Notes of Government Budget and the Economy Class 12 Chapter 5 Economics




  • Meaning of the Budget
  • Objectives of the Budget
  • Components of the Budget
  • Budget Receipts
  • Budget Expenditure
  • Balanced, Surplus and Deficit Budgets
  • Types of Deficits



  1. Define a Budget.

Ans: It is an annual statement of the estimated Receipts and Expenditures of the Government over the fiscal year which runs from April -I to March 31.

  1. Name the two broad divisions of the Budget.

Ans: i) Revenue Budget

  1. Capital Budget
  2. What are the two Budget Receipts?

Ans: i) Revenue Receipts

  1. Capital Receipts
  2. Name the two types of Revenue Receipts.

Ans: i) Tax Revenue

ii) Non-tax Revenue

  1. What are the two types of taxes?

Ans: a) Direct Taxes: i) Income Tax, ii) Interest Tax, iii) Wealth Tax

  1. Indirect Taxes: i) Customs duties, ii) Excise duties, iii) Sales Tax
  2. What are the main items of Capital Receipts?

Ans: a) Market Loans (loans raised by the government from the public)

  1. Borrowings by the Government
  2. Loans received from foreign governments and International financial Institutions.
  3. Give two examples of Developmental Expenditure.

Ans: Plan expenditure of Railways and Posts

  1. Give two examples of Non-Developmental expenditures.

Ans: i) Expenditure on defence ii) Interest payments

  1. Define Surplus Budget.

Ans: A Surplus Budget is one where the estimated revenues are greater than the Estimated expenditures.

  1. What are the four different concepts of Budget Deficits?

Ans: a) Budget Deficit

  1. Revenue Deficit
  2. Primary Deficit and
  3. Fiscal Deficit


  1. Explain the objectives of the Government Budget.

Ans: These below are the main objectives of the Government Budget.

  1. Activities to secure reallocation of resources: – The Government has to reallocate resources with social and economic considerations.
  2. Redistributive Activities: – The Government redistributes income and wealth to reduce inequalities.
  3. Stabilizing Activities: – The Government tries to prevent business fluctuations and maintain economic stability.
  4. Management of Public Enterprises: – Government undertakes commercial activities that are of the nature of natural Monopolies, heavy manufacturing etc., through its public enterprises.
  5. What are the components of the Budget?

Ans: These below are the main components of the Government Budget. They are—

  1. Budget Receipts
  2. Budget Expenditure

Budget receipts may be classified as:

  1. Revenue Receipts and
  2. Capital Receipts

Revenue Receipts may be classified as:

  1. Tax Revenue and
  2. Non-tax Revenue

Budget Expenditure may be classified as

  1. Revenue Expenditure and Capital Expenditure
  2. Plan Expenditure and Non-Plan Expenditure
  3. Developmental and Non-Developmental Expenditure
  4. Define Direct Taxes and Indirect taxes and give two examples each.
  5. Direct Tax: – These are those taxes levied immediately on the property and Income of persons, and those that are paid directly by the consumers to the state.

Examples: Income Tax, Wealth Tax, Corporation Tax etc.

  1. Indirect Taxes: These are those taxes that affect the income and property of persons

through their consumption expenditure. Indirect taxes are those taxes levied on one

person but paid by another person.

Examples: Customs duties, excise duties, sales tax, service tax etc.

  1. What are the Non-Tax Revenue receipts?

Ans: These below are the Non-tax revenue receipts:

  1. Commercial Revenue: Examples-Payments for postage, toll, interest on funds borrowed from government credit corporations, electricity, Railway services.
  2. Interest and dividends
  3. Administrative revenue: Examples: Fees, fines, penalties etc.,
  4. What are the three major ways of Public Expenditure?

Ans: These below are the three ways of Public Expenditure—

  1. Revenue Expenditure and Capital Expenditure
  2. Plan Expenditure and Non-Plan Expenditure
  3. Development and Non-developmental Expenditure.
  4. What do you mean by Revenue Expenditure and Capital Expenditure?

Ans: i) Revenue Expenditure:- It is the expenditure incurred for the normal running of government departments and provision of various services like interest charges on debt, subsidies etc.,

ii)Capital Expenditure:- It consists mainly of expenditure on acquisition of assets like land, building, machinery, equipment etc., and loans and advances granted by the Central Government to States & Union Territories.

  1. Define Balanced, Surplus and Deficit Budgets.

Ans: a) Balanced Budget – It is one where the estimated revenue EQUALS the estimated expenditure.

  1. Surplus Budget:- It is one where the estimated revenue is GREATER THAN the estimated expenditures.
  2. Deficit Budget:- It is one where the estimated revenue is LESS THAN the estimated expenditure.
  3. Explain the four different concepts of Budget deficit.

Ans: These are the four different concepts of Budget Deficit.

  1. Budget Deficit:- It is the difference between the total expenditure, current revenue and net internal and external capital receipts of the government.

Formulae: B.D = BE > B.R (B.D= Budget Deficit, BE. Budget Expenditure B.R= Budget Revenue

  1. Fiscal Deficit:- It is the difference between the total expenditure of the government, the revenue receipts PLUS those capital receipts which finally accrue to the government. Formulae: F.D = B.E – B.R (B.E > B.R. other than borrowings) F.D=Fiscal Deficit,

B.E= Budget Expenditure, B.R. = Budget Receipts.

  1. Revenue Deficit: – It is the excess of governments revenue expenditures over revenue receipts.

Formulae: R.D= RE – R.R., When RE > R.R., R.D= Revenue Deficit, R.E= Revenue Expenditure, R.R. = Revenue Receipts.

  1. Primary Deficit: – It is the fiscal deficit MINUS Interest payments.

Formulae: P.D= F.D – I.P, P.D= Primary Deficit, F.D= Fiscal Deficit, I.P= Interest Payment.


  1. How is tax revenue different from administrative revenue?


  1. Tax Revenue:-

i) It is the main source of revenue of the government

iil It is the revenue that arises on account of taxes levied by the government.

  1. Taxes of two types i.e., Direct and Indirect.
  2. Direct taxes are those taxes levied immediately on the property and income of

persons. Examples: Income Tax, Corporate Tax, Wealth Tax etc., Incidence and impact falls on same person.

  1. Indirect taxes are those taxes levied on the production and sale of the goods.

Examples: Sales Tax, Excise Duty etc. Tax paid by one person but burden taken by another person.

  1. Administrative Revenue:-

i) It is the revenue that arises on account of the administrative function of the Government.

ii) It includes-

  1. Fees
  2. License fees
  3. Fines and penalties
  4. Forfeitures of surety by courts
  5. Escheat – means claim of the government on the property of a person who dies without having any legal heirs.
  6. What is a balanced government budget? Explain the multiplier effect of a balanced budget. Ans:
  7. Balanced Budget: – It is one where the estimated revenue of the government equals the estimated expenditure.
  8. Effect of Multiplier on the BalancedBudget:-
  9. If only source of revenue is a lump sum tax, a balanced budget will then mean that the

amount of tax equals the amount of expenditure (T=E)

  1. A balanced budget has an expansionary effect on the economy.
  2. Under balanced budget, the increase in income is equalent to the amount of

government expenditure financed by tax revenue (i.e., A Y =AG/AT)

  1. The multiplier effect of a balanced budget is ONE (Unitary)
  2. A balanced budget is a good policy to bring the economy, which is under employment

to a full employment equilibrium.


1. What are the three levels at which the budget impacts the economy?

Ans: These below are the three levels at which the budget impacts the economy.

  1. Aggregate fiscal discipline:- This means having control over expenditures, given the quantum of revenues. This is necessary for proper macro-economic performance.
  2. Allocation of resources: – The allocation of resources based on social priorities.
  3. Effective and efficient provision of programmes:- Effectiveness measures the extent to which goods and services the government provides its goals.


1. The following figures are based on budget estimates of Government of India for the year 2001 – 2002. Calculate i) Fiscal Deficit ii) Revenue Deficit and iii) Primary deficit.



A) Revenue receipts


i) Tax Revenue


ii) Non-tax Revenue


B) Capital receipts


i) Recoveries of loans


ii) Other receipts


iii) Borrowings and other




C) Revenue expenditure


i) Interest payments


ii) Major subsidies


iii) Defence Expenditure


D) Capital Expenditure


E) Total Expenditure


i) Plan expenditure


ii) Non-plan expenditure


  1. Ans: Fiscal Deficit = Total expenditure – Revenue receipts – Non-debt capital receipts = 3,75,223 – 2,31,745 – 15,164 – 12,000 = Rs. 1,16,314 billion.
  2. Revenue Deficit = Revenue expenditure – Revenue receipts

= 3, 10,566 – 2, 31,745 = Rs. 78,821 billion.

  1. Primary deficit = Fiscal deficit – Interest payments

= 1, 16,314 – 1, 12,300 = Rs. 4,014 billion.

2. From the following data about a government budget find

a) Revenue Deficit b) Fiscal Deficit and c) Primary Deficit.



Rs. (cr.)


Tax revenue



Capital receipts



Non-tax revenue






Revenue expenditure



Interest payments


Ans: a) Revenue Deficit = Revenue expenditure – (Tax revenue + Non-tax revenue) 80 – (47+10) = 80 – 57 = 23 (cr.)

Fiscal Deficit = Borrowings = 32 (cr.)

Primary Deficit = Borrowings – Interest Payments 32 – 20 = 12 (cr.)


  1. Define full employment? (1)
  2. What do you mean by Aggregate Demand? (1)
  3. Write any two components of aggregate demand? (1)
  4. Define Aggregate Supply? (1)
  5. When APC is 0.6, what is the value of APS? (1)
  6. If the rate of MPC is 0.75 find the value of multiplier? (1)
  7. Define investment multiplier? (1)
  8. What are the conditions for equilibrium level of income and employment? (1)
  9. What is meant by excess demand? (1)
  10. Define inflationary gap. (1)
  11. Define deficient demand? (1)
  12. Define underemployment equilibrium? (3)
  13. What are the monetary measures to correct excess demand? (3)
  14. State the fiscal measures to correct excess demand? (3)
  15. Explain any two monetary and fiscal measures to correct deficient demand? (4)
  16. Define investment multiplier. What is the relationship between MPC and multiplier? (4)
  17. State the components of AD. Explain any one. (4)
  18. Explain investment multiplier with the help of an example. (4)
  19. Derive saving function from consumption function. (4)
  20. State the Keynesian psychological law of consumption function. (4)


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