Chapter 8 Government Budget and the Economy Solutions
Question - 1 : - Explain why public goods must be provided by the government?
Answer - 1 : -
- Public goods are those goods and services for which consumption by some individuals does not reduce the amount available to others.
- For example parks,roads,water,bridges,national defense etc..
- these goods are non-rival and non-excludable ones.
- people receives benefits from public goods but do not pay for them.Such a goods can only prepared by government.
Distinguish between revenvu expenditure and capital expenditure .State the basis of classifying government expenditure into revenue and capital expenditure. Give an example of each.
Answer - 2 : - 
Question - 3 : - The fiscal deficit gives the borrowing requirement of the government Elucidate.
Answer - 3 : -
1. Fiscal deficit is defined as excess of total expenditure over total receipts (revenue and capital receipts) excluding borrowing. In the form of an equation:
Fiscal Deficit = Total Budget Expenditure – Total Budget Receipts (Net of borrowing)
= Total Expenditure (Revenue
Expenditure + Capital Expenditure) – Revenue Receipts (Tax Revenue + Non-Tax Revenue) – Non-Debt Capital Receipts (Recovery of Loans + Dis-investment Proceeds)
= Revenue Deficit + Capital Deficit (excluding Borrowing)- Borrowing
= Net borrowing at home + Borrowing from RBI + Borrowing from abroad
2. Fiscal deficit shows total borrowing requirements of the government from all sources.
3. As the government borrowing increases, its liability in future to repay loan with interest also increases leading to a higher revenue deficit. Therefore, fiscal deficit should be as low as possible.
Question - 4 : - Give the relationship between revenue deficit and fiscal deficit.
Answer - 4 : -
- Fiscal deficit is always a wider concept than revenue deficit.
- Revenue deficit is defined as the excess of government’s revenue expenditure over revenue receipts. In terms of formula:
- Revenue Deficit = Revenue Expenditures (RE) – Revenue Receipts (RR)
- In short, there will be revenue deficit in a government budget when revenue expenditure exceeds revenue receipts.
- Fiscal deficit is defined as the excess for all expenditure over total receipts net of borrowings.
Initially, Fiscal deficit does not take into account all types of receipts. It does not take into account borrowings. But finally they have to depend on borrowing to met fiscal deficit.
Fiscal Deficit = Revenue Deficit + Capital Deficit (Excluding Borrowing)- Borrowing
= Net borrowing at home + Borrowing from RBI + Borrowing from abroad
Question - 5 : - Does public (government) debt impose a burden? Explain.
Answer - 5 : -
Public debt is not always a blessing. Excessive use of it creates a lot of crisis in an economy; such as,
- Hampers Economic Development of a Country: Loans are easily borrowed but it is very difficult to repay them.Generally, government imposes more taxes. It brings instability and is an obstacle in the economic development of a country.
- Poses Threat to Political Freedom: Foreign loans and assistance lead to deep conflict among countries. The friction among countries challenges the political freedom.
- Proves a Burden on Common Man: Loans taken for unproductive purposes, like war and armaments, are a burden on common man in the form of higher taxes.
- Leads to Extravagant Spending: Public debt leads to unplanned spending. This provides incentive to the government to implement the schemes that require excessive expenditure.
- Results in Drain of National Wealth: Repayment of foreign loans results in drain of wealth out of the country.
Answer - 6 : -
- Fiscal deficits are not necessarily inflationary.
- As we know fiscal deficit shows borrowing requirement of the government.
- If we borrow when there is a situation of underemployment in an economy i.e., in a situation of deficient demand, then it is not inflationary because in a situation of deficient demand output is held back because of lack of demand.
- A high fiscal deficit (borrowing) is accompanied by higher demand and greater output which is not inflationary.
- On the other hand, if we borrow at the full employment level, then it is inflationary in nature.
- A high fiscal deficit (borrowing) is accompanied by higher prices because aggregate demand is greater than aggregate supply at the full employment level which is always inflationary.
Question - 7 : - Discuss the issue of deficit reduction.
Answer - 7 : -
The deficit in a government budget can be reduced by the following steps:
- Taxes should be increased. Government can make a plan for rising direct taxes to increase its receipts can also be raised by increasing rates of taxes or by imposing new taxes.
- Reduction in Government Expenditures: It can be done through making government activities more efficient through better planning of programmes and better administration.
- The government can raise Receipts through the sale of shares in PSUs (Public Sector Undertaking).
- Changing the scope and role of government by withdrawing from same areas where it operated before.