In Attached document it is the brief explanation about the Government Budget And The Economy of Class 12 according to NCERT Syllabus . I hope your doubts and query will get away after this document.I hope This will work for you. Best of Luck.
Chapter 5
Governmen
Governmentt Budget
and the Economy
In a mixed economy, apart from the private sector, there is the
government which plays a very important role. In this chapter, we
shall not deal with the myriad ways in which it influences economic
life but limit ourselves to three distinct functions that operate
through the revenue and expenditure measures of the government
budget.
First, certain goods, referred to as public goods (such as
national defence, roads, government administration), as distinct
from private goods (like clothes, cars, food items), cannot be
provided through the market mechanism, i.e. by transactions
between individual consumers and producers and must be
provided by the government. This is the allocation function.
Second, through its tax and expenditure policy, the
government attempts to bring about a distribution of income that
is considered ‘fair’ by society. The government affects the personal
disposable income of households by making transfer payments
and collecting taxes and, therefore, can alter the income
distribution. This is the distribution function.
Third, the economy tends to be subject to substantial
fluctuations and may suffer from prolonged periods of
unemployment or inflation. The overall level of employment and
prices in the economy depends upon the level of aggregate demand
which is a function of the spending decisions of millions of private
economic agents apart from the government. These decisions, in
turn, depend on many factors such as income and credit availability.
In any period, the level of expenditures may not be sufficient for full
utilisation of labour and other resources of the economy. Since wages
and prices are generally rigid downwards (they do not fall below a
level), employment cannot be restored automatically. Hence, policy
measures are needed to raise aggregate demand. On the other hand,
there may be times when expenditures exceed the available output
under conditions of high employment and thus may cause inflation.
In such situations, restrictive conditions are needed to reduce
demand. These constitute the stabilisation requirements of the
domestic economy.
To understand the need for governmental provision of public
goods, we must consider what distinguishes them from private
goods. There are two major differences. One, the benefits of public
goods are not limited to one particular consumer, as in the case
of private goods, but become available to all. For instance, if a
,person consumes a chocolate or wears a shirt, these will not be available to
other individuals. This person’s consumption stands in a rival relationship to
the consumption of others. However, if we consider a public park or measures
to reduce air pollution, the benefits will be available to all. The consumption of
such products by several individuals is not ‘rivalrous’ in the sense that a person
can enjoy the benefits without reducing their availablity to others. Two, in
case of private goods anyone who does not pay for the good can be excluded
from enjoying its benefits. If you do not buy a ticket, you are excluded from
watching a film at a local theatre. However, in case of public goods, there is no
feasible way of excluding anyone from enjoying the benefits of the good (they
are non-excludable). Since non-paying users usually cannot be excluded, it
becomes difficult or impossible to collect fees for the public good. This leads to
the ‘free-rider’ problem. Consumers will not voluntarily pay for what they can
get for free and for which there is no exclusive title to the property being enjoyed.
The link between the producer and the consumer is broken and the government
must step in to provide for such goods. Public provision, however, is
not the same as public production. Public provision means that they are
financed through the budget and made available free of any direct payment.
These goods may be produced directly under government management or by
the private sector.
The chapter proceeds as follows. In section 5.1, we present the components
of the government budget to bring out the sources of government revenue and
the avenues of government spending. In section 5.2, we discuss the issue of
government deficit, when expenditures exceed revenue collection. Section 5.3
deals with fiscal policy and the multiplier process within the income expenditure
approach described earlier. Government borrowing to cover deficits leads to debt
accumulation – what the government owes. The chapter concludes with an
analysis of the debt issue.
5.1 COMPONENTS OF THE GOVERNMENT BUDGET 61
and the Economy
Government Budget
There is a constitutional requirement in India (Article 112) to present before the
Parliament a statement of estimated receipts and expenditures of the government
in respect of every financial year which runs from 1 April to 31 March. This
‘Annual Financial Statement’ constitutes the main budget document. Further,
the budget must distinguish expenditure on the revenue account from other
expenditures. Therefore, the budget comprises of the (a) Revenue Budget and
the (b) Capital Budget (Refer Chart 1).
5.1.1 The Revenue Account
The Revenue Budget shows the current receipts of the government and the
expenditure that can be met from these receipts.
Revenue Receipts: Revenue receipts are receipts of the government which are
non-redeemable, that is, they cannot be reclaimed from the government. They
are divided into tax and non-tax revenues. Table 5.1 provides the receipts and
expenditure of the Central Government for the financial year 2012-13.
Tax revenues consist of the proceeds of taxes and other duties levied by the
central government. Tax revenues, an important component of revenue receipts,
comprise of direct taxes – which fall directly on individuals (personal
income tax) and firms (corporation tax), and indirect taxes like excise taxes (duties
levied on goods produced within the country), customs duties (taxes imposed
, on goods imported into and exported out of India) and service tax1. Other direct
taxes like wealth tax, gift tax and estate duty (now abolished) have never been of
much significance in terms of revenue yield and have thus been referred to as
‘paper taxes’. Corporation tax contributed the largest share in revenues in
2012-13 (34.4 per cent) while personal income tax contributed the second largest
(190 per cent). The share of direct taxes in gross tax revenue has increased from
19.1 per cent in 1990-91 to 53.4 per cent in 2012-13.
The redistribution objective is sought to be achieved through progressive
income taxation, in which higher the income, higher is the tax rate. Firms are
taxed on a proportional basis, where the tax rate is a particular proportion of
profits. With respect to excise taxes, necessities of life are exempted or taxed at
low rates, comforts and semi-luxuries are moderately taxed, and luxuries, tobacco
and petroleum products are taxed heavily.
Non-tax revenue of the central government mainly consists of interest receipts
on account of loans by the central government, dividends and profits on
investments made by the government, fees and other receipts for services rendered
by the government. Cash grants-in-aid from foreign countries and international
organisations are also included.
The estimates of revenue receipts take into account the effects of tax proposals
made in the Finance Bill2.
Government Budget
Revenue Capital
Budget Budget
62
Revenue Revenue Capital Capital
Introductory Macroeconomics
Receipts Expenditure Receipts Expenditure
Tax Non-tax Plan Revenue Non-plan Revenue Plan Capital Non-plan Capital
Revenue Revenue Expenditure Expenditure Expenditure Expenditure
Chart 1: The Components of the Government Budget
Revenue Expenditure: Revenue Expenditure is expenditure incurred for
purposes other than the creation of physical or financial assets of the central
government. It relates to those expenses incurred for the normal functioning of
the government departments and various services, interest payments on debt
incurred by the government, and grants given to state governments and other
parties (even though some of the grants may be meant for creation of assets).
1
Service Tax, a tax on services like telephone services, stock brokers, health clubs, beauty
parlours, dry cleaning services etc. introduced in 1994-95 to correct the disparity in taxation
between goods and services, has become a buoyant source of revenue in recent years. The number
of services subject to taxation has increased from 3 in 1994-95 to 100 in 2007-08
2
A Finance Bill, presented along with the Annual Financial Statement, provides details of the
imposition, abolition, remission, alteration or regulation of taxes proposed in the Budget.
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