolidated Fund, Contingency Fund, and Public Fund are used to manage government finances.
Government Expenditure
- Revenue Expenditure refers to spending on the day-to-day operations of the government, such as salaries, subsidies, and pensions.
- Capital Expenditure refers to spending on assets, such as roads, bridges, and government infrastructure.
Government Receipts
- Revenue Receipts come from taxes and non-tax sources, such as stamp duty and dividends from state-owned enterprises.
- Capital Receipts include grants, loan recoveries, and non-debt receipts, like disinvestment proceeds from the sale of state-owned enterprises.
Borrowing
- Borrowing is necessary to cover budget deficits. The options for borrowing include:
- Domestically from the public
- External financial institutions
- Central bank (this is generally considered a last resort, as it can lead to inflation).
Laffer Curve
- The Laffer Curve illustrates the relationship between tax revenue and tax rates. It suggests that increasing tax rates beyond a certain point can actually lead to a decrease in tax revenue.
Glossary of Terms
- Gross Domestic Product (GDP): The total value of goods and services produced in a country within a year.
- Horizontal Equity: People with equal income should pay the same amount of tax.
- Indirect Tax: Taxes levied on goods and services.
- Laffer Curve: A theory suggesting that as tax rates increase, tax revenue will increase up to a certain point, and then decrease if tax rates are too high.
- Primary Deficit: The difference between the fiscal deficit and interest payments on past debt.
- Progressive Income Tax: A tax system where higher earners pay a larger proportion of their income in taxes.
- Proportional Income Tax: A tax system where all earners pay the same percentage of their income in taxes.
- Regressive Income Tax: A tax system where lower earners pay a larger proportion of their income in taxes.
- Revenue Deficit: The difference between government revenue expenditure and government revenue receipt.
- Revenue Expenditure: Government spending on goods and services that do not create assets, such as salaries, pensions, and subsidies.
- Revenue Receipt: Government income from taxes and other sources.
- Vertical Equity: People with higher income should pay a larger proportion of their income in taxes.
Principles of Taxation
- Benefit Principle: Tax based on the benefit received from the government.
- Ability to Pay Principle: Tax based on income and wealth.
- Horizontal Equity: Equal treatment of those who are equal.
- Vertical Equity: Unequal treatment of those who are unequal.
- Objective: Minimize impact on free market consumption and production decisions.
-
Examples:
- Toll Roads: Benefits principle and horizontal equity (same benefit - same tax)
- Income Tax: Ability to pay principle
- Tax on Essential Food: Minimal to ensure vertical equity
Types of Taxes
-
Direct Taxes:
- Income tax: Based on ability to pay.
- Wealth tax: Based on ability to pay.
- Progressive nature: Rich pay higher proportion and amount.
-
Indirect taxes:
- Sales tax, excise duty, property tax: Charged at the point of sale.
- Regressive nature: Depends on the price of goods or services. Rich pay lower percentage compared to poor.
- Equity: Indirect taxes can be considered equitable when applied to goods and services considered luxuries.
Government Budget
- Budget: The government's expenditure and revenue statement.
- Budget Presentation: In February in India to allow for approval by both houses and implementation by April.
- Railway Budget: Presented separately in India.
-
Two Parts:
- Part A: Economic survey of the past year.
-
Part B: Budget presentation (estimated receipts and spending) with three accounts:
- Consolidated Fund: All revenues and loans raised. Requires parliamentary approval for spending.
- Contingency Fund: Used for unforeseen expenditures by the President of India (ex. disasters). Post facto expense from the Consolidated Fund.
- Public Account: Includes funds like PPF and SSC. Does not belong to the government and must be returned to the people.
-
Example Budget Size:
- 2010-11: Over 1100 Thousand Crores ($246 Million)
- Receipts: 682 Thousand Crores
- GDP: 7800 Thousand Crores
- Government Participation: Small in India (14%). About 30% in developed countries.
-
Recent Budget:
- 2023-24: 4503 Thousand Crores
- 2023-24 GDP: 40 Lakh Crore ($3.8 Trillion)
Expenditure, Revenue and Deficit
- Revenue Expenditure: Used for the normal functioning of the government (judiciary, law enforcement, admin, salaries, subsidies, pensions). Does not create assets.
- Capital Expenditure: Used for asset creation (dams, bridges, roads, plants and machinery).
-
Revenue Receipts:
- Tax receipts
-
Non-tax receipts:
- Stamp duty
- Dividends from PSUs
-
Capital Receipts:
- Grants received
- Loans recovered
-
Non-debt Capital Receipts:
- Occasional disinvestment proceeds from selling stakes in PSUs (LIC, ONGC etc.)
-
Low Percentage of Revenue w.r.t Expenditure (Low tax & non-tax revenue vs expenditure):
- Does not necessarily mean low government interference.
- Could indicate inefficiency in revenue collection.
Borrowing Options
- Deficit Financing: Borrowing to cover budget deficits.
-
Options:
- Domestically from the Public: Preferred option.
- External Financial Institutions: Less desirable due to external exposure.
- Borrow from the central bank: Used in extreme conditions as it can lead to inflation.
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Description
Explore the critical concepts of Nominal vs. Real GDP and various types of budget deficits such as Revenue Deficit, Fiscal Deficit, and Primary Deficit. This quiz aims to deepen your understanding of economic indicators and their implications for financial management and policy. Test your knowledge and see how well you grasp these fundamental economic concepts.
