Government Budget and the Economy

About this unit

This unit studies the government budget: the annual statement of expected receipts and expenditure. It shows how the budget is classified into revenue and capital accounts, what the different deficit measures mean, and how the budget is used to allocate resources, redistribute income and stabilise the economy. Budget terms appear regularly in news, so understanding them also helps you follow public debates on taxation and borrowing.

Key ideas

• A budget is an annual financial statement of estimated receipts and expenditure of the government.
• Objectives: allocation of resources, redistribution of income, economic stability, management of public enterprises.
• Revenue receipts neither create a liability nor reduce assets; capital receipts do one of the two.
• Revenue expenditure creates no asset and reduces no liability; capital expenditure does one of the two.
• Revenue deficit, fiscal deficit and primary deficit measure different gaps.
• Fiscal deficit equals the government's borrowing requirement.

How to prepare

Learn the two tests for classifying receipts and expenditure and practise classifying examples. Memorise the three deficit formulas and solve short numericals. Expect "which of these is a capital receipt" type questions and calculation of deficits.