CBSE Class 12 Economics Government Budget And The Economy Worksheet

Question. Which of the following is Revenue expenditure?
a) Construction of school
b) Borrowings
c) Grants given to the state governments.
d) Loans given to the state governments
Answer. C

Question. ………………………………. Indicates the borrowing requirement of the govt.
a) Revenue deficit
b) Budgetary deficit
c) Fiscal deficit
d) Primary deficit
Answer. C

Question. Identify which of the following is not an example of tax revenue for the government. (Choose the correct alternative)
a) Wealth Tax
b) Special Assessments
c) Income Tax
d) Corporate Tax
Answer. B

Question. Find out incorrect statement from the following:
(a) A government budget is an estimation of receipts and expenditure for current year.
(b) A government budget is an estimation of receipts and expenditure for next financial year.
(c) Capital receipts decreases assets of the government.
(d) Subsidies are not treated as capital expenditure of the government.
Answer. A

Question. Which of the following is a basis for comparison between direct and indirect taxes?
a) Impact
b) Shift of burden
c) Coverage
d) All of the above
Answer. D

Question. Identify the correct formula to calculate Fiscal Deficit.
a) Total expenditure - Total Receipt (other than borrowings)
b) Revenue Expenditure- Revenue Receipt
c) Capital Expenditure- Capital Receipt
d) Revenue Expenditure + Capital expenditure - Revenue Receipt.
Answer. A

Question. Match the item in column A to those in column B and choose the correct option:
Column A                         Column B
A Capital Budget         (I)  Total expenditure = Total Revenue
B Balanced Budget      (II) Total expenditure< Total Revenue
C Surplus budget       (III) Total expenditure > Total revenue
D Deficit Budget         (IV) Capital receipts + capital expenditure
a) A-(iv), B-(i), C-(ii), D- (iii)
b) A-(iv), B-(i), C-(iii), D- (ii)
c) A-(iv), B-(iii), C-(ii), D- (i)
d) A-(i), B-(iv), C-(ii), D- (iii)
Answer. A

Question. In a govt. budget, revenue deficit is Rs. 50000 crores and borrowings are Rs.75000 crores. The fiscal deficit will be:
a) Rs. 25000 crores
b) Rs.125000 crores
c) Rs.50000 crores
d) Rs.75000 crores
Answer. D

Question. Read the following statements carefully and choose the correct alternatives given below:
Statement 1 – Tax Revenue and non-tax revenue are increasing but recovery of loan is reducing.
Statement 2 –Revenue receipts and capital receipts are decreased from 2019 to 2021
Alternatives:
a) Both the statements are true.
b) Both the statements are false.
c) Statement 1 is true and Statement 2 is false
d) Statement 2 is true and Statement 1 is false
Answer. C

Read the following statements – Assertion (A) and Reason (R). Choose one of the correct alternatives given below 

Question. Assertion (A): GST is imposed on goods and services and it is an indirect tax.
Reason (R): Indirect taxes are those tax whose money burden cannot be shifted.
a) Both Assertion (A) and Reason (R) are true, (R) is correct explanation of (A).
b) Both Assertion (A) and Reason (R) are true but (R) is not correct explanation of (A).
c) Assertion (A) is true and Reason (R) is false.
d) Assertion (A) is false and Reason (R) is true.
Answer. C

Question. Assertion (A): Recovery of loan by the government is capital receipts.
Reason (R): Disinvestment is revenue receipts of the government.
a) Both Assertion (A) and Reason (R) are true, (R) is correct explanation of (A).
b) Both Assertion (A) and Reason (R) are true but (R) is not correct explanation of (A).
c) Assertion (A) is true and Reason (R) is false.
d) Assertion (A) is false and Reason (R) is true.
Answer. ​​​​​​C
 

Read the following paragraph carefully and Answer: the given questions 

Every govt. seeks to control and give direction to economic activities. For this purpose, it may exercise a large number of instruments available to it. Among these instruments, the most important is the fiscal policy, which operates through the financial operations of the government. In modern times the responsibilities and functions of a government have been gradually increasing as the areas of the activity are expanding continuously. It requires more and more finance as the corresponding expenditures are moving northwards. The government has to perform innumerable functions for ensuring economic growth and development of the country for which it has to take care of public revenue and public expenditure.

Question. Fiscal policy is the policy of the …….
a) Government
b) Central Bank
c) Both govt. and central bank
d) None of these.
Answer. A

Question. During the time of inflation, govt. should go for ……………….…. budget.
a) Deficit
b) Surplus
c) Balanced
d) Capital
Answer. B

Read the following paragraph and Answer: the given questions 

In the modern world, govt. aims at maximizing the welfare of the people and the country. It requires various infrastructure and economic welfare activities. These activities require huge govt. spending through appropriate planning and policy. Budget provides a solution to all these concerns. Budget is prepared by the government at all levels.
Estimated expenditure and receipts are planned as per the objectives of the government. In India, budget is prepared by the parliament on such a day as the president may direct. The parliament approves the budget before it can be implemented. The receipts and expenditures as shown in the budget are only the estimated values for the upcoming fiscal year, and not the actual figure.

Question. Which of the following is not an objective of the govt. budget?
a) Reallocation of resources.
b) Re distribution of income
c) Reducing expenditure
d) Economic stability.
Answer. C

Question. Govt. budget is a statement of actual receipts and payments of the govt. (True/False)
a) True
b) False
Answer. B

Short Answer: Question and Answer

Question. What are the different sources of nontax revenue? 
Answer. 
• Non tax revenue refers to revenue receipts of the govt. other than the tax revenue.
• Major sources are: - Administrative revenue (Fess, Fines & penalties, Escheats, License fees, forfeitures etc.) Gift & grants, Income from govt. properties, special assessments, interest received, dividends etc.

Question. Distinguish between revenue receipt and capital receipt. 
Answer. 
Revenue Receipts (RR): -
Receipts which neither creates liability nor reduces the assets of the govt.
Major features are:
It does not create liability to the govt. It does not reduce the assets of the govt.
They are regular and recurring in nature.
Major sources are: Tax revenue and Non- tax revenue
Capital Receipts (CR): -
Receipts which either creates liability or reduces the assets of the govt.
Major features:
It creates liability for the govt. It reduces the assets of the govt.
They are irregular and non-recurring in nature. For example; disinvestment, recovery of loans, small savings etc.

Question. Define fiscal deficit and write any three implications of fiscal deficit. 
Answer. 
Fiscal deficit refers to the excess of Budgetary Expenditure over Budgetary receipts, excluding borrowings, during an accounting year.
FD = BE- BR (Excluding borrowings)
Major implications:
1 Leads to Debt trap: - Borrowings not only involves repayment of borrowed amount but it also requires payment of interest. Interest payments increases revenue expenditures which leads to revenue deficits, ultimately leads to debt trap.
2. Creates inflationary situation in the economy: - Borrowings leads to increase in money supply in the economy creates inflation.
3. Foreign dependence: - Govt. borrows money from the foreign countries and foreign financial institutions, which ultimately increases its dependences on these countries and institutions.
4. Financial burden on future generations: - If the country did not repay the borrowed amount in time, its burden will go to the future generations, which will hamper the future growth of the country.

Question. Explain how the govt. is using as an instrument for reducing the inequalities in income.
Answer. 
Reducing inequality is an inherent part of every economic system.
• By imposing taxes on the rich and through providing welfare programs to the poor people govt. is achieving this goal.
• Also known as redistribution of income & wealth
• Progressive taxes on the rich and through providing job opportunities and also through transfer payments govt. is achieving this goal.
• Govt. also aims to achieve regional equality by providing facilities to the rural areas, basically infrastructural Facilities for bringing balanced growth.

Question. What do you mean by deficit budget? What are its types? 
Answer.  Deficit Budget: If Budgetary Receipts are LESS THAN the Budgetary Expenditure of the govt., then it is known as Deficit budget.
BR < BE or TR < TE
Types of budgetary deficits: - 1. Revenue Deficit (RD) 2. Fiscal Deficit (FD)
3. Primary Deficit (PD)

Question. ‘’Through its budgetary policy govt. allocates resources in accordance with the requirements of the country.’’ Do you agree? Justify your Answer: with valid reason. 4 marks
Answer. Re-allocation of resources is the major objectives of the govt. Govt. aims to reallocate resources in accordance with the economic and social priorities of the country.
• To encourage investment, govt. gives tax concessions and subsidies etc., to the producers.
• Govt. discourages the production of the harmful goods by imposing heavy taxes and encourages the production of needful goods like ‘khadi products’ by providing subsidies.
• Also undertake production of those goods where private sector does not take interest.

Question. What do you mean by revenue deficit? Write its implications.
Answer. 
If Revenue Expenditures are MORE THAN the Revenue Receipts of the govt., then it is known as REVENUE DEFICIT (RD) during an accounting year.
RD = RE - RR or RD= RE > RR
Major implications are: -
1. It is a warning signal to the govt. either to reduce the revenue expenditure or to increase the revenue receipts.
2. It indicates the inability of the govt. to meet its regular and recurring expenditure.
3. It also implies that the govt. has to make up this deficit from capital receipts which may lead to inflationary situation in the economy.

Question. What do you mean by unbalanced budget? What are its types?
Answer.  Un- balanced budget: -
If Budgetary Receipts are not equal to the Budgetary Expenditure of the govt., then it is known as un balanced budget. Major TYPES of unbalanced budget are: Surplus Budget & Deficit Budget
Surplus Budget
If Budgetary Receipts are MORE THAN the Budgetary Expenditure of the govt., then it is known as Surplus budget.
BR > BE or TR > TE
Deficit Budget
If Budgetary Receipts are LESS THAN the Budgetary Expenditure of the govt., then it is known as Deficit budget.
BR < BE or TR < TE

LONG ANSWER: QUESTIONS (6 marks)

Question. Define govt. budget and explain its major objectives.
Answer.  An annual statement of estimated receipts and estimated expenditure of the govt. during an accounting year (fiscal year).
Major objectives are:
1. Re-allocation of resources: -Govt. aims to reallocate resources in accordance with the economic and social priorities of the country.
• To encourage investment, govt. gives tax concessions and subsidies etc., to the producers.
• Govt. discourages the production of the harmful goods by imposing heavy taxes and encourages the production of needful goods like ‘khadi products’ by providing subsidies.
• Also undertake production of those goods where pvt. Sector does not take interest.
2. Economic equality: -Reducing inequality is an inherent part of every economic system.
• By imposing taxes on the rich and through providing welfare programs to the poor people govt. is achieving this goal.
• Also known as redistribution of income & wealth
• Progressive taxes on the rich and through providing job opportunities and also through transfer payments govt. is achieving this goal.
• Govt. also aims to achieve regional equality by providing facilities to the rural areas, basically infrastructural Facilities for bringing balanced growth.
3. Economic stability: -
• Govt. budget is used to prevent the business fluctuations like booms or depressions (inflations or deflations) to achieve the goal of balanced growth (economic stability).
• The policy of surplus budget during the time of inflation and deficit budget during the time of deflation helps the govt. to achieve this goal.
4. Economic Growth: -
• Economic growth depends on the rate of saving and investment in the economy. Increase in GDP
• Govt. budget aims to mobilise sufficient resources for investment in the economy.
• Various provisions are making in the govt. budget for increasing the investment in the economy.
5. Management of public sector enterprises: - All public sector enterprises are managed through the govt. budget, functioning for social welfare

Question. Define tax and differentiate between direct and indirect tax. Give examples
Answer.  Tax is a compulsory contribution made by individuals and institutions to the govt. without any direct return.
Direct Tax: -
• Taxes that are imposed on property and income of individuals and firms and are directly paid by them to the govt.
• The burden of tax cannot be shifted.
• The Impact and incidence of tax falls on same person.
• For e.g.: - Income tax, property tax etc.
Indirect Tax: -
• Taxes that are levied on goods and services.
• The burden of tax can be shifted.
• The Impact and incidence of tax falls on different persons.
For e.g.: - GST (Goods & Service tax)

Question. What are the different sources of capital receipts? Explain. 4 marks
Answer. 
Major sources of capital receipts are:
1. Borrowings: -
• These are the funds raised by the govt. to meet the excess expenditures.
• Govt. borrows funds from internal sources (RBI, Open market) External sources (Foreign governments, foreign financial institutions like IMF, IBRD etc.)
• Borrowings are capital receipts as they create liability and reduce the assets of the government.
2. Disinvestment:
• It refers to the act of selling a part or the whole unit of selected public sector undertakings held by the government to the private agencies.
• It reduces the assets of the govt.
• It leads to transfer of ownership of PSU’s to the private enterprises
3. Recovery of loans: -
• Govt. provides various loans to the state government’s or UT’s or even to foreign countries.
• Recovery of such loan is a capital receipt as it reduces the assets of the govt.
4. Small Savings: - Small savings in the form of Post office deposits, NSC are other sources of capital receipts as it leads to an increase in liability.

Question. Questions are to be Answered on the basis of the data given below (in ₹ Crores)
Budget at a Glance
(In ₹ crores)                                 2019-2020 Actuals       2020-2021 Budget Estimates
1. Revenue Receipts                                      1684059           2020926
2. Tax Revenue (Net to Centre)                      1356902            1635909
3. Non Tax Revenue                                       327157             385017
4. Capital Receipts ¹                                      1002271           1021304
5. Recovery of Loans                                      18316               14967
6. Other Receipts                                           50304              210000
7. Borrowings and Other Liabilities²                  933651           796337
8. Total Receipts (1+4)                                   2686330          3042230
9. Total Expenditure (10+13)                           2686330         3042230
10. On Revenue Account of which                     2350604         2630145
11. Interest Payments                                      612070           708203
12. Grants in Aid for creation of capital assets    185641           206500
13. On Capital Account                                     335726            412085

Question. The percentage change in the Tax Revenue, between 2019- 20 (Actual) and 2020-21 (Budgeted Estimate), taking the 2019-20 as base, would be ____________.
(Fill up the blank with correct alternative)
a) 15.02%
b) 20.56%
c) 17.06%
d) 20.01%
Answer. B

Question. The value of borrowings and other liabilities has ___________ crores between 2019-20 (Actual) and 2020- 21 (Budgeted Estimate).
(Fill up the blank with correct alternative)
a) Fallen by ₹ 137314
b) Risen by ₹ 137314
c) Fallen by ₹ 137324
d) Risen by ₹ 137324
Answer. A

Question. 8. The value of borrowings for the year 2020-21, would be ₹ _____________ crores. (Fill up the blank with correct alternative))
a) 88134
b) 796337
c) 933651
d) 666545
Answer. B

Question. The percentage change in the Total receipts, between 2019- 20 (Actual) and 2020-21 (Budgeted Estimate), taking the 2020- 21 as base, would be ____________.
(Fill up the blank with correct alternative)
a) 11.70%
b) 13.14%
c) 13.24%
d) 10.01%
Answer. A

Numerical illustrations:

Question. Estimate the value of RD, FD, & PD (For practice)
                                          Amount ( Rs. Crs)
1. Capital receipts                        635902
(a) Recovery of Loans                  10753
(b) Other receipts                        69500
(c) Borrowings & other liabilities   555649
2. Revenue Receipts                    1141575
3. Total Receipts                          1777477
4. Plan Expenditure                      465277
(a) Own revenue a/c                    330020
(b) Own capital a/c                      135257
5. Non plan expenditure              1312200
(a) Own revenue a/c                   1206027
(b) Own capital a/c                     106173
6. Total Expenditure                   1777477
7. Interest payments                  456145
Answer. RD = 394472 Crs FD = 555649 crs PD = 99504 Crs

Key Points for Class 12 Economics Chapter 5 Government Budget and The Economy

Budget:- Govt. Budget is the annual financial statement of expected receipts and expenditure of the government during next financial year.

Objective of Budget:-

1. Redistribution of Income and Wealth:- The govt. redistribute income and wealth through taxation and subsidy by budget.

2. Reallocation of Resources:- Govt. user budgetary policy to allocate resources in the manner such that there is a balance between the goals of profit maximization and social welfare.

3. Economic Stability:- Government Budget is a tool to prevent economy form the inflation or deflation and to maintain economic stability.

4. Managing Public Enterprises:- In the Budget govt. make various provisions to manage public sector industries.

5. Economic Growth:-

Structure of Budget:- The Govt. Budget is divided into two parts:-
A) Revenue Budget: - In include „revenue receipt‟ and revenue expenditure of the govt.
B) Revenue Receipts (RR):- It refers to those monetary receipts which neither create a liability to the govt. nor lead to reduction in asset.
Example: - Taxes, Fees, License and Permit, Escheat.

Following are the main components of revenue receipts:-

1. Tax: - Tax is a compulsory payment to govt. without expectation of direct benefit to the tax payers. There are main

two type of taxes:-
(i) Direct Tax: - If the liability to pay tax (incidence) and its burden (impact) fall on same person, it is termed as Direct tax.
Burden of direct tax cannot be shifted on other person.
Example: - Income tax, Wealth tax, Corporate tax, etc.
(ii) Indirect Tax: - If the liability to pay tax (incidence) and its burden (impact) cab be on different people, it is called indirect tax.
Example: - Sales tax, Excise tax, custom duty etc.

2. Non- Tax Revenue:- Sources other than taxes
(i) Fees: - Paid to govt. for services.
(ii) License and permit: - Paid to govt for granting the permission of doing certain things of activities.
(iii) Fines and Penalties
(iv) Income from Public enterprises

(B) Revenue Expenditure: - Those expenditure which do not create any assets and do not reduce any liability of the govt. These are the recurrent expenditure of govt.
Examples: - Salaries, pension, interest payment, subsidy grants to state govt. etc.

B. Capital Budget: - It includes capital receipts and capital expenditure of the govt.
(i) Capital Receipts: - It refers to those monetary receipts which either create liability for the govt. or cause reduction in the assets of the government.
♦ Borrowings
♦ Recovery of Loans and Advances
♦ Disinvestment
(ii) Capital Expenditure: - The expenditure which either creates any asset or reduces liability of govt. is treated as capital expenditure.
♦ These are non- recurring type of expenditure.
♦ Examples: - Expenditure on purchasing assets, land building.
♦ Payment of loans.

Plan and Non- Plan Expenditure
♦ Plan expenditure: - It refers to the expenditure incurred on various projects and development programmes covered under the current five year plan.
Example: - exp. On rural development, irrigation.
♦ Non Plan Expenditure: - It refers to the expenditures on projects other than current five year plan.
Example:- Interest payments, expenditure of defence services, subsidies.
♦ Development Expenditure: - Expenditure incurred on activities which are directly related to economic and social development.
♦ Non development Expenditure: - The expenditure incurred on essential services by the govt.
Example:- Expenditure on administration, defence collection of tax.

Types of Budget
Balance Budget: - A govt. budget is said to be balanced budget in which total receipts are equal to Total Revenue.
Total Receipts = Total Expenditure
♦ Surplus Budget: - Budget in which govt. receipts are greater than govt.
expenditure.
♦ Deficit Budget: - Budget in which govt. expenditure in greater than govt.
receipts.
♦ Budget Deficit: - It refers to a situation when Budget expenditure of the govt. is greater than Budget receipts.

Types of Budget Deficit
A. Revenue Deficit: - It is excess of governments revenue expenditure (RE) over revenue receipts (RR) during a Fiscal year.
Implication of Revenue Deficit
i) Increased revenue deficit shows the warming to govt. to reduce its day to day expenditure.
ii) Increased revenue deficit raises the loan liability of the govt.
Fiscal Deficit: - Fiscal deficit is the excess of total expenditure (revenue+ capital) over total receipts excluding borrowings (revenue receipts + capital receipts other than borrowings) during a given Fiscal year.

Implication/Significance:-
• Fiscal deficit rises the inflation
• It increases the dependence on foreign country
• It effect the future growth and development
• It indicates greater borrowings and liability which may cause of a country in a debt trap.