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Class 12 Government Budget and the Economy: cheat sheet
CBSE Social Science. The government budget: public goods, the three functions, revenue and capital receipts and expenditure, revenue, fiscal and primary deficits, and the spending and tax multipliers.
Key ideas
- Public goods are non-rivalrous and non-excludable, so private firms cannot charge for them and the government provides them.
- The budget has three functions: allocation (public goods), redistribution (taxes and transfers) and stabilisation (steadying output and employment).
- Revenue receipts (taxes, interest, dividends, fees) create no liability; capital receipts (borrowing, loan recovery, sale of shares) create liabilities or reduce assets.
- Revenue expenditure (salaries, pensions, interest, subsidies) creates no asset; capital expenditure (roads, machinery, loans given) creates assets or reduces liabilities.
- Direct taxes fall on the person who pays them; indirect taxes are paid on goods and passed on to buyers.
- The fiscal deficit is what the government must borrow; the primary deficit leaves out interest on past debt.
- A rise in government purchases raises income by more than an equal tax cut does, and a balanced rise in both raises income by the same amount.
Remember
| Revenue deficit | revenue expenditure − revenue receipts |
| Fiscal deficit | total expenditure − (revenue receipts + non-debt creating capital receipts) |
| Primary deficit | fiscal deficit − interest payments |
| Fiscal deficit from revenue deficit | revenue deficit + capital expenditure − non-debt creating capital receipts |
| As a share of GDP | deficit ÷ GDP × 100 |
| Spending multiplier | ΔY = ΔG ÷ (1 − c) |
| Tax multiplier | ΔY = −c × ΔT ÷ (1 − c) |
| Balanced budget multiplier | 1 (ΔY = ΔG when ΔG = ΔT) |
Watch out
- Counting borrowing as a revenue receipt (it is a capital receipt).
- Forgetting to subtract non-debt creating capital receipts in the fiscal deficit.
- Using 1 ÷ (1 − c) for a tax change: only the fraction c of a tax change affects spending.
Worked example
Suppose a government’s budget (₹ crore) has revenue receipts 1970, revenue expenditure 2130, capital expenditure 590, non-debt creating capital receipts 30 and interest payments 70. Find the revenue, fiscal and primary deficits.
Working: 2,130 − 1,970; 2,130 + 590 − 1,970 − 30; 720 − 70
Answer: revenue deficit ₹160 crore; fiscal deficit ₹720 crore; primary deficit ₹650 crore
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