Important Questions for class 12 economics Budgetary Deficiet and Its Measures

Government Budget and The Economy Important Questions for class 12 economics Budgetary Deficiet and Its Measures

1. Budgetary Deficit When a government spends more than it collects by way of revenue, it incurs a budgetary deficit, i.e. Expected expense > Expected revenue.

2.Measures of Budgetary Deficit It includes revenue deficit, fiscal deficit and primary deficit.

3. Revenue Deficit When the revenue receipts are less than the revenue expenditures in the government budget, this short fall is known as revenue deficit.
It is calculated as
Revenue Deficit = Revenue Expenditure – Revenue Receipts

4. Implications of Revenue Deficit
(i) Huge expenditure on administration and maintenance.
(ii) Increase in government liability.
(iii) Higher inflation.\
(iv) Higher future burden of loan and interest payments on government.

5. Measures to Reduced Revenue Deficit
(i) Reduction in government’s expenditure.
(ii) Increase in government’s revenue.

6. Sources of Financing Fiscal Deficit The two main sources are :
(i) Borrowings
(ii) Deficit Financing

7. Fiscal Deficit It refers to the excess of total expenditure over the sum of revenue receipts and capital receipts excluding borrowings. It is calculated as
Fiscal Deficit = Total Budget Expenditure – Total Budget Receipts (excluding borrowings)
^or
Fiscal Deficit = [Revenue Expenditure + Capital Expenditure]
– [Revenue Receipts + Capital Receipts (excluding borrowings)]
or
Fiscal Deficit = Borrowings

8. Implications of Fiscal Deficit
(i) High inflation
(ii) Increased foreign dependence
(iii) Financial burden on citizens
(iv) Increased borrowings by government
(v) Debt trap
(vi) High interest payments by the government

9. Measures to Reduce Fiscal Deficit
(i) Reduction in public expenditure by:
(ii) Reducing subsidies
(iii) Reducing non-plan expenditure.
(iv) Steps to increase revenue by :
(v) Increasing the incidence and burden of tax.
(vi) Increasing the profitability of PSU’s
(vii) Controlling tax evasion.

10. Primary Deficit The difference between fiscal deficit and interest payment is termed as primary deficit. It is calculated as
Primary Deficit – Fiscal Deficit – Interest Payments

11. Implications of Primary Deficit
(i) Indicates how much government borrowing is going to meet expenses other than interest payments.
(ii) Reflects the extent to which current government policy is adding to future burdens.
(iii)Used as a measure of fiscal irresponsibility.

12. Measures to Reduce Primary Deficit
(i) Efforts should be made to reduce fiscal deficit.
(ii) Early repayment of loans should be encouraged.

Previous Years Examination Questions

1 Mark Questions

1. Define fiscal deficit. (All India 2014)
Ans. Fiscal deficit is the difference between the government’s total expenditure and total receipts excluding borrowings.
Fiscal Deficit = Total Budget Expenditure – Total Budget Receipts (Excluding borrowings) or
Fiscal Deficit = Borrorings

2. What is’primary deficit’. (Foreign2014)
or
How is primary deficit calculated? (Delhi 2010,2008C)
Ans. The difference between fiscal deficit and interest payment is known as primary deficit.
Primary Deficit = Fiscal Deficit – Interest Payments

3. What is’revenue deficit? (All India 2013)
or
What is the meaning of revenue deficit? (All India 2010)
Ans. When the revenue receipts are less than the revenue expenditures in a government budget, this shortfall is termed as revenue deficit.
Revenue Deficit = Revenue Expenditure – Revenue Receipts
3 Marks Questions

4. Distinguish between fiscal deficit and revenue deficit. (Delhi 2013)
Ans. Difference between fiscal deficit and revenue deficit

5. Explain the meaning and implications of revenue deficit.
(All India 2011)
Ans. When the revenue receipts are less than the revenue expenditures in the government budget, this shortfall of receipts is known as revenue deficit.
Implications of revenue deficit are as follows:
(i) High revenue deficit shows accumulated and recurring expenses of government such as expenses on defence, payment of interest, etc.
(ii) The revenue deficit is managed by borrowing or disinvestment. Hence, high revenue deficit either increases government liability or reduction of government assets.
(iii) High revenue deficit leads to inflationary situation in the economy, as high government expenditure increases the aggregate demand of the economy.
(iv) High revenue deficit implies high future burden of loan and interest payments on the government.

6. Distinguish between fiscal deficit and primary deficit.
(All India 2010; Delhi 2009)
Ans. Difference between fiscal deficit and primary deficit

7. Give the meaning of revenue deficit, fiscal deficit and primary deficit.
(All India 2009; Delhi 2009C)
Ans. (i) Revenue deficit When the revenue receipts are less than the revenue expenditures in the government budget, this short fall is known as revenue deficit. It is calculated as
Revenue Deficit = Revenue Expenditure – Revenue Receipts
(ii) Fiscal deficit It refers to the excess of total expenditure over the sum of revenue receipts and capital receipts excluding borrowings. It is calculated as
Fiscal Deficit = Total Budget Expenditure – Total Budget Receipts (excluding borrowing)
or
Fiscal Deficit = Borrowings
(iii) Primary deficit The difference between fiscal deficit and interest payments is termed as primary deficit. It is calculated as
Primary Deficit = Fiscal Deficit – Interest Payments
4 Marks Questions

7. Explain revenue deficit in a government budget. What does it indicate?
(Delhi 2012; All India 2009C)
or
What is revenue deficit? Explain its implications. (Delhi 2012; All India 2008)
Ans.When the revenue receipts are less than the revenue expenditures in the government budget, this shortfall of receipts is known as revenue deficit.
Implications of revenue deficit are as follows:
(i) High revenue deficit shows accumulated and recurring expenses of government such as expenses on defence, payment of interest, etc.
(ii) The revenue deficit is managed by borrowing or disinvestment. Hence, high revenue deficit either increases government liability or reduction of government assets.
(iii) High revenue deficit leads to inflationary situation in the economy, as high government expenditure increases the aggregate demand of the economy.
(iv) High revenue deficit implies high future burden of loan and interest payments on the government.

9. Explain the concept of fiscal deficit in a government budget. What does it indicate? (All India 2012)
or
What is fiscal deficit? What are its implications? (Delhi 2008; All India 2008)
Ans. It refers to the excess of total expenditure over the sum of revenue receipts and capital receipts excluding borrowings. It is calculated as :
Fiscal Deficit = Total Budget Expenditure – Total Budget Receipts (excluding borrowing)
or
Fiscal Deficit = Borrowings

Implications of fiscal deficit are :
(i) Borrowings requirements of government.
(ii) High interest payments by government.
(iii) High level of inflation due to high government expenditure.
(iv) Increased foreign dependence of the economy.

10. From the following data about a government budget, find out the following:
(i) Revenue deficit
(ii) Fiscal deficit
(iii) Primary deficit

(i) Revenue Deficit = Revenue Expenditure – Revenue Receipts =100 -80 =Rs. 20 Arab
(ii) Fiscal Deficit = [Revenue Expenditure + Capital Expenditure] – [Revenue Receipt
+ Capital Receipt Net of Borrowing]
= [100 + 110]- [80 + 95]
=210-175
= Rs. 35 Arab
(iii) Primary Deficit = Fiscal Deficit – Interest Payments = 35-10 =Rs. 25 Arab

11. From the following data about a government budget, find
(i) Revenue deficit
(ii) Fiscal deficit
(iii) Primary deficit

Ans. (a) Revenue Deficit = Revenue Expenditure – (Tax Revenue + Non-tax Revenue)
= 80-[47+ 10] = 80-57
= Rs. 23 Arab
(i) Fiscal Deficit = Borrowings Borrowings = Rs. 32 Arab
So, Fiscal Deficit = Rs. 32 Arab
(iii) Primary Deficit = Fiscal Deficit – Interest Payments
= 32-20
= Rs. 12 Arab

12. Define a government budget. Give meanings of revenue deficit, fiscal deficit and primary deficit. (Delhi 2011)
or
What is a government budget. Explain the meanings of fiscal deficit and primary deficit. (All India 2010C)
Ans. Government budget is a statement of expected/estimated receipts and expenditure of the government over a period of one financial year, i.e. 1 st April to 31 st March.
Revenue deficit, fiscal deficit, primary deficit
When the revenue receipts are less than the revenue expenditures in the government budget, this shortfall of receipts is known as revenue deficit.
Implications of revenue deficit are as follows:
(i) High revenue deficit shows accumulated and recurring expenses of government such as expenses on defence, payment of interest, etc.
(ii) The revenue deficit is managed by borrowing or disinvestment. Hence, high revenue deficit either increases government liability or reduction of government assets.
(iii) High revenue deficit leads to inflationary situation in the economy, as high government expenditure increases the aggregate demand of the economy.
(iv) High revenue deficit implies high future burden of loan and interest payments on the government.
6 Marks Question

13. Distinguish between the following
(i) Revenue receipts and capital receipts
(ii) Revenue deficit and fiscal deficit. (Compartment 2014)
Ans. (i) Difference between revenue receipts and capital receipts

(ii) Difference between revenue deficit and fiscal deficit

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