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Government Budget And The Economy NCERT Textbook With Solutions Book PDF Free Download
Chapter 5: Government Budget And The Economy
There is a constitutional requirement in India (Article 112) to present before the Parliament a statement of estimated receipts and expenditures of the government in respect of every financial
year which runs from 1 April to 31 March.
This ‘Annual Financial Statement’ constitutes the main budget document of the government.
Although the budget document relates to the receipts and expenditures of the government for a particular financial year, its impact of it will be there in subsequent years.
There is a need therefore to have two accounts- those that relate to the current financial year only are included in the revenue account (also called revenue budget) and those that concern the assets and liabilities of the government in the capital account (also called a capital budget). In order to understand the accounts, it is important to first understand the objectives of the government budget.
The government plays a very important role in increasing the welfare of the people. In order to do that the government intervenes in the economy in the following ways.
Allocation Function of Government Budget Government provides certain goods and services which cannot be provided by the market mechanism i.e. by the exchange between individual consumers and producers.
Examples of such goods are national defense, roads, government administration, etc. which are referred to as public goods.
To understand why public goods need to be provided by the government, we must understand the difference between private goods such as clothes, cars, food items, etc., and public goods.
There are two major differences. One, the benefits of public goods are available to all and are not only restricted to one particular consumer.
For example, if a person eats chocolate or wears a shirt, these will not be available to others. It is said that this person’s consumption stands in rival relationship to the consumption of others.
However, if we consider a public park or measures to reduce air pollution, the benefits will be
available to all.
One person’s consumption of a good does not reduce the amount available for consumption for others and so several people can enjoy the benefits, that is, the consumption of many people is not ‘rivalrous’.
Two, in the case of private goods anyone who does not pay for the goods can be excluded from enjoying its benefits. If you do not buy a ticket, you will not be allowed to watch a movie at a local cinema hall.
However, in the case of public goods, there is no feasible way of excluding anyone from enjoying the benefits of the good.
That is why public goods are called non-excludable. Even if some users do not pay, it is difficult and sometimes impossible to collect fees for the public good.
These nonpaying users are known as ‘free-riders’. Consumers will not voluntarily pay for what they can get for free and for which there is no exclusive title to the property being enjoyed.
The link between the producer and consumer which occurs through the payment process is broken and the government must step in to provide for such goods.
| Author | NCERT |
| Language | English |
| No. of Pages | 19 |
| PDF Size | 2.3 MB |
| Category | Economics |
| Source/Credits | ncert.nic.in |
NCERT Solutions Class 12 Economics Chapter 5 Government Budget And The Economy
1. Explain why public goods must be provided by the government.
Public goods are those goods where there is no competition and the use of goods is not restricted to only one individual. These goods are for use by all individuals of the society. Such goods are used for the welfare of society.
Therefore, the government should provide public goods for the following reasons:
1. So that benefits of the public goods can be enjoyed by all members of the society.
2. So that the consumption of these goods will not impact the consumption of any other individual.
2. Distinguish between revenue expenditure and capital expenditure.
| Basis of Comparison | Capital Expenditure | Revenue Expenditure |
| Definition | Expenditure incurred for acquiring assets, to enhance the capacity of an existing asset that results in increasing its lifespan | The expense incurred for maintaining the day to day activities of a business |
| Term | Long Term | Short Term |
| Value addition | Enhances the value of an existing asset | Does not enhance the value of an existing asset |
| Physical Existence | Have a physical presence except for intangible assets | Do not have a physical presence |
| Occurrence | Non-recurring in nature | Recurring in nature |
| Capitalisation | Yes | No |
| Impact on Revenue | Do not reduce business revenue | Reduces business revenue |
| Benefits | Long-term benefits for business | Short-term benefits for business |
| Examples | Highway, tunnel, metro projects | Pension, Salary etc. |
3. ‘The fiscal deficit gives the borrowing requirement of the government’. Elucidate.
A fiscal deficit is referred to as the shortfall in the government’s income as compared to its spending. A high fiscal deficit means that the government is borrowing more money than it is earning. A higher fiscal deficit creates a burden of loan and interest payments for the future generation.
The fiscal deficit is determined by
Total Expenditure – Total Receipts excluding borrowings
4. Give the relationship between the revenue deficit and the fiscal deficit.
Revenue deficit is referred to as an excess of revenue expenditure as compared to earnings by revenue receipts of the government. Fiscal deficit is a bigger phenomenon where the difference is between the total expenditure and total receipts obtained by the government. When revenue deficit increases correspondingly the fiscal deficit also increases.
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