Government Budget Quiz

Government Budget

• A government budget is a statement of estimated government receipts and expenditure for a financial year.

Objectives of Government Budget

• Redistribution of Income and Wealth: The government uses taxation and subsidies to improve income and wealth distribution across the economy. Equitable distribution signifies social justice.
• Reallocation of Resources: Budgetary policy directs resource allocation to balance profit maximization and social welfare goals. Goods harmful to health are discouraged through heavy taxation.
• Economic Stability: The government's budgetary policy manages deflation and inflation, stabilizing the economy. Addressing trade cycles is also part of this objective.
• Managing Public Enterprises: The budget supports public sector enterprise growth focused on social welfare rather than profit.

Structure of Budget

• Budget Receipts: These refer to the total estimated money received by the government from all sources during a fiscal year.
  • Revenue Receipts: These receipts don't create government liability or reduce assets. Examples include tax receipts.
  • Capital Receipts: These receipts either create government liability or reduce government assets. Examples include recovering loans, borrowing, and disinvestment.

Tax Receipts

• A tax is a compulsory payment to the government by households, firms, or organizations.
• Types of Taxes:
  • Progressive Taxes: Tax rates increase with income (burden mostly on high-income earners).
  • Regressive Taxes: Tax rates decrease with income (burden equally shared by low and high-income earners).
  • Indirect Taxes: These taxes are levied on goods, services, and other activities. Some indirect taxes are VAT and specific taxes.

Non-Tax Receipts

• These receipts are from sources other than taxes. Examples are:
  • Fees: Payments for government services (e.g., birth registration or passport fees).
  • Fines: Penalties for violations of laws.
  • Escheat: Income from property left by individuals without legal heirs.
  • Special Assessment: Payments by property owners for development activities.
  • Income from Public Enterprises: Profits of government-owned enterprises.
  • Income from Sale of Spectrum: Revenue from the sale of radio frequencies.
  • Grants/Donations: Receipts received from citizens or other entities in times of need.

Budget Expenditure

• Revenue Expenditure: Government expenditures that don't create assets or reduce liabilities. Examples include wages, interest payments, subsidies, and defense spending.
• Capital Expenditure: Government expenditures that create assets or reduce liabilities. Examples include land acquisition, machinery purchases, and loans provided to other entities.

Development and Non-Development Expenditure

• Development Expenditure: Expenditures for growth-related activities like education, health, agriculture, and infrastructure projects.
• Non-Development Expenditure: Expenditures on non-development activities such as administration, defense, subsidies, and interest payments.

Plan and Non-Plan Expenditure

• Plan Expenditure: Expenditure related to programs under five-year plans.
• Non-Plan Expenditure: Expenditure not associated with five-year plans.

Budget Deficit

• Budget Deficit: Occurs when expenditure exceeds receipts.
  • Revenue Deficit: Excess of revenue expenditure over revenue receipts.
  • Fiscal Deficit: Excess of total expenditure over total receipts (excluding borrowings).
  • Primary Deficit: Difference between fiscal deficit and interest payments.

Balanced & Unbalanced Budget

• Balanced Budget: Government receipts equal government expenditure.
• Unbalanced Budget: Government receipts and expenditure do not match.
  • Surplus Budget: Receipts exceed expenditure.
  • Deficit Budget: Expenditure exceeds receipts.

Measures to Curtail Budgetary Deficits

• Lowering Government Expenditure: Reducing spending on development and non-development programs, and increasing private sector involvement.
• Raising Government Receipts: Increasing tax revenue and encouraging disinvestment of inefficient public enterprises.

Foreign Exchange Rate

• The price of one currency in terms of another currency.
• Types of Exchange Rate Systems
  • Fixed Exchange Rate Systems: Government-set exchange rates. Can have variants like the Gold Standard and Bretton Woods.
  • Flexible/Floating Exchange Rate Systems: Exchange rates determined by demand and supply forces.

Determination of Exchange Rate in a Free Market

• The market rate is determined by the demand and supply of the currency.
• Increased demand, other things equal, leads to higher prices.
• Increased supply, other things equal, leads to lower prices.

Foreign Exchange Market

• The market for national currencies of different countries.
• Functions:
  • Transfers purchasing power between countries.
  • Provides credit for international trade and investment.
  • Manages risk related to changes in exchange rates.

Appreciation & Depreciation of Domestic Currency

• Appreciation: Increase in the value of domestic currency relative to other currencies.
• Depreciation: Decrease in the value of domestic currency relative to other currencies.

Managed Floating & Dirty Floating

• Managed Floating: Adjustment in exchange rate based on declared rules and regulations in the market.
• Dirty Floating: Manipulating exchange rates to benefit one country's economic goals, even at the expense of other countries.

Fixed Exchange Rate Systems Variations

• Wider Bands: Slight band allowed for fluctuations around a fixed exchange rate and an exchange rate parity between two currencies.
• Crawling Peg: Allows small, gradual adjustments in the exchange rate for different currencies within a certain range.

Purchasing Power Parity (PPP)

• The ratio of purchasing power of different currencies. The ratio of price levels in different countries determine the exchange rate between these countries.

Balance of Payments (BoP)

• The record of all economic transactions between a country and the rest of the world.
• Components:
  • Current Account: Imports, exports, services, and unilateral transfers; invisible trade accounts.
  • Capital Account: Financial transactions such as investments, loans, and purchases of assets; foreign investment.

Capital Account

• Records transactions that change the asset/liability status of a country or its government.
• Components:
  • Foreign Investment (FDI & Portfolio): Direct purchase of assets in another country vs. purchasing assets without control
  • Loans/Borrowings: Country's borrowing from other entities and international assistance.