Economics Ch - 10 Class 12th (Govt. Budget and the Economy) Part - 1

 Ch - 10 (Govt. Budget and the Economy) Part - 1

Government Budget is a statement of estimated receipts and expenditure of the govt. during a financial year.

The Budget Unfolds :-

1.The financial performance of the government over the past one year.

2.The financial programs and politics of the government for the next one year.

OBJECTIVES OF THE GOVERNMENT BUDGET :-

1.GDP Growth / Economic Growth :-

Growth domestic product (GDP) is the sum total of factor incomes produced within the domestic territory of a country during an accounting year.

It is achieved in two ways :-

>by making public investment expenditure.

>by inducing private investment expenditure.

GDP is the central objective of govt. budgetary policy . There are some other targets like allocation resources , redistribution of income and wealth etc. which help in increasing the GDP growth.

2.Allocation of Resources :- It implies that the resources should be allocated in such a manner such that there is a balance b/w goals of profit maximization and social welfare.

The govt. can impact allocation of resources by shifting its own investment from inefficient units of production.

Allocation of resources would be impacted when the govt. increases investment on the production of public goods.

3.Redistribution of Income and Wealth :- It implies the distribution of income and wealth in such a way that rich people do not become more rich and poor people do not become more poor.

The govt uses fiscal instruments of taxation and subsidies with a view of improving the distribution of income and wealth in the economy.

Equitable distribution of income and wealth is a sign of social justice which is the principal objective of any welfare state as in India.

Distribution of income and wealth is improves in two ways :-

a)By imposing taxes on rich and going subsidies to poor.

b)By supplying food grains to B.P.L. population at a low price.

4.Provision of Public Goods :- 

*Supply and Demand forces in a market economy do not allow enough production of public goods.

*These are those goods which satisfy collective needs of the people . For ex.Law and order and defense of country.

*It is through budgetary allocation of funds that these goods are sufficiently provided to people.

5.Balanced Regional Growth :-

*The budgetary policies place priority on he development of backward regions in the country.

*This is achieved through liberal tax laws for the backward regions establishment of S.E.Z. (Special Economic Zones) in the backward regions through liberal tax laws may be cited as an example.

It helps in the industrialization of backward region.

6.Employment Opportunities :- 

Budgetary policies focus on the generation of employment opportunities through investment in public enterprises.

Budgetary provisions are made for schemes like M.G.N.R.E.G.A. offering employment to poorer sections of society.

Govt. provide subsidies to labour intensive units of production to increase employment opportunities.

7.Economic Stability :- Free play of market forces generates trade cycles also called business cycle . These refer to the phases of recession , depression , recovery and boom in the economy.

              Boom  

            /            \

 Recovery     Recession

           \              / 

          Depression

The govt. of a country is always committed to save the economy from business cycles.

Budget is used as an important policy instrument to correct the situations of deflation and inflation . This helps in achieving the economy stability stimulates the inducement to invest and increases the rate of growth and development.

STRUCTURE OF THE BUDGET

                    OR 

COMPONENTS OF THE BUDGET

Two broad components of the government budget are :-

1.Budget Receipts.

2.Budget Expenditure.

1.Budget Receipts :- It refers to the estimated money receipts of the government from all sources during the fiscal year.

The budget receipts are classified as:-

a)Revenue Receipts.

b)Capital Receipts.

A) Revenue Receipts :- Revenue Receipts are those money receipts of the government which neither create any corresponding liability for the govt. nor cause any reduction in assets of the government.

Revenue receipts are broadly classified as tax receipts and non-tax receipts.

                               Revenue Receipts

                                         |

                                                                                  

    |                                                                   |

  Tax                                                        Non-Tax

Receipts                                                  Receipts

Tax Receipts :- A tax is a legally compulsory payment to the govt. made by the households , firms or other institutional units to the govt. institutional units to the govt. without reference to anything in return.

Types of Taxes :-

Taxes are broadly classified as:-

1.Progressive and Regressive Taxes.

2.Value Added and Specific Taxes.

3.Direct and Indirect Taxes.

1.Progressive and Regressive Taxes - Taxes are classified as "progressive" and "regressive" depending upon the real burden of taxation.

a)Progressive Tax - A tax is said to be progressive when the rate of tax increases with an increase in income . So that the real burden of tax increases with an increase in income.

For Ex.Tax rate is 10% for income b/w Rs.2 or Rs.5 Lakh . It is 15% for income b/w Rs.5 to Rs.10 Lakh and so on . Thus, tax rate increases as the level of income increases.

b)Regressive Tax - A tax is said to be regressive when it causes a greater real burden on the poor than the tax.

For Ex.If a person . With Rs.1,00,000 as his monthly income pays 10% income tax (Rs.10,000) he still has a balance of Rs.90,000 per month . But if a person with Rs.5000 as his monthly income has to pay 10% income tax (Rs.500) it might mean a cut in his essential consumption leading to poor health.

>Thus a constant rate of taxation on the rich and the poor is a regressive tax , as it causes a greater real burden on the poor than the rich.

2.Value Added Tax and Specific Tax :- Depending upon tax base , taxes can be classified as :-

a)Value Added Tax or VAT :- VAT is an indirect tax which is imposed on value added at the various stages of production.

Value Added refers to the diff b/w value of output and value of intermediate consumption . It is imposed at each stage of production. 

For Ex. G.S.T.

b)Specific Tax - When a tax is lived on a commodity on the basis of its units , size or weight , it is called the specific tax.

3.Direct and Indirect Taxes :- Tax are classified as direct and indirect depending on their fiscal burden.

a)Direct Tax - A direct tax is the one the fiscal burden of which is borne by the person on whom it is imposed.

For Ex.Income Tax , Corporation Tax , Gift Tax , Wealth Tax etc.

b)Indirect Tax - An indirect tax is the one the fiscal burden of which can be shifted to other persons.

For Ex. G.S.T.

Non - Tax Receipts :-

These are those receipts arise from resources other than taxes.

Some of the non tax receipts are as follows :-

1.Fees - A fee is payment to the govt. for administrative and judicial services that it renders to the people.

For Ex.Land registration fees, birth and death registration fees, passport fees and court fees etc.

2.Fines - Fines are those payments which are made by the law breakers to the govt. These are economic punishments for breaking laws . The aim is not to be earn revenue , but to make people respectful to the laws.

3.Escheat - Escheat refers to that income of the state which arises out of the property left by the people without a legal heir. These are no claimants of such property. The govt makes revenue out of it .

4.Special Assessment - Special Assessment is thew payment which is made by the owners of those properties whose value has appreciated due to developmental activities of the govt.

For Ex.When  as a result of construction of roads or provision of sewerage system or construction of drains etc. value of the neighbouring property of its rental value appreciates , then a part of the developmental expenditure is recovered from the owners of such property by way of special assessment.

5.Income from Public Enterprises - Several enterprises are owned by the govt.

For Ex. Indian Railways , Indian Oil etc.

Profit of these enterprises are a source of revenue for the government.

6.Income from the sale of spectrum like 2G and 3G :- Income from the sale of spectrum has emerged as a significant source of non-tax receipts of the govt.

7.Grants / Donations :- Grants are also a source of govt. revenue . It is very common for the people to offer donations and grants to the govt. when there are natural calamities like earthquake , floods and famines.