Government Budget and the Economy Overview
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Questions and Answers

The government intervention to expand or reduce demand constitutes the stabilisation ______.

function

Revenue receipts are those receipts that do not lead to a claim on the ______.

government

Tax revenues are divided into direct taxes and ______ taxes.

indirect

Examples of direct taxes include personal income tax and ______ tax.

<p>corporation</p> Signup and view all the answers

Excise taxes are taxes levied on goods produced within the ______.

<p>country</p> Signup and view all the answers

Necessities of life are either exempted from excise taxes or taxed at ______ rates.

<p>low</p> Signup and view all the answers

Non-tax revenue mainly consists of interest receipts on loans and ______ on investments.

<p>dividends</p> Signup and view all the answers

Capital receipts involve money received by the government from loans or from the sale of its ______.

<p>assets</p> Signup and view all the answers

A government incurs a budget ______ when it spends more than it collects in revenue.

<p>deficit</p> Signup and view all the answers

The revenue deficit refers to the excess of government’s revenue expenditure over revenue ______.

<p>receipts</p> Signup and view all the answers

In 2022–23, the revenue deficit was calculated as ______ percent of GDP.

<p>3.8</p> Signup and view all the answers

Total revenue receipts amounted to ______ percent of GDP in the 2022–23 budget.

<p>8.5</p> Signup and view all the answers

Interest payments accounted for ______ percent of the government's revenue expenditure.

<p>3.6</p> Signup and view all the answers

The total expenditure of the government for 2022–23 was ______ percent of GDP.

<p>15.3</p> Signup and view all the answers

Capital receipts in the budget are comprised of recovery of loans, other receipts, and borrowings and other ______.

<p>liabilities</p> Signup and view all the answers

The fiscal deficit is calculated as total expenditure minus revenue receipts and ______.

<p>capital receipts</p> Signup and view all the answers

The fiscal deficit will have to be financed through ______.

<p>borrowing</p> Signup and view all the answers

Gross fiscal deficit includes Net borrowing at home, Borrowing from RBI, and Borrowing from ______.

<p>abroad</p> Signup and view all the answers

Net borrowing at home includes borrowing from the public through debt instruments and indirectly from ______.

<p>commercial banks</p> Signup and view all the answers

The gross fiscal deficit is a key variable in judging the financial health of the public sector and the ______ of the economy.

<p>stability</p> Signup and view all the answers

Revenue deficit is a part of fiscal deficit, expressed as Fiscal Deficit = Revenue Deficit + Capital Expenditure - non-debt creating ______.

<p>capital receipts</p> Signup and view all the answers

A large share of revenue deficit in fiscal deficit indicates that a large part of borrowing is used to meet ______ expenditure needs.

<p>consumption</p> Signup and view all the answers

The primary deficit focuses on present fiscal imbalances and is calculated by subtracting net interest liabilities from the ______.

<p>fiscal deficit</p> Signup and view all the answers

Net interest liabilities consist of interest payments minus interest receipts by the government on net ______ lending.

<p>domestic</p> Signup and view all the answers

Under GST, the tax is discharged at every stage of ______ and the credit of tax paid at the previous stage is available for set off.

<p>supply</p> Signup and view all the answers

It effectively is a tax on ______ addition at each stage of supply.

<p>value</p> Signup and view all the answers

GST has replaced various types of taxes/cesses levied by the ______ and State/UT Governments.

<p>Central</p> Signup and view all the answers

Some major taxes that were levied by Centre include Central Excise Duty, Service Tax, and Central Sales ______.

<p>Tax</p> Signup and view all the answers

State Governments will continue to levy VAT on alcoholic liquor for ______ consumption.

<p>human</p> Signup and view all the answers

There are ______ standard rates applied under GST: 0%, 3%, 5%, 12%, 18%, and 28%.

<p>six</p> Signup and view all the answers

GST was rolled out during a special midnight session of the ______ on 30 June/1 July, 2017.

<p>Parliament</p> Signup and view all the answers

The 101st Constitution Amendment Act introduced Article 246A empowering Parliament and Legislatures of States to make laws with respect to ______ tax.

<p>Goods and Services</p> Signup and view all the answers

A cut in taxes increases disposable income (Y – T) at each level of _____

<p>income</p> Signup and view all the answers

This shifts the aggregate expenditure schedule upwards by a fraction c of the decrease in _____

<p>taxes</p> Signup and view all the answers

The tax multiplier can be calculated using the same method as for the government expenditure _____

<p>multiplier</p> Signup and view all the answers

A tax cut will cause an increase in _____ and output.

<p>consumption</p> Signup and view all the answers

The tax multiplier is a _____ multiplier.

<p>negative</p> Signup and view all the answers

The tax multiplier is smaller in absolute value compared to the government spending _____

<p>multiplier</p> Signup and view all the answers

In equation (5.7), the change in output (∆Y*) is influenced by the change in _____ (∆T)

<p>taxes</p> Signup and view all the answers

The relationship in equation (5.8) describes how output (∆Y) relates to the change in _____ (∆T).

<p>taxes</p> Signup and view all the answers

An increase in G by 100 increases output by ______.

<p>500</p> Signup and view all the answers

A tax increase would reduce income by ______.

<p>400</p> Signup and view all the answers

The equilibrium income refers to the final income arrived at after all rounds of the ______ have worked themselves out.

<p>multipliers</p> Signup and view all the answers

The balanced budget multiplier is equal to ______.

<p>1</p> Signup and view all the answers

The increase in government spending raises income directly and then indirectly through the ______ chain.

<p>multiplier</p> Signup and view all the answers

The effect on income of a tax increase is given by ______.

<p>– ∆T(c + c2 +...)</p> Signup and view all the answers

In the case of proportional taxes, the government collects a constant fraction, ______, of income.

<p>t</p> Signup and view all the answers

From the equation ∆Y = ∆ G + c (∆Y – ∆T), we see that investment does not ______.

<p>change</p> Signup and view all the answers

Flashcards

Stabilisation Function

The government's use of fiscal policy to influence the economy, aiming to either boost demand (expansionary) or curb it (contractionary).

Revenue Receipts

Government income that doesn't create an obligation to repay (non-redeemable).

Direct Taxes

Taxes levied on income earned by individuals and corporations.

Indirect Taxes

Taxes imposed on goods and services, charged at various stages of production and sale.

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Excise Taxes

Taxes on goods produced within the country.

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Customs Duties

Taxes on goods imported into and exported out of a country.

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Non-Tax Revenue

Government income from sources other than taxes, such as interest on loans, dividends from investments, and fees for services.

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Capital Receipts

Government income obtained through borrowing or selling assets.

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Tax Cut Effect on AE

A decrease in taxes leads to an increase in disposable income, which subsequently shifts the aggregate expenditure (AE) curve upwards.

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Marginal Propensity to Consume (MPC)

The fraction of additional income that is spent on consumption.

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Tax Multiplier

The change in equilibrium output resulting from a change in taxes.

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Tax Multiplier Formula

The tax multiplier is calculated as -c/(1-c), where 'c' is the MPC. A negative value indicates that a decrease in taxes leads to an increase in output.

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Tax Multiplier vs. Government Spending Multiplier

The tax multiplier has a smaller magnitude than the government spending multiplier, meaning that a change in taxes has a less impactful effect on output.

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Government Spending Multiplier

The change in output resulting from a change in government spending.

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Tax Multiplier Direction

A change in taxes affects consumption and thus output, but with a negative effect. An increase in taxes leads to a decrease in output, and vice versa.

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Tax Multiplier Principle

The tax multiplier is based on the idea that changes in disposable income, caused by changes in taxes, affect consumption and therefore the aggregate expenditure.

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Fiscal Deficit

The total amount of money a government borrows in a given year to finance its spending.

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Revenue Deficit

The portion of the fiscal deficit that is used to finance the government's day-to-day expenses (like salaries, pensions, and subsidies).

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Capital Expenditure

The amount of money a government borrows to finance its investment spending, such as infrastructure projects.

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Non-debt Creating Capital Receipts

Money earned by the government from sources other than taxation, such as selling off assets.

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Gross Primary Deficit

The amount of money a government needs to borrow after accounting for interest payments on existing debt.

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Net Borrowing at Home

The amount of money a government borrows from domestic sources, such as individuals and banks.

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Borrowing from RBI

The amount of money a government borrows from the central bank of the country.

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Borrowing from Abroad

The amount of money a government borrows from foreign sources, such as other countries or international organizations.

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Budget Deficit

When a government's spending exceeds its revenue, it incurs a budget deficit. This indicates that the government is borrowing money to cover its expenses.

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Revenue Deficit Calculation

The difference between the government's revenue expenditure and its revenue receipts is called the revenue deficit. It's the amount the government needs to borrow to finance its everyday operations.

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Revenue Expenditure

Revenue expenditure refers to the government's spending on day-to-day operations like salaries, subsidies, and interest payments on debt. These expenses do not create assets.

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Balanced Budget Multiplier

The change in equilibrium income (∆Y) resulting from an equal change in government spending (∆G) and taxes (∆T) where ∆G=∆T, with no impact from induced consumption.

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Multiplier

The multiple by which a change in autonomous spending (e.g., government spending) affects equilibrium income.

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Multiplier Process

The process by which an initial change in spending leads to a larger change in equilibrium income, as spending is passed through the economy.

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Equilibrium Income

The final level of income reached after all rounds of the multiplier process have worked themselves out.

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Balanced Budget

A situation where the government's receipts (taxes) equal its expenditures.

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Autonomous Government Spending

A type of government spending that is not directly tied to changes in GDP, like infrastructure projects or defense spending.

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Proportional Taxes

A situation where the government's revenues (taxes) are a fixed proportion (t) of national income, represented as T = tY.

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What is GST?

A tax system where the tax is calculated at each stage of production and distribution, and the tax paid at the previous stage is deducted from the tax payable at the current stage.

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What is the main goal of GST?

GST aims to harmonize taxation across India, creating a uniform system for all goods and services. This eliminates the complexities of multiple taxes and rates.

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What taxes did GST replace?

Various taxes like Central Excise Duty, Service Tax, and State VAT are now replaced by the single GST system.

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What are some exceptions to GST?

GST is applied to all goods and services except for five petroleum products, which are temporarily exempt. Alcohol for human consumption continues to be taxed by states.

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What are the GST tax rates?

The GST system has six standard rates: 0%, 3%, 5%, 12%, 18% and 28%. These rates are based on the type of goods and services being bought or sold.

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What was the significance of GST implementation?

GST is the biggest tax reform in India since independence, aimed at simplifying the tax system and creating a more equitable business environment.

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How was the GST law implemented?

The GST law was implemented through the 101st Constitution Amendment Act, which granted the Central and State governments the power to levy GST

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What are the GST acts?

The CGST Act, UTGST Act, and SGST Acts were enacted to govern the implementation of GST across India, ensuring a uniform approach to the tax system.

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Study Notes

Government Budget and the Economy

  • Government plays a crucial role in a mixed economy, influencing economic life through the budget.
  • The government budget outlines estimated receipts and expenditures for a financial year (April 1st to March 31st).
  • Revenue receipts (non-redeemable) include taxes and non-tax sources.
  • Tax revenues are categorized as direct (personal income, corporation tax) and indirect (excise, customs, service tax).
  • Non-tax revenue includes interest, dividends, and fees.
  • Capital receipts create liabilities (loans) or decrease assets (selling of shares).

Objectives of Government Budget

  • Allocation: Government provides goods and services (national defense, roads) not efficiently provided by the market. Public goods are non-rivalrous (consumption by one doesn't reduce it for others) and non-excludable (everyone can use it).
  • Redistribution: The government redistributes income through taxes and transfers, aiming for a fairer distribution.
  • Stabilization: Government intervention corrects income and employment fluctuations. This involves managing aggregate demand to maintain employment and control inflation.

Classification of Receipts and Expenditures

  • Revenue Receipts: Do not create a claim on the government.

    • Tax revenues (direct and indirect).
    • Non-tax revenues (interest, dividends, fees).

  • Capital Receipts: Create liability or reduce government assets.

    • Borrowing.
    • Sale of assets.

  • Revenue Expenditure: Normal functioning expenses (salaries, pensions, interest payments).

  • Capital Expenditure: Creates assets or reduces liabilities (land, buildings, machinery).

    • Further categorized into Plan and Non-Plan.

Balanced, Surplus, and Deficit Budget

  • Balanced budget: Government spending equals revenue collection.
  • Surplus budget: Revenue exceeds expenditure.
  • Deficit budget: Expenditure exceeds revenue.
    • Various measures capture government deficits (revenue deficit, fiscal deficit, primary deficit).

Other notes

  • Fiscal policy impacts the economy.
  • The 2005-06 Indian Budget included gender sensitivities in its allocations.
  • The 2006-07 budget expanded on the 2005-06 statement.

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Description

This quiz explores the role of government budgets in a mixed economy, outlining the components of government receipts and expenditures. It examines how budgets impact economic life, allocation of public goods, and income redistribution strategies. Test your understanding of these fundamental concepts in economic governance.

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