Government And Budget

 

Government Budget

In India, government budget is normally presented in the Parliament in the month of February every year. Before the budget is presented, for many days there are speculations among people about the expected changes in various taxes. Are the rates of income tax going to be increased or decreased? Whether the price of petrol and cooking gas cylinders going to be left unchanged? All of us discuss these expected changes in budget because they affect our future expenditure on goods and services. However, this may give an impression that government budget is merely an exercise concerned with various taxes. But, in fact, government budget is much more than changes in taxes.

What is Government Budget?

The budget of a government is a summary of the item-wise intended/expected revenues and anticipated expenditures of the government during a fiscal year/financial year. In India the financial year spans from 1st April to 31st March over two calender years.

Government at all levels, whether central, state or a local level, prepare the budget. Budget is prepared, keeping in view the general policy of government towards the welfare of people.

Government incurs various expenditures to provide basic facilities such as education, health, etc. It also spends money to increase production, to reduce unemployment, poverty and inequalities in income and wealth etc. Such expenditure of government promotes welfare of the people. To finance this expenditure, government raises revenue from sources such as taxes, public debt, etc. These financial resources that fund government expenditure are raised from people.

The items of expenditure and the sources of financing them are planned by government in accordance with the objective of public welfare. Thus, government takes decisions on behalf of people with respect to how public money is to be spent under different heads of expenditures and how it is to be raised from various sources. This makes government accountable to people. Through legislatures, parliament and various other civic bodies, people exercise their right to know as to how government is spending public money and how it is raising it from them. This accountability of government to the people of the country is manifested in the government budget. A budget is a consolidated financial statement prepared by government on expected public expenditure and public revenue during a financial year.

There are three main features of a government budget

  • One, it is a consolidated financial statement of expected expenditures and various sources of revenue of government.
  • Two, it relates to a financial year.
  • And three, the expenditures and the sources of revenue are planned in accordance with the declared policy objectives of government.

 

Structure Of Budget

To understand the basic structure of budget and its various components, let us consider the budget of the Central Government of India for the financial years 2012-13 presented in table below. From this Table we find that the budget has two parts –

  1. Receipts and
  2. Expenditures.

 

Receipts

The receipts of government show the different sources from which government raises revenue. These receipts are of two kinds –

  1. Revenue receipts and
  2. Capital receipts.

 

Revenue Receipts

Revenue receipts are current incomes of government, which neither create liabilities nor cause any reduction in the assets of the government. These receipts are classified into –

  • (a) Tax Revenue and
  • (b) Non-tax Revenue.

(a) Tax Revenue

A tax is a legal compulsory payment by the people and firms to the government of a country without reference to any direct benefit in return. It is imposed on the people by the government.

Traditionally the revenue from taxes has been the primary source of government income. A government collects revenue from various taxes like income tax, sales tax, service tax, excise duty, custom duty etc. 

  • Income tax is imposed on those who earn income such as wages, salaries, rent, interest and profit.
  • Sales tax is the tax on the sale of goods. Whenever we purchase a good, a part of our payment goes to the government as sales tax.
  • Service tax is the tax we pay when we use a service such as telephone service.
  • Excise duty is a tax paid by the producer manufacturing a good.
  • Custom duty is paid when a good is imported or exported.

All taxes are of two kinds –

  1. Direct taxes and
  2. Indirect Taxes.

This distinction between taxes depends on

  • the liability of payment of tax to government and
  • the actual burden of tax.

In case of direct taxes, the liability of payment and the burden of the tax falls on the same person.
For example, income tax is a direct tax because the person who is liable to pay it also bears the burden of the tax; The burden of the tax cannot be shifted on others.

In case of indirect taxes, the liability of payment and the burden of the tax may fall on different persons.
For example, in case of sales tax, although the liability to pay tax lies with the seller of a good, the actual burden of tax falls on the buyer. The buyer and not the seller is the one who finally pays the sales tax. The seller only collects the tax from the buyer by increasing the price and pays it to the government. Thus, we find that in case of sales tax, the burden of tax is shifted from the seller to the buyer.
All taxes on production are indirect taxes because producers recover these taxes from buyers by increasing the price of the product.

Example of Direct Taxes

  • Income tax : the tax on incomes of individuals
  • Corporation tax : the tax on corporate profits
  • Wealth tax : the tax on wealth of individuals
  • Gift tax : the tax on gifts given

Example of Indirect Taxes

  • Value added tax
  • Excise duty : the tax on goods manufactured in factories
  • Customs duty : the tax on imports and exports
  • Service tax : the tax on the services provided

(b) Non-Tax Revenue

The incomes accruing to government from sources other than taxes are non-tax revenues. The major sources of non-tax revenues of the central government of India are –

  1. Commercial Revenue : It is received by government in the form of prices paid by people for goods and services that government provides e.g. people pay for electricity and for services of Railways, postal stamps, toll etc.
  2. Administrative Revenue : It arises on account of administrative services of the government. They are as follows –
    • (a) fees in the form of passport fees, government hospital fees, education fees, court fee, etc.
    • (b) fine and penalties – charged by government on law-breakers for disobeying rules and regulations.
    • (c) licence fee and permit
    • (d) Escheat : Income that government get by taking possession of property which has no legal claimant or legal heir.
    • (e) Interest receipts
    • (f) profits of public sector undertakings.

 

Capital Receipts

Capital receipts are those receipts of the government which either create liability or cause any reduction in the assets of the government.

The major sources of capital receipts of the central government are –

  1. Borrowings
  2. Recovery of Loans and
  3. Disinvestment – Resale of shares of public sector undertakings.

Borrowings

There are two sources from which the central government borrows. They are –

  • (a) Domestic Borrowings : The government borrows from domestic financial market by issuing securities and treasury bills. It also borrows from people through various deposit schemes such as Public Provident Fund, Small Savings Schemes, and National Savings Scheme etc. These are borrowings of the government within the country.
  • (b) External Borrowings : In addition to domestic borrowings the government also borrows from foreign governments and international bodies like International Monetary Fund (IMF), World Bank etc. Foreign borrowings by the government bring in foreign exchange into the domestic economy.

Recovery of Loans

Quite often state and local governments borrow from the central government. The loans recovered by the central government from state and local governments are capital receipts in the budget because recovery of loans reduces debtors (assets).

Disinvestment – Resale of shares of public sector undertakings

This is a very recent source of capital receipts by which the central government has been mobilizing financial resources since 1991. Prior to 1991, the central government-owned 100 percent of the shares of public sector undertakings. From 1991, the government adopted the policy of privatisation of public sector undertakings. Consequently, it started selling its shares to general public and to financial institutions. This selling of shares of public sector undertakings by the government is known as ‘disinvestment of public sector undertakings’.

 

Revenue receipts & Capital receipts

Revenue receipts are current income receipts from all sources such as taxes, profits of public enterprises, grants, etc. Revenue receipts neither create any liability nor cause any reduction in the assets of the government.

Capital receipts, on the other hand, are the receipts of the government which either create liability or cause any reduction in the assets of the government. e.g. borrowings, recovery of loan and disinvestment etc.

There is a similarity between the financing by an individual and the financing by a government. An individual, generally, finances his current expenditure from his current income. He borrows when his current income is not sufficient for his current expenditure. Likewise, a government has two sources to finance its expenditures: current income or revenue receipts and capital receipts. It borrows when revenue receipts fall short of its current expenditures. The dissimilarity between financing by an individual and that by a government is that an individual first estimates his current income and then plans his expenditures while a government plans its expenditures first and then finds the sources to finance them.

 

Expenditure

Government expenditure is classified in two ways –

  1. capital expenditure and revenue expenditure and
  2. plan expenditure and non-plan expenditure.

 

Capital Expenditure and Revenue Expenditure

When government incurs expenditure to create assets such as school and hospital buildings, roads bridges, canals, railway lines etc., or reduce its liability such as repayment of loan etc., such expenditure is known as capital expenditure.

When government incurs expenditure that neither creates any asset nor reduces any liability, such expenditure is known as revenue expenditure. For Example, payment of salaries to government employees, maintenance of public property, providing free education and health services to people, etc constitute revenue expenditure. These do not create any public asset.

 

Plan Expenditure and Non-Plan Expenditure

After independence, our country adopted the path of planning to achieve economic development. Under planning, provisions were made in the government budget for expenditure that was to be incurred every year according to the priorities laid down in the five-year plans. Such expenditure is known as plan expenditure.

Beside plan expenditure, government also incurs routine expenditure such as expenditure on police, judiciary, water supply, sanitation and health, legislatures, defence, various government departments, etc. Such routine expenditure is termed as non-plan expenditure.

 

Types Of Budget

Government receipt and expenditure are the two components of a budget. In terms of the magnitudes of receipts and expenditure, we may have balance budget, deficit budget and surplus budget.

  • When the government expenditure is exactly equal to its receipts, the government has balanced budget.
  • When the government expenditure exceeds its receipts, it is deficit budget.
  • When the government revenue is greater than its expenditure, the government runs a budget surplus.

Thus,

  • Balance budget → Total Budgeted Receipt = Total Budgeted Expenditure
  • Deficit budget → Total Budgeted Receipts < Total Budgeted Expenditure
  • Surplus budget → Total Budgeted Receipts > Total Budgeted Expenditure

There was a time when budget surplus was regarded as an index of a good budget. However, in modern economy budget deficit has become order of the day.

 

Types Of Budget Deficit

 

Revenue Deficit

It refers to the excess of total revenue expenditure of the government over its total revenue receipts.

Revenue Deficit = Total Revenue Expenditure – Total Revenue Receipts.
OR
Revenue Deficit = Total Revenue Expenditure – (Tax Revenue + Non Tax Revenue)

 

Fiscal Deficit

Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowings during a fiscal year.

Fiscal Deficit = Total Budget Expenditure – Total Budget Receipts Excluding Borrowings
OR
Fiscal Deficit = (Revenue Expenditure + Capital Expenditure) – (Revenue Receipts + Capital Receipts Excluding Borrowings)

Fiscal deficit shows the borrowing requirements of the government during the budget year. Fiscal deficit reflects the borrowing requirements of the government for financing the expenditure including interest payments.

Fiscal Deficit = Revenue Expenditure + Capital Expenditure – Revenue Receipts – Capital Receipts Excluding Borrowings
OR
Fiscal Deficit = Revenue Expenditure + Capital Expenditure – Tax Revenue – Non Tax Revenue – Recovery Of Loans – Disinvestment
OR
Fiscal Deficit = Total Borrowing Requirement Of The Government

Fiscal deficit indicates the additional amount of financial resources needed to meet government expenditure. Two, it is an indicator of the increase in future liabilities of the government on interest payment and loan repayment. The government has to pay back the borrowed amount with interest in future. Consequently, the government has to either borrow more from the people or tax people more in future to pay interest and loan amount.

 

Primary Deficit

Primary deficit is defined as fiscal deficit minus interest payments on previous borrowings.

Primary deficit shows the borrowing requirements of the government for meeting expenditure excluding interest payment.

Gross Primary Deficit = Fiscal Deficit – Interest Payments

Net Primary Deficit = Fiscal Deficit + Interest Received – Interest Payments

It shows the total amount that the central government needs to borrow.

 

Deficit Financing

 

Three Ways To Finance Deficit

There are three ways by which the central government finances deficit. These are –

  1. Borrowing from Public and Foreign Governments
  2. Withdrawing Cash Balances held with the Reserve Bank of India (RBI)
  3. Borrowing from the Reserve Bank of India (RBI)

The Government ordinarily prefers to borrow either from its citizens or from foreign governments instead of withdrawing cash balances held with the RBI or borrowing from it.

  • Borrowing domestically from public has no effect on the supply of money and consequently on prices because when government borrows, the money held by people is transferred to government with no change in the supply of money.
  • However, the money supply increases –
    • when government borrows from foreign countries; or
    • any money that flows out of the RBI;
  • The negative side of withdrawing or borrowing from RBI is that the increase in supply of money also increases the prices in an economy.

 

Budgetary Policy (Fiscal Policy)

Budgetary policy relates to two important issues. These are –

  1. On what items should the government spend?
  2. How the government should raise resources to finance its expenditure?

The answer to the first question will depend on the priorities of the government to solve various economic, social and other problems that a country faces. For example, if there is a constant threat of attack from another country, the government has no choice but to spend more on defence. If there is a threat of outbreak and spread of an epidemic, the government has to spend more on health services. If the government had taken loan in the past, it has to spend more on interest payments.

On the second question the government has to consider various ways to raise resources. Should the people be taxed more? Which section of the people to be taxed more? Which commodities are to be taxed? How much the government should borrow? From whom should it borrow and in what form? The answers to these questions are to be found in the policy objectives of the government.

The fiscal policy is concerned with the raising of government revenue and increasing expenditure. To generate revenue and to increase expenditures, the government finance or policy called Budgeting policy or fiscal policy.

 

Major Fiscal Measures

  1. Public Expenditure : Government spends money on a wide variety of things, from the military and police to services like education and health care, as well as transfer payments such as welfare benefits.
  2. Taxation : Government imposes new taxes and change the rate of current taxes. The expenditure of government is funded by the imposition of taxes.
  3. Public Borrowing : Government also raises money from the population or from abroad through bonds, NSC, Kisan Vikas Patra, etc.
  4. Other Measure : Other measures adopted by the government are –
    • (a) Rationing and price control
    • (b) Regulation of wages
    • (c) Increase the production of goods and services.

 

Objectives of Budget and Budgetary Policy

  1. To promote economic growth : Government promotes economic growth by setting up basic and heavy industries like steel, chemical, fertilizers, machine tools, etc. It also builds infrastructure like roads, canals, railways, airports, education and health services, water and electricity supply, telecommunications, etc. that foster economic growth.
    Both basic and heavy industries and infrastructure require a huge amount of investment which normally the private sector does not take up. Since these industries and infrastructure facilities are essential for economic growth in the country, the burden to set up and develop them falls on the government.
  2. To reduce income and wealth inequalities : Government reduces inequalities in income and wealth by taxing the rich more and spending more on the poor. Further, it provides for the employment opportunities to poor that help them to earn.
  3. To provide employment opportunities : Employment opportunities are increased by the government in various ways, One, jobs are created when it sets up public sector enterprises. Two, it provides subsidies and other incentives like tax holidays, low rates of taxes etc. to private sector that encourage production and employment. It also encourages setting up of small-scale, cottage and village industries by people who are employment oriented. This it does by providing them tax concessions, subsidies, grants, loans at low rates of interest, etc. Finally, it creates jobs for poor when it undertakes public works programmes like construction of roads, bridges, canals, buildings, etc.
  4. To ensure stability in prices : Government ensures stability of prices of essential goods and services by regulating their supplies. Hence, it incurs expenditure on ration and fair price shops that keep sufficient stock of food grains. If also subsidizes cooking gas, electricity, water and essential services like transport and maintains their prices at low-level affordable to the common man.
  5. To correct balance of payments deficit : The balance of payments account of a country records its receipts and payment with foreign countries. When payments to foreigners are more than receipts from foreigners, the balance of payments account is said to be in deficit. Quite often this deficit is caused when a country imports more than it exports. Consequently, the payments on imports to foreigners are more than the receipts from exports. In such a situation, to reduce the deficit in balance of payment account, the government discourages imports by increasing taxes on them and encourages exports by increasing subsidies and other export incentives. However, it should be noted that tax on import is not a popular measure now as it is treated as an obstacle to free flow of goods and services between countries.
  6. To provide for effective administration : Government incurs expenditures on police, defence, legislatures, judiciary, etc. to provide effective administration.

 

Components Of The 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 (refer below chart) –

  • (a) Revenue Budget
  • (b) Capital Budget

Measures Of Government Deficit

The budget is not merely a statement of receipts and expenditures.

Since Independence, with the launching of the Five-Year Plans, it has also become a significant national policy statement. The budget, it has been argued, reflects and shapes, and is, in turn, shaped by the country’s economic life.

Along with the budget, three policy statements are mandated by the Fiscal Responsibility and Budget Management Act, 2003 (FRBMA).

  • The Medium-term Fiscal Policy Statement sets a three-year rolling target for specific fiscal indicators and examines whether revenue expenditure can be financed through revenue receipts on a sustainable basis and how productively capital receipts including market borrowings are being utilised.
  • The Fiscal Policy Strategy Statement sets the priorities of the government in the fiscal area, examining current policies and justifying any deviation in important fiscal measures.
  • The Macroeconomic Framework Statement assesses the prospects of the economy with respect to the GDP growth rate, fiscal balance of the central government and external balance*.

* The 2005-06 Indian Budget introduced a statement highlighting the gender sensitivities of the budgetary allocations. Gender budgeting is an exercise to translate the stated gender commitments of the government into budgetary commitments, involving special initiatives for empowering women and examination of the utilisation of resources allocated for women and the impact of public expenditure and policies of the government on women.

 

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 divided into tax and non-tax revenues.

  • Tax Revenues consist of the proceeds of taxes and other duties levied by the central government. Tax revenues, an important component of revenue receipts, comprises –
    • 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 Tax. Excise taxes were the single largest revenue earner contributing 35.7 per cent of total tax revenue in 2003-04.
    • 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’.
    • Two new taxes – the Fringe Benefits Tax (on those benefits enjoyed collectively by the employees) and tax on cash withdrawals from banks over a certain threshold in a day – were introduced in the budget for 2005-06.
    • Progressive Income Taxation – 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 which constitutes the single largest item of non-tax revenue);
    • Dividends and Profits on Investments made by the government;
    • Fees and Other Receipts for services rendered by the government;
    • 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 Bill*.

* 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.

 

Revenue Expenditure

Broadly speaking, revenue expenditure consists of all those expenditures of the government which do not result in creation of physical or financial assets. It relates to –

  • 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).

Budget documents classify total revenue expenditure into plan and non-plan expenditure.

  • Plan revenue expenditure relates to central Plans (the Five-Year Plans) and central assistance for State and Union Territory Plans.
  • Non-plan expenditure, the more important component of revenue expenditure, covers a vast range of general, economic and social services of the government. The main items of non-plan expenditure are interest payments, defence services, subsidies, salaries and pensions.
    • Interest payments on market loans, external loans and from various reserve funds constitute the single largest component of non-plan revenue expenditure. They used up 41.5 per cent of revenue receipts in 2004-05.
    • Defence expenditure, the second largest component of non-plan expenditure, is committed expenditure in the sense that given the national security concerns, there exists little scope for drastic reduction.
    • Subsidies are an important policy instrument which aim at increasing welfare.
    • Apart from providing implicit subsidies through under-pricing of public goods and services like education and health, the government also extends subsidies explicitly on items such as exports, interest on loans, food and fertilisers. The amount of subsidies as a per cent of GDP has been falling from 1.7 per cent in 1990-91 to 1.66 per cent in 2002-03 to 1.45 per cent in 2004-05.

 

The Capital Account

The Capital Budget is an account of the assets as well as liabilities of the central government, which takes into consideration changes in capital. It consists of capital receipts and capital expenditure of the government. This shows the capital requirements of the government and the pattern of their financing.

 

Capital Receipts

The main items of capital receipts are loans raised by the government from –

  • the public which are called market borrowings,
  • the Reserve Bank and commercial banks and other financial institutions through the sale of treasury bills,
  • loans received from foreign governments and international organisations, and
  • recoveries of loans granted by the central government.

Other items include –

  • small savings (Post-Office Savings Accounts, National Savings Certificates, etc),
  • provident funds, and
  • net receipts obtained from the sale of shares in Public Sector Undertakings (PSUs).

 

Capital Expenditure

This includes expenditure –

  • on the acquisition of land, building, machinery, equipment,
  • investment in shares, and
  • loans and advances by the central government to state and union territory governments, PSUs and other parties.

Capital expenditure is also categorised as plan and non-plan in the budget documents.

  • Plan capital expenditure, like its revenue counterpart, relates to central plan and central assistance for state and union territory plans.
  • Non-plan capital expenditure covers various general, social and economic services provided by the government.

 

Measures Of Government Deficit

When a government spends more than it collects by way of revenue, it incurs a budget deficit. [More formally, it refers to the excess of total expenditure (both revenue and capital) over total receipts (both revenue and capital). From the 1997-98 budget, the practice of showing budget deficit has been discontinued in India.]

There are various measures that capture government deficit and they have their own implications for the economy.

  • Revenue Deficit
  • Fiscal Deficit
  • Primary Deficit

 

Revenue Deficit

The revenue deficit refers to the excess of government’s revenue expenditure over revenue receipts.

Revenue Deficit = Revenue Expenditure – Revenue Receipts

The revenue deficit includes only such transactions that affect the current income and expenditure of the government.

When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.

This situation means that the government will have to borrow not only to finance its investment but also its consumption requirements. This will lead to a build up of stock of debt and interest liabilities and force the government, eventually, to cut expenditure.

Since a major part of revenue expenditure is committed expenditure, it cannot be reduced. Often the government reduces productive capital expenditure or welfare expenditure. This would mean lower growth and adverse welfare implications.

 

Fiscal Deficit

Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing.

Gross Fiscal Deficit = Total Expenditure
– (Revenue Receipts + Non-Debt Creating Capital Receipts)

  • Non-debt creating capital receipts are those receipts which are not borrowings and, therefore, do not give rise to debt. Examples are recovery of loans and the proceeds from the sale of PSUs.

The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources. From the financing side –

Gross Fiscal Deficit = Net Borrowing At Home
+ Borrowing From RBI
+ Borrowing From Abroad

  • Net borrowing at home includes that directly borrowed from the public through debt instruments (for example, the various small savings schemes) and indirectly from commercial banks through Statutory Liquidity Ratio (SLR).

The fiscal deficit of the central government, after declining from 6.6 per cent of GDP in 1990-91 to 4.1 per cent in 1996-97 rose to 6.2 per cent in 2001-02 (Table 5.1). Under the constraint imposed by the FRBMA, the fiscal deficit as well as the revenue deficit have fallen to 4.1 per cent and 2.5 per cent respectively in 2004-05 (provisional figures). The increasing share of the revenue deficit as a proportion of the fiscal deficit (which was 49.4 per cent in 1990-91 but has increased to 79.7 in 2003-04) indicates the rapid decline in the quality of the deficit.

 

Primary Deficit

The borrowing requirement of the government includes interest obligations on accumulated debt. To obtain an estimate of borrowing on account of current expenditures exceeding revenues, we need to calculate what has been called the primary deficit.

It is simply the fiscal deficit minus the interest payments

Gross Primary Deficit = Gross Fiscal Deficit – Net Interest Liabilities

Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending.

 

Fiscal Policy

One of Keynes’s main ideas in The General Theory of Employment, Interest and Money was that government fiscal policy should be used to stabilise the level of output and employment.

Through changes in its expenditure and taxes, the government attempts to increase output and income and seeks to stabilise the ups and downs in the economy. In the process, fiscal policy creates –

  • a surplus (when total receipts exceed expenditure) or
  • a deficit budget (when total expenditure exceed receipts) or
  • a balanced budget (when expenditure equals receipts).

The government directly affects the level of equilibrium income in two specific ways – government purchases of goods and services (G) increase aggregate demand and taxes, and transfers affect the relation between income (Y) and disposable income (YD) – the income available for consumption and saving with the households.

 


 

Bibliography :

NIOS – Economics
NCERT – Introductory Macroeconomics

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