Receipts and expenditure

The essentials

Budget receipts and expenditure are classified into revenue and capital items using two tests.

Receipts. A revenue receipt neither creates a liability for the government nor reduces its assets. A capital receipt either creates a liability or reduces assets.

Expenditure. Revenue expenditure neither creates an asset nor reduces a liability. Capital expenditure either creates an asset or reduces a liability.

Key points

• Revenue receipts: tax revenue (direct taxes like income tax and corporation tax; indirect taxes like GST and customs duty) and non-tax revenue (interest and dividends received, fees, fines, profits of public enterprises, grants).
• Capital receipts: borrowings (create a liability), recovery of loans given earlier (reduces assets), disinvestment, the sale of shares in public sector enterprises (reduces assets).
• Non-debt capital receipts: recovery of loans and disinvestment, as these do not create a liability.
• Revenue expenditure: salaries, pensions, interest payments, subsidies, grants to states.
• Capital expenditure: building roads, schools and hospitals, buying machinery, loans to states, repayment of loans.
• Direct tax: its burden falls on the person who pays it (income tax). Indirect tax: its burden can be shifted to others (GST).

Exam tips

Apply the test literally. For a receipt ask "does it create a liability or reduce an asset?"; for expenditure ask "does it create an asset or reduce a liability?"

Common mistakes

• Calling interest payments capital expenditure; they are revenue expenditure.
• Calling disinvestment a revenue receipt; it reduces assets, so it is capital.