GOVERNMENT BUDGET IMPORTANT QUESTIONS
1 mark each
1. ‘Fiscal Deficit is a part of Primary Deficit’. Do you agree with the given statement?
Ans. No, I do not agree with the given statement. Primary deficit is a part of fiscal deficit (and not the other way round). Fiscal Deficit = Primary Deficit + Interest Payments.
2. Assertion (A): Fiscal deficit is greater than budgetary deficit.
Reason (R): Fiscal deficit is the borrowing from the Reserve Bank of India plus other liabilities of the Government to meet its expenditure.
(a) Both A and R are true and R is the correct explanation of A
(b) Both A and R are true but R is not a correct explanation of A
(c) A is true but R is false
(d) A is false but R is true
Ans. (a)
3. Assertion (A): Increase in Revenue deficit does not always lead to a higher fiscal deficit.
Reason (R): Fiscal deficit is also influenced by capital expenditure and non-debt creating capital receipts of the government in addition to revenue receipts and expenditure.
(a) Both A and R are true and R is the correct explanation of A
(b) Both A and R are true but R is not a correct explanation of A
(c) A is true but R is false
(d) A is false but R is true
Ans. (a)
4. Assertion (A): A higher value of primary deficit is better for the economy
Reason (R): High value of the primary deficit indicates the situation where even after paying the amount of interest, a significant amount of borrowing is left to be used for the expenses.
(a) Both A and R are true and R is the correct explanation of A
(b) Both A and R are true but R is not a correct explanation of A
(c) A is true but R is false
(d) A is false but R is true
Ans. (a)
5. The impact and incidence of _________ is on different persons.
Ans. Indirect Tax
6. The government can achieve its budget objective of ‘Redistribution of income’ by _______.
(a) Managing the General Price level in the economy to the desired level.
(b) Increasing the Gross Domestic Products (GDP) of the economy.
(c) Bringing the production of goods and services under its direct and absolute control.
(d) Rationalization of taxes in a pro-poor direction.
Ans. (d)
7. A tax is said to be ________ when it causes a greater real burden on the poor than the rich.
Ans. Regressive Tax
8. Zero primary deficit means:
(a) The fiscal deficit is zero
(b) No interest payments
(c) Government has to resort to borrowings only to meet interest payments
(d) No borrowings requirements
Ans. (c)
9. Statement 1: Fiscal deficit gives borrowing requirements of the government.
Statement 2: High-interest payments on past borrowings have greatly increased the fiscal deficit.
a) Both the statements are true
b) Both the statements are false
c) 1 is true and 2 is false
d) 2 is true 1 is false
Ans. (a)
10. Statement 1: Inclusive growth is not within the ambit of the budgetary policy of the government.
Statement 2: Taxes and subsidies are an important element of budgetary policy and promote inclusive growth.
(a)Both the statements are true
(b)Both the statements are false
(c) 1 is true and 2 is false
(d) 2 is true and 1 is false
Ans. (d)12. Assertion (A): Highway and road work announced in Kerla, Tamil Nādu, West Bengal, and Assam in budget 2021.
Reason (R): Such announcements will increase the revenue expenditure of the government.
(a) Both A and R are true and R is the correct explanation of A.
(b) Both A and R are true but R is not a correct explanation of A.
(c) A is true but R is false.
(d) A is false but R is true.
Ans. (c)
13. Assertion (A): Income tax is a great source of revenue for the government.
Reason (R): It is a direct tax as its burden can’t be shifted.
(a) Both A and R are true and R is the correct explanation of A
(b) Both A and R are true but R is not a correct explanation of A
(c) A is true but R is false.
(d) A is false but R is true.
Ans. (a)
14. The programmes and policies of the government as presented in the budget are known as _________ of the government.
Ans. Budgetary or Fiscal Policy.
15. _______ budget is a good strategy during periods of modest recession when aggregate demand needs a modest rise.
Ans. Balanced Budget
2 marks each
16. Does Public debt impose a burden? Explain.
Ans. Government debt or public debt refers to the amount of money that a central government owes. This amount may be borrowings of the government from banks, public financial institutions, and other external and internal sources. Public debt imposes a burden on the economy as a whole which is described as follows: (ANY TWO)
(a) Adverse effect on productivity and investment: – A government may impose taxes or get money printed to repay the debt. This, however, reduces the people’s ability to work, save money and invest, thus hampering the development of a country.
(b) The burden on future generations: The government transfers the burden of reduced consumption to future generations. Higher government borrowings in the present lead to higher taxes levied in the future to repay the past obligations.
(c) Lowers the private investment: The government attracts more investment by raising rates of interest on bonds and securities. As a result, a major part of the savings of citizens goes into the hands of the government, thus crowding out private investments.
(d) Leads to the drain of National wealth: The wealth of the country is drained out at the time of repaying loans taken from foreign countries and institutions.
17. Are fiscal deficits necessarily inflationary?
Ans. No, the fiscal deficit does not always inflationary.
Fiscal deficits can prove inflationary if the deficit is financed by printing of new as it will increase the money supply and purchasing power in the economy. It will further worsen the situation if new money is used to finance the current consumption expenditure of the government.
However, if the increase in money supply leads to an increased supply of goods and services or new money is used for infrastructural activities or other capital projects, then the fiscal deficit will not prove to be inflationary.
18. “The Government Budget of a country cannot have fiscal deficit without the existence of revenue deficit.” Defend or refute the given statement.
Ans. Yes, it is possible in the following situations:
(i) When the revenue budget is balanced and the capital budget shows a deficit.
(ii) When there is a surplus in the revenue budget but the deficit in the capital budget is greater than this surplus.
19. A rise in fiscal deficit when the government revises the salary structure of its employees leads to a rise in primary deficit as well. Comment.
Ans. Revision of salary structure enhances revenue expenditure of the government. It would mean a rise in the fiscal deficit of the government. If interest payments are constant, a rise in fiscal deficit would amount to a rise in primary deficit as well.
20. Revenue deficit can be managed through borrowing or disinvestment. But fiscal deficit can be managed only through borrowing. Do you agree? State reason in support of your answer.
Ans. The statement is true. Because disinvestment is already included as an item of capital receipt (non-debt creating capital receipt) in the estimation of fiscal deficit. On the other hand, estimation of revenue deficit does not account for borrowing as well as disinvestment. So that, both these windows are available to manage revenue deficit.
21. Subsidy on diesel oil is a wasteful expenditure by the government. Write one point in support of this observation and one against it.
Ans. It is a wasteful expenditure:
Because the benefit of subsidy is unduly reaped by a richer section of the society who get cheaper oil to run their luxury cars.
It is not a wasteful expenditure:
Because farmers need to be given diesel at a low price. So that, the cost of farming does not rise and farming remains a profitable occupation.
22. Does non-plan expenditure contribute to social welfare?
Ans. Yes, non-plan expenditure does contribute to social welfare. Most of the non-plan expenditure consists of expenditure on subsidies and the maintenance of law and order in the country. Both these categories of expenditure are welfare-oriented.
23. How has the decline in the price of crude oil in the international market helped the government to reduce the fiscal deficit?
Ans. India imports crude oil to meet the bulk of domestic demand for petrol and diesel. A substantial fall in crude oil prices in the international market has promoted the government to increase excise duty on petrol and diesel without passing the benefit of it to the consumers. It has raised the tax revenue of the government. Accordingly, the fiscal deficit has been reduced.
24. Do you approve of investment as an appropriate policy for financing budgetary deficit?
Ans. Disinvestment occurs when the government chooses to sell its stake in the public sector or joint sector enterprises. This leads to privatization. Presently, this seems to be the only effective remedy available to the government to finance the deficit. However, the government should be careful about two points:
(a) It should unload shares of only inefficient enterprises. Otherwise, it would not only be lowering its asset holding, but also closing a regular source of income, and
(b) Money received through disinvestment should not be used for purpose of political popularity (to garner votes). Instead, it should be used as a productive investment.
25. Externalities refer to the harms (or benefits) a firm or an individual causes to another for which they are not penalized (or paid for). Externalities may be positive or negative. For example, an increase in the government’s expenditure on the education of individuals can lead to broader society benefits in the form of greater economic productivity, lower unemployment rate, greater household mobility, and a higher rate of political participation.
(a) Positive Externalities refer to the:
A. Benefits of a firm or individual B. Harms of a firm or individual
C. Both A and B D. None of these
Ans. (A)
(b) Government’s Expenditure on Education lead to:
A. Create Employment Opportunities B. Reduce Poverty
C. Economic Productivity D. All of these
Ans. (D)
26. Finance Minister has announced that steps would be taken to rationalize subsidies that presently dominate the economy of the nation.
What is the economic value of this statement?
Ans. The statement comes in the wake of a consistently high fiscal deficit arising out of the high expenditure of the government on subsidies. Expenditure on subsidies is mostly unproductive. Because it just focuses on lowering the market price of certain goods. To the extent money is spent on subsidies, it is not available for investment in strategic sectors of the economy like infrastructure. Rationalizing the subsidies means the provision of subsidies only for the below poverty line population. The government has already initiated this process by withdrawing subsidies on petrol and diesel.
27. India’s GDP contracted 23.9% in the April-June quarter of 2020-21 as compared to the same period of 2019-20, suggesting that the lockdown has hit the economy hard.
State and discuss any two fiscal measures that may be taken by the Government of India to correct the situation indicated in the above news report.
Ans. The situation suggests that the production activity in the domestic economy has tended to retard, owing to lockdown. The economy has witnessed a loss of employment and the consequent fall in income and expenditure. The economy is drifting towards a recessionary trend. Following two fiscal measures may be taken to correct this situation:
(a) Increase in Government Expenditure: The government should increase its expenditure. This includes both consumption expenditure as well as investment expenditure. A rise in government expenditure leads to a rise in AD which is what is required to combat recession in the economy.
(b) Modify Tax Structure: The tax structure should be modified to induce private investment. The focus should be on such areas of production activity that generate employment, like real estate.
28. What are non-debt-creating capital receipts? Give two examples of such receipts.
Ans. Capital receipts are those receipts of the government that either create liabilities or reduce assets. Capital receipts excluding borrowings are known as non-debt-creating capital receipts.
Examples: Disinvestment, Recovery of loans.
29. The Government, under Ujjwala Yojana, is providing free LPG kitchen gas connections to the families below the poverty line: What objective the government is trying to fulfill through the government budget, and how? Explain.
Ans. Through Ujjwala Yojana, the government is trying to reduce the gap between the rich and the poor. The government sells LPG gas at a higher rate to those who can afford it. Revenue so collected is used to provide LPG gas connection free of cost and also at subsidized rates to the families below the poverty line. This reduces the disposable income of the rich and increases that of the poor, reducing the gap between the two.
30. Identify the ‘Objectives of Government Budget’ from the following statements:
(i) Government increases taxes on liquor.
(ii) Government increases its expenditure during deflation to increase aggregate demand.
(iii) Government increases taxes on super-rich people.
(iv) Government increases expenditure on infrastructure.
Ans.
i. Reallocation of Resources.
ii. Economic Stability.
iii. Reducing inequalities in income and wealth.
iv. Economic Growth.
31. Inclusive growth is not within the ambit of budgetary policy of the government.
Ans. False, Inclusive growth implies that the benefits of growth accrue to all sections of the society. ‘Taxes and subsidies are an important element of budgetary policy, and these are meant to promote inclusive growth.
3 marks each
32. The revenue deficit is the real deficit and not the fiscal deficit. How?
Ans. A fiscal deficit is defined as the excess of total expenditure over total receipts excluding borrowings. In other words, it is equal to borrowings and borrowings are just an act of the government which may be finance interest payments of the government also.
While revenue deficit exclusively takes into account current interest payment obligations of the government not connected with the actual activities.
Thus, revenue deficit is more important than fiscal deficit.
33. Should we rely exclusively on direct taxes for mobilizing tax revenue because indirect taxes are inequitable? Comment.
Ans. As we know, direct and indirect taxes are complementary to each other i.e., they are not substitutes for each other. We cannot depend solely on direct taxes because they are progressive and there is the possibility of tax evasion. But as against it indirect taxes are proportional (regressive) in nature and are imposed on goods and services which every individual purchase. So, direct and indirect taxes are important for providing funds for investment and other social welfare considerations.
34. A balanced budget is recommended as a useful policy instrument when the economy is close to the level of full employment. How?
Ans. A balanced budget causes a modest increase in the level of AD. Because expenditure by the government raises AD by the same amount, while tax receipts reduce AD by ‘MPC times’ the tax receipts. A modest increase in AD would push the economy towards the point of full employment when it is marginally away from this point.
Also, a balanced budget is a good strategy during periods of modest recession when aggregate demand needs a modest rise.
35. Why should revenue deficit be curbed?
Ans. A revenue deficit often occurs when the unproductive expenditure of the government (like expenditure on subsidies and purchases relating to law & order and defense of the country) is more than the tax and non-tax revenue receipts. Thus, it contributes to the fiscal deficit without adding much to the flow of goods and services 1n the economy. Revenue deficit compels the government to resort to borrowing or disinvestment. Borrowing leads to a rise in national debt. Disinvestment leads to the transfer of asset ownership from the public sector to the private sector. It implies a shift in focus from social welfare to profit maximization. Thus, we conclude that the revenue deficit should be curbed.
36. Briefly describe how the government budget contributes to the process of growth and stability.
Ans. The government budget contributes to growth because a significant percentage of budgetary expenditure is committed to the growth and expansion of public sector enterprises. The government also offers subsidies to the producers to maintain a high level of production of the essential goods.
Stability is promoted by combating inflation through fiscal discipline and combating deflation through liberal spending by the government. Fiscal discipline aims at lowering AD during inflation. Liberal spending promotes AD during deflation.
37. In the government of India’s budget for the year 2022-2023, the Finance Minister proposed to raise the Goods a Services Tax (GST) on cigarettes. He also proposed to increase income tax on individuals earning more than Rupee one crore per annum.
Identify and explain the types of taxes proposed by the Finance Minister. Was the objective only to earn revenue for the government? What possible welfare objectives could the Government be considering?
Ans. Goods and Services Tax (GST) – Indirect tax. Indirect tax is a tax where the payer and the bearer of the tax are different people.
Income tax – Direct tax. Direct tax is a tax where the payer and bearer of the tax are the same people.
Besides the objective of raising more revenue, the proposals also serve some welfare objectives.
• Firstly, raising Goods and Services Tax (GST) on cigarettes will make them more expensive. The price rise is expected to discourage cigarette smoking, which will positively impact the health of people and raise their welfare.
Secondly, raising the income tax on income above Rupee one crore will reduce the gap between the rich and poor people. In other words, income inequalities will reduce.
• Thirdly, the extra revenue raised from these proposals could be spent on health education and other welfare-enhancing schemes to improve the welfare of the poor.
38. Explain the concept of Public Goods.
Ans. Public goods are those goods that are meant for collective use by all sections of society. Example: Law and order, defense, and public administration. These goods have two characteristics: (i) non-rivalrous, and (ii) non-excludability.
(i) Non-rivalrous: These goods are non-rivalrous in the sense that the use of a public good by one individual does not reduce its availability for the other. Example: Parks, and national defense, when used by one individual are not reduced for the other.
(ii) Non-excludability: These goods are non-exclusive in the sense that the use of a public good by those individuals who pay for it does not exclude others from using it who do not pay for it. Example: Street lights may be paid utility service. But those who do not pay cannot be excluded from the use of it.
6 marks each
39. Financing the fiscal deficit should not be confused as the solution to the problem of fiscal deficit. True or false give the reason in support of your answer.
Ans. Financing the fiscal deficit and solution to tt1e problem of fiscal deficit are different propositions. The fiscal deficit may be financed through borrowing. But this is not the solution to the problem. The solution to the probl·em of fiscal deficit is to be found in terms of (i) lowering the government expenditure, and (ii) raising the government revenue. However, it is not so easy to lower government expenditure in a country like India where a sizeable percentage of the population belongs to the BPL category. BPL population deeply depends on the government for food, shelter, clothing, and education. Likewise (in India), it is not so easy for the government to increase its revenue.
Taxation is the principal source of revenue. But when the bulk of the population lives on low incomes, a high rate of direct taxation (income and wealth tax) would only lead to a high rate of tax evasion or unbearable hardship on the marginal families. Also, high rate of indirect. taxation (like excise duty) would increase the cost of production and lower the inducement to invest.
The permanent solution to the problem of high fiscal deficit is to be found in economic expansion: GDP level and disposable income of the people should rise. A higher level of GDP would automatically generate higher revenue for the government. Also at a higher level of income, government expenditure on public welfare would automatically shrink. A rise in revenue and a fall in expenditure would bring fiscal discipline.
40. How can the government impact the allocation of resources through its budgetary policy? Write down any 5 ways.
Ans. The following observations highlight how the government can impact the allocation of resources through its budgetary policy:
(i) The government can offer subsidies on such goods (like coarse cloth) tho production of which is essential for poorer sections of the society. So that, the resources are shifted from the production of ‘goods for the rich to the production of ‘goods for the poor’.
(ii) The government can grant a ‘tax holiday’ (exemption from tax payments) to induce investment in the production of essential goods like ‘life-saving drugs’. So that the resources are shifted from the production of non-essential drugs to life-saving drugs.
(iii) The government can impact the allocation of resources by shifting its investments from inefficient to efficient units of production. Also, the allocation of resources would be impacted when the government increases investment in the production of public goods.
(iv) High taxation can be imposed on such goods (like cigarettes and liquor), the production of which is harmful to society. Accordingly, the resources would shift to the production of socially useful production activities.
(v) The government can make a larger budgetary allocation for its ‘Support Price Policy’ in favor of food crops. This would shift resources from non-food crops to food crops. This would make the country self-sufficient in food grain production.