DPP's Ch - Government Budget PDF

By DeeCee – Divine Classes DPP’s Ch – Government Budget 1. The formula to calculate Primary deficit is................. Ans 1. Fiscal Deficit minus Interest payments 2. Government expenditure incurred on defence...

By DeeCee – Divine Classes DPP’s Ch – Government Budget 1. The formula to calculate Primary deficit is................. Ans 1. Fiscal Deficit minus Interest payments 2. Government expenditure incurred on defence items is a type of ……………… expenditure in the Government Budget. Ans 2. Revenue Expenditure 3. Government expenditure on Mid-Day Meal scheme running in government (state run) schools is a type of …………………….. expenditure in government budget. Ans 3. Revenue Expenditure 4. State one fiscal measure that can be used to reduce the gap between rich and poor. Ans 4. Taxation, Subsidies (Any 1) 5. Primary deficit is equal to: (a) Fiscal Deficit less Interest Payments (b) Revenue Deficit less borrowings (c) Borrowings less interest payments (d) Borrowings less Fiscal Deficit. Ans 5. Option (a) 6. Fiscal deficit can be estimated using the formula ……………………….. Ans 6. Total estimated expenditure less total estimated non debt receipts of the government 7. Define the capital receipts of a government. Ans 7. It refers to the receipts which either creates liability or reduces the assets of the government. 8. …………………… is a revenue receipt of the government. (a) Funds raised by the government by issuing National Saving Certificates (b) Sale of 40% shares of a public sector undertaking to a private enterprise (c) Profits of LIC, a public enterprise (d) Amount borrowed from Japan for construction of Bullet Train. Ans 8. Option (c) 9. State whether the following statement is true or false: "Government Budget is an important monetary policy instrument." 1 By DeeCee – Divine Classes Ans 9. False, Government Budget is an important fiscal policy instrument as it deals with taxation and expenditure policy of the government. 10. State, whether the given statement is true or false: Expenditure on Ujjwala Yojana launched by the Government is an example of capital expenditure." Ans 10. False, it is a revenue expenditure because it neither creates assets nor reduces the liabilities of the government. 11. Define "Primary deficit". Ans 11. It refers to the difference between fiscal policy and interest payments. 12. What do you mean by Fiscal Deficit? Ans 12. It refers to the difference between total estimated expenditure and total estimated non debt receipts of the government during a fiscal year. 13. Give any one example of 'debt creating capital receipts' in the Government Budget. Ans 13. Borrowings from abroad 14. Give any two examples of non-tax revenue receipts. Ans 14. Fines and challans, interest/profit/rent/dividend received, escheats, special assessments (Any 2) 15. Disinvestment is a.................(capital/revenue) receipt of the government. Ans 15. Capital Receipt 16. "The Government Budget of a country cannot have fiscal deficit without the existence of revenue deficit." Defend or refute the given statement. Ans 16. False, there is a possibility that revenue budget of the government is in surplus and fiscal deficit occurs on account of deficit in capital budget. Also, deficit in capital budget should be greater than revenue budget surplus for fiscal deficit. 17. Identify which of the following statements is true? (a) Fiscal deficit is difference between planned revenue expenditure and planned revenue receipts (b) Fiscal deficit is difference between total planned expenditure and total planned receipts (c) Primary deficit is the difference between total planned receipt and interest payments. (d) Fiscal deficit is the sum of primary deficit and interest payment. Ans 17. Option (d) 18. Which of the following is not a non-tax revenue receipt? (Choose the correct alternative) (a) Goods and Services tax 2 By DeeCee – Divine Classes (b) External grants (c) Dividends and profits (d) Disinvestment Ans 18. Option (a) that is Goods and Services Tax 19. State, whether the following statement is true or false "Government budget is an annual statement showing actual receipts and actual payments of the government for the last fiscal year." Ans 19. False, government budget is an annual statement showing the total estimated expenditure and total estimated non debt receipts of the government during a given fiscal year 20. Primary deficit can be zero if.................... (Fill in the blank with correct alternative) (a) Fiscal deficit = Interest payments (b) Fiscal deficit < Interest payments (c) Fiscal deficit > Interest payments (d) Revenue deficit < Fiscal deficit Ans 20. Option (a) 21. Define capital receipts. Ans 21. It refers to a receipt which either creates liabilities or reduces the assets of the government. 22. ……………………… deficit includes interest payment by the Government on the past loans. Ans 22. Fiscal Deficit 23. Disinvestment by government means: (a) Selling of its fixed capital assets (b) Selling of shares of PSUs held by it (c) Selling of its buildings (d) All the above Ans 23. Option (b) 24. Define the term 'Public Goods'. Ans 24. Public Goods refer to the goods which are non-rival and non-excludable in nature. These goods are provided by the government of the nation. 25. Primary deficit in a government budget will be zero. When........ (a) Revenue deficit is zero (b) Net interest payments are zero 3 By DeeCee – Divine Classes (c) Fiscal deficit is zero (d) Fiscal deficit is equal to interest payments Ans 25. Option (D) 26. Define Government Budget. Ans 26. It is an annual statement showing total estimated expenditure and total estimated non debt receipts of the government during a given fiscal year. 27. Fiscal Deficit equals: (a) Primary deficit minus interest payments (b) Primary deficit plus interest payments (c) Total budget expenditure minus total budget receipts (d) None of the above Ans 27. Option (b) 28. What is meant by revenue receipts of the government budget? Ans 28. It refers to the receipts which neither creates liability nor reduces the assets of the government. 29. The government under "Ujjwala Yojna" is providing free LPG gas cylinders to the families under BPL. Which objective of budget is government trying to achieve? Ans 29. Reducing Inequalities of Income and Wealth 30. Define 'Revenue Expenditure'. Ans 30. It refers to the expenditure which neither creates assets nor reduces the liability of the government. 3 1. Identify the following as revenue receipts and capital receipts. Give reason. (i) Sale of shares of a Public Sector Undertaking (PSU) to a private company Y Ltd. (ii) Financial help from a multinational corporation for victims in a flood affected area. (iii) Dividends paid to the Government by the State Bank of India. (iv) Borrowings from International Monetary Fund (IMF). Ans 31. (i) It is a capital receipt as it reduces assets of the government. (ii) It is revenue receipt as it neither creates any liability nor reduces any asset of the government. (iii) It is revenue receipt as it neither creates any liability nor reduces any asset of the govemment. (iv) It is a capital receipt as it creates liability for the government. 4 By DeeCee – Divine Classes 32. Identify the following as revenue expenditure and capital expenditure. Give reasons. (i) Repayment of loans. (ii) Subsidies. (iii) Expenditure on collection of taxes. (iv) Expenditure on building a bridge. Ans 32. (i) It is a capital expenditure as it reduces the liability of the government. (ii) It is a revenue expenditure as it neither creates any asset nor reduces any liability of the government. (iii) It is a revenue expenditure as it neither creates any asset nor reduces any liability of the government. (iv) It is a capital expenditure as it increases asset of the government. 33. How can surplus budget be used during inflation? Ans 33. Surplus budget refers to a budget where estimated total receipts are more than estimated total expenditure. In case of surplus budget, government takes more money from the economy than it injects into it. It results a fall in aggregate demand and price level in the economy and helps to combat inflationary situations. 34. Differentiate between revenue budget and capital budget. Ans 34. The main differences between the two are: (i) Revenue budget comprises only revenue receipts and revenue expenditures of the government, while capital budget comprises of capital receipts and capital expenditures of the government. (ii) Revenue budget include all such financial transactions which do not create any asset or liability for the government. On the other hand, transactions in capital budget do create assets or liabilities for the government. 35. Can there be a fiscal deficit in a government budget without a revenue deficit? Explain. Ans 35. Yes, it is possible in the following situations: (i) When revenue budget is balanced and capital budget shows a deficit. (ii) When there is a surplus in the revenue budget but the deficit in capital budget is greater than this surplus. 36. In the Government of a country's budget for the year 2013-14, the Finance Minister proposed to raise the tax on cigarettes. He also proposed to increase income tax on individuals earning more than rupees one crore per annum. Is the objective only to earn revenue for the government? What possible welfare objective can you think of from these proposals? Explain. Ans 36. Besides the objective of raising more revenue, the proposals also serve some welfare objectives. 5 By DeeCee – Divine Classes Firstly, raising tax on cigarettes will make cigarettes costlier and discourage smoking. Less smoking will have positive influence on health and raise welfare of the people. Secondly, raising income tax on incomes above rupees one crore will help in reducing inequalities in income. Thirdly, the extra revenue raised from these proposals, if spent on health and education of the poor will also raise welfare of the poor. 37. Government raises its expenditure on producing public goods. Which economic value does it reflect? Explain. Ans 37. Increased expenditure by government on public goods like defence, maintaining law and order etc. increases their availability to the people of the country. For example more expenditure on maintaining law and order raises the sense of security among the people. Any such expenditure raises welfare of the people. 38. Tax rates on higher income group have been increased. Which economic value does it reflect? Explain. Ans 38. This will reduce the inequalities of income as the difference between disposable incomes of higher income and lower income groups will fall. This will also provide more resource to the govemment for spending on welfare of the poor. 39. Government has started spending more on providing free services like education and health to the poor. Explain the economic value it reflects. Ans 39. Spending on free services to the poor raises their standard of living and at the same time helps in reduction in Income Inequalities. It also helps in raising production potential of the country by raising the efficiency level of the working class among the poor. 40. In the government of India's budget for the year 2013-14, the Finance Minister proposed to raise the Goods and Services Tax (GST) on cigarettes. He also proposed to increase income tax on individual earning more than Rupee one crore per annum. Identify and explain the types of taxes proposed by the Finance Minister. Was the objective only to earn revenue for the government? What possible welfare objectives could the Government be considering? Ans 40. Goods and Services Tax (GST) - Indirect tax. Indirect tax is a tax where the payer and the bearer of the tax are different people. Income tax-Direct tax. Direct tax is a tax where the payer and bearer of the tax is the same person. Besides the objective of raising more revenue, the proposals also serve some welfare objectives. Firstly, raising Goods and Services Tax (GST) on cigarettes will make them more expensive. The price rise is expected to discourage cigarette smoking, which will positively impact the health of people and raise their welfare. Secondly, raising income tax on income above Rupee one crore will reduce the gap between the rich and poor people. In other words, income inequalities will reduce. Thirdly, the extra revenue raised from these proposals could be spent on health education and other welfare enhancing schemes to improve the welfare of the poor. 6 By DeeCee – Divine Classes 41. Explain the need for reduction in inequalities of income and wealth. Explain any two budgetary measures by which it can be done. Ans 41. Inequalities of income and wealth reflect a section of society being deprived of even basic necessities. Thus, arises the need for reducing them in the society. Two budgetary measures by which it can be done: Progressive taxation. Increasing government's expenditure. 42. The Government decides to give budgetary incentives to investors for making investments in backward regions. Explain these possible incentives and the reasons for the same. Ans 42. Budgetary incentives refer to concession in taxation and granting subsidies to those production units which set up their units in economically backward areas. Tax concessions, like lower Goods and Services Tax (GST) aim at reducing cost and thus raising profits. Subsidies aim at reducing prices of products to encourage sales and earning more profits. Thus, both aim at raising profits 43. The government budget of a hypothetical economy presents the following information. Which of the following value represents Budgetary Deficit? (all fig. in crores) A. Revenue Expenditure = 25,000 B. Capital Receipts: = 30,000 C. Capital Expenditure = 35,000 D. Revenue Receipts = 20,000 E. Interest Payments = 10,000 F. Borrowings = 20,000 (i) 12,000 (ii) 10,000 (iii) 20,000 (iv) None of the above Ans 43. (ii)10,000. Budgetary Deficit = Revenue Expenditure + Capital Expenditure - (Revenue Receipts + Capital Receipts) = 25,000 + 35,000 - (20,000 + 30,000) = 10,000 crores. 44. "Fiscal deficit is necessarily inflationary in nature". Do you agree? Support your answer with valid Q. reasons. Ans 44. The term 'Fiscal Deficit’ is the difference between the government's total expenditure and its total receipts (excluding borrowing). Such borrowings are generally financed by issuing new currency which may lead to inflation. However, if the borrowings are for infrastructural development, this may lead to capacity building and may not be inflationary. 7 By DeeCee – Divine Classes 45. What are non-debt creating capital receipts? Give two examples such receipts. Ans 45. Capital receipts are those receipts of government which either create liabilities or reduce assets. Capital receipts excluding borrowings are known as non-debt creating capital receipts. Examples: Disinvestment, Recovery of loans. 46. The Government, under Ujjwala Yojana, is providing free LPG kitchen gas connections to the families ‘below the poverty line. What objective the government is trying to fulfil through the government budget and how? Explain. Ans 46. Through Ujjwala Yojana, government is trying to reduce gap between the rich and the poor. Government sells LPG gas at a higher rate to those who can afford it. Revenue so collected is used to provide LPG gas connection free of cost and also at subsidized rates to the families below the poverty line. This reduces disposable income of the rich and increases that of the poor, reducing the gap between the two. 47. Explain how the allocation of resources can be influenced in the government budget through taxes, expenditure and subsidies. Ans 47. Government can influence allocation of resources through taxes, subsidies and expenditure. By Imposing taxes at higher rates, it can discourage those occupations which are not beneficial to society. By giving subsidies, it can encourage certain industries which are beneficial to people. By opening public undertakings in fields where the private sector is shy of investing, it can promote public utility services. 48. Government provides essential items of food grains almost free to the families below the poverty line. Which objective the government is trying to fulfil through the government budget and how? Explain. Ans 48. By providing essential items of food grains almost free to the families below the poverty line, government is trying to reduce the gap between the rich and the poor. Government taxes the rich and spends the amount on the poor. This reduces disposable income of the rich and increases the disposable income of the poor. 49. Identify the 'Objectives of Government Budget from the following statements: (i) Government increases taxes on liquor. (ii) Government increases its own expenditure during deflation to increase aggregate demand. (iii) Government increases taxes on super rich people. (iv) Government increases expenditure on infrastructure. Ans 49. (i) Reallocation of Resources. (ii) Economic Stability (iii) Reducing inequalities in income and wealth. 8 By DeeCee – Divine Classes (iv) Economic Growth. 50. Suppose you are a member of the "Advisory Committee to the Finance Minister of India". The Finance Minister is concerned about the rising Revenue Deficit in the budget. Suggest three measures to control the rising Revenue Deficit of the government. Ans 50. Measures to Control Revenue deficit: (a) To reduce government administrative expenses. (b) To reduce the burden of subsidy (c) To increase taxation. 51. From the following data about a Government budget, find out (a) Revenue deficit (b) Fiscal deficit and (c) Primary deficit: Particulars (₹ Arab) (i) Capital Receipts net of Borrowings 95 (ii) Revenue Expenditure 100 (iii) Interest Payments 10 (iv) Revenue Receipts 80 (v) Capital Expenditure 110 Solution: (a) Revenue Deficit = Revenue Expenditure - Revenue Receipts = 100 Arab - 80 Arab = ₹ 20 Arab (b) Fiscal Deficit = (Revenue Expenditure + Capital Expenditure) - (Revenue Receipts + Capital Receipts net of Borrowings) = (100 Arab + 110 Arab) - (80 Arab + 95 Arab) = 35 Arab (c) Primary Deficit = Fiscal Deficit-Interest Payment Primary Deficit = 35 Arab - 10 Arab = 25 Arab Q 52. Find (a) Fiscal Deficit and (b) Primary Deficit from the following: Particulars (₹ in crore) (i) Revenue Expenditure 70,000 (ii) Borrowings 15,000 (iii) Revenue Receipts 50,000 (iv) Interest Payments 25% of Revenue Deficit Solution: Revenue Deficit = Revenue Expenditure - Revenue Receipts 9 By DeeCee – Divine Classes Revenue Deficit = 70,000 crores - 50,000 crores = 20,000 crores 25 Interest Payments = 25% of Revenue Deficit = 20,000 crores x 100 = 5,000 crores (a) Fiscal Deficit Borrowings = 15,000 crores (b) Primary Deficit = Fiscal Deficit - Interest Payment Primary Deficit = 15,000 crores - 5,000 crores = 10,000 crores Q 53. From the following data, calculate Fiscal Deficit: Particulars (₹ in Billions) 1. Capital Receipt 68 2. Revenue Expenditure 160 3. Interest Payment 20 4. Borrowings 32 5. Tax Revenue 50 6. Non-Tax Revenue 10 Solution: Fiscal Deficit = Borrowings = 32 Billion. Q 54. Given the following data estimate the values of: (i) Revenue deficit, and (ii) Fiscal deficit: Particulars (₹ in crores) 1. Tax Revenue 1,000 2. Non-Tax Revenue 150 3. Net Borrowings by Government 780 4. Disinvestment Proceeds 50 5. Revenue Expenditure 1,500 6. Capital Expenditure 480 Solution: (i) Revenue Deficit = Total Revenue Expenditure - Total Revenue Receipt = Revenue Expenditure - (Tax Revenue + Non-Tax Revenue) = 1,500 - (1,000 + 150) Revenue Deficit = ₹ 350 crores Fiscal Deficit = Total Expenditure - (Revenue Receipt + Disinvestment Proceeds) = (1,500 + 480) - (1,000 + 150 + 50) Fiscal Deficit = ₹ 780 crores (Fiscal Deficit can also be directly given as value of net borrowings by government i.e. ₹ 780 crores} 10