Welcome dear students! Today we are going to learn about Public Finance and Budget from Class 10 Social_Science.
We will cover the meaning and importance of public finance, the concept of a budget, public expenditure and public income, and deficit finance along with fiscal deficit.
Do you know how your family gets its income, how much, and from what sources? Generally, income is calculated per year. Each family earns its income by working in jobs in the agricultural, industrial or service sector. This income is used for the purposes of consumption and development. Balancing income and expenditure by an individual or a family, and thereby achieving progress, is an art. When expenditure is more than income, it leads to debt. Personal Finance deals with this kind of income, expenditure and debt management of an individual. In the same manner, the government manages its finance. It is called Public Finance. In this chapter, let us understand how the government manages its finance.
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Let us begin with the meaning and importance of public finance. Public finance means the finances of the government. Public finance studies the way the government manages its income, expenditure and debts. Dalton defines public administration as the income and expenditure of Government and the adjustment of one to the other. Public finance gives a complete picture of the government’s income, expenditure and debt management.
There are certain fundamental differences between public and private finance. In private finance, personal or private finance relates to the income and expenditure of one person or one family. Individuals calculate their income beforehand and then spend it accordingly. Personal financial transactions are kept confidential. When an individual or a family saves money, it supplements their prosperity. On the other hand, public finance relates to the income and expenditure of the government. In public finance, the government calculates its expenditure first and then adjusts its income accordingly. Public financial matters are discussed openly in the legislative houses. When the government saves money, growth is stunted. Hence, governments always try to show more expenditure on developmental works.
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Now let us understand the importance of public finance. A government, with the intention to establish economic progress and financial stability, announces a fiscal policy related to its income, expenditure and debt. First, the government manages public finance according to this fiscal policy. Second, public finance is managed keeping in mind the overall progress of the nation. Third, through fiscal policies, the government formulates methods to equitably distribute the country’s natural wealth, labour and capital investment, and tries to maximize production. Fourth, the government ensures the equitable distribution of income among all sections of the people, so that everyone lives comfortably. Fifth, national progress is achieved by securing the welfare of the people. Sixth, government policies enhance public expenditure in priority areas like agriculture, small scale industries and basic infrastructure. Seventh, the government takes steps to ensure balanced growth in all spheres of the economy. Eighth, developing countries like India utilize public finance to eradicate poverty and unemployment, and to regulate financial upheavals and commodity prices. Ninth, to establish financial stability, the government uses financial policy as a strategic weapon.
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Next, let us learn about the budget. Every year, the government presents its budget for the financial year. In India, the financial year starts from April 1st and ends on March 31st of the successive year. Through this budget, the government tries to achieve the objectives of its fiscal policies. So, what is a budget? The statement of estimated income and expenditure of a year prepared by the government is called a Budget. It is a document showing the income and expenditure of the government. Both the Union and State Governments present their own budgets. The Union Government budget in India is prepared by the Union Finance Minister in collaboration with the Finance Department. Normally, the Union Finance Minister presents the union budget in the Lok Sabha during the budget session held in February or March every year. Both the Lok Sabha and Rajya Sabha hold a lengthy debate on the budget, and the assent of both Houses must be obtained by March 31st.
Budgets are of three types: Surplus Budget, Deficit Budget and Balanced Budget. If the budget shows excess income compared to expenditure, it is called a Surplus budget. If expenditure is more than income, it is called a Deficit budget. If both income and expenditure are the same, it is called a Balanced budget. In developing countries like India, governments normally present a deficit budget to achieve economic progress.
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Now we will study public expenditure. The government spends money for various purposes like defence, administration, economic development and welfare of the people. This is called Public Expenditure. In other words, the expenditure incurred by the government in the interest of the public is called public expenditure. In the 20th century, with the advent of welfare states, the role and scope of modern governments expanded. Hence, public expenditure also increased. In India, Central and State governments have their own expenditures. The expenditure of the Central government is of two types: Revenue Expenditure and Capital Expenditure.
First is Revenue Expenditure. The expenditure incurred by the Central government from the sources of revenue income is called Revenue Expenditure. This expenditure is used for various financial and social services, defence, administration, interest payment, grants to states and other purposes. Revenue expenditure is classified into two groups: Planned Expenditure and Non-planned Expenditure.
Planned Expenditure is the expenditure incurred by the government towards financial and social services, nation-building exercises and developmental works. It covers developmental activities under various plans, including plans for states and centrally-administered territories. Under Central Planned Expenditure, the government spends money on three types of services and development. First, financial services, which include agriculture and agriculture-related activities, industry, communication, fuel, science and technology, and rural development. Second, social services, which include education, health, hygiene, family welfare, drinking water supply, housing, and social welfare. Third, general services, which cover the expenditure incurred on maintenance of peace, law and order.
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Non-planned Expenditure is the expenditure incurred on administration, defence, interest payment and other heads, with the exception of developmental activities. The major heads of non-plan expenditure are civil administration, defence, interest payment, allocations to states and various subsidies.
Second is Capital Expenditure. The money spent by the government on agriculture, industry, transport, electricity, irrigation projects and other developmental activities, along with the creation of new assets, is called Capital Expenditure. The government spends this amount from the income generated by capital receipts. Capital Expenditure also has two types: Planned Expenditure and Non-planned Expenditure. The expenditure incurred on long-term developmental projects in agriculture, industry, transport, irrigation and so on is called Planned Capital Expenditure. The expenditure incurred by the government on paying compensation to people affected by developmental activities is called Non-planned Capital Expenditure. In this manner, the government spends money on administration, national economic development and citizens’ welfare. To meet this expenditure, the government tries to generate income.
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Let us look at the percentage of estimated expenditure of the Central government in 2013-14. Grants given to States and Union Territories account for 4 percent. Planned expenditure in States and Union Territories accounts for 7 percent. Subsidies account for 12 percent. Non-planned expenditure accounts for 11 percent. Defence expenditure accounts for 10 percent. Proportioned tax income to States accounts for 17 percent. Interest payment accounts for 18 percent. Central planned expenditure accounts for 21 percent.
Now we move to public revenue. The government collects income from varied sources to meet its expenditure. This is called Public Revenue. Governments are ever ready to create facilities for the welfare of people and speedy economic development. Due to this, the role of governments has expanded. As a result, public expenditure is ever increasing and necessary revenue sources have to be identified and added. In India, Central and State governments have their own sources of revenue. We will now learn about the revenue sources of the Central Government.
The Central government collects its income from various sources, classified under two heads: Revenue Receipts and Capital Receipts. Revenue Receipts are the income generated by the government through taxes and non-tax sources. This is the actual revenue of the government. Revenue Receipts are of two types: Tax revenue and Non-tax revenue.
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Tax Revenue is the money paid by citizens without any expectation of direct return, called Tax. The Central government imposes various types of taxes to collect revenue. Taxes are the major sources of revenue for the government. The government imposes a higher rate of taxes on high-income groups and a lower rate on low-income groups. The poor are exempted from income tax. Similarly, a higher rate of taxes is imposed on luxury goods and services used by the rich, and a lower rate on goods and services used by common people. This principle is called the Principle of Progressive Taxation.
The taxes imposed by the Central government are of two types. First, Direct Taxes. When the tax is paid by the individual on whom it is imposed, it is called a Direct Tax. The burden of this tax is not transferable to others. Normally, the tax paid by individuals and organizations on their income is a Direct Tax. The main types are Personal Income Tax, Corporate Tax, Wealth Tax and Stamp Duty. Second, Indirect Taxes. If the burden of a tax imposed by the government is transferable to others, it is called an Indirect Tax. Generally, indirect taxes are imposed on goods and services. For example, the government imposes a tax on the manufacturer at the time of production. The manufacturer transfers this burden to the trader, and the trader transfers it to the consumer. Ultimately, the consumer bears the burden. The main forms of indirect taxes are Import-Export Taxes, Goods and Service Tax, and Foreign Travel Tax. Through these, the government aims at increased revenue collection.
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Non-Tax Revenue is generated from sources apart from taxes. The main types of Non-tax revenue are: the net profit earned by the Reserve Bank of India, the net profit generated by the Indian Railways, the revenue generated by the Departments of Post and Telecommunications, the revenue generated by Public Sector Industries, the revenue generated by the Coins and Mints, and various types of fees and penalties.
Capital Receipts are the revenue generated by the government intended to create new assets in various fields of the economy. This revenue meets expenses for developing agriculture, industries, irrigation, electricity and basic amenities. The government generates capital revenue mainly through loans from internal and external sources. The loan obtained from citizens, banks, financial institutions and industries is called internal debt. The loan obtained from foreign governments, foreign financial institutions and international financial institutions is called foreign debt. Apart from loans, the government generates capital revenue by withdrawing its investment in public industries, called disinvestment. State governments also repay loans and financial help taken from the central government. The money obtained through disinvestment and loan repayment is called Non-debt capital receipts. In this manner, the central government generates revenue from various sources to fund administration and development.
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Let us examine the percentage of estimated revenue of the Central Government in 2013-14. Non-debt capital receipts account for 3 percent. Debt and other liabilities account for 27 percent. Service tax and other taxes account for 9 percent. Non-tax revenue accounts for 9 percent. Customs duty accounts for 9 percent. Central excise tax accounts for 10 percent. Income tax accounts for 12 percent. Corporate tax accounts for 21 percent.
Now let us discuss deficit financing. The government first estimates its expenditure and then generates revenue accordingly. It usually plans more expenditure than revenue, which is beneficial for national development. To fill any gaps between income and expenditure, the government raises loans from the Reserve Bank of India, withdraws cash reserves from the Reserve Bank, and obtains loans from internal and external sources. In developing countries, government expenditure increases faster than revenue, leading to deficit financing. According to the Indian Planning Commission, deficit financing means improving the net purchasing power of the economy through the budgetary operation of the government. Briefly, deficit financing occurs when government expenditure exceeds its revenue. As a result, developmental activities increase, the money supply in circulation increases, and public purchasing power improves. Deficit is indicated by the negative sign. There are four kinds of deficit financing: Budget Deficit, Revenue Deficit, Fiscal Deficit and Primary Deficit.
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Fiscal Deficit is defined as follows: In the budget, if the government’s expenditure is more than its revenue receipts and non-debt capital receipts, it is called fiscal deficit. Here, non-debt capital revenue refers to revenue from loan repayments by states and revenue from disinvestment. Total government expenditure includes both revenue expenditure and capital expenditure. Fiscal deficit indicates the actual borrowing burden on the government treasury, showing how much loan the government must take from internal and external sources. If the government cannot overcome the fiscal deficit through loans, the Reserve Bank of India provides funds by printing notes and putting them into circulation. The formula for fiscal deficit is: Fiscal deficit equals the sum of Revenue receipts and Non-debt Capital Receipts minus Total Expenditure.
Other Deficits in the Budget are calculated as follows: Budget Deficit equals Total Revenue minus Total Expenditure. Revenue Deficit equals Revenue receipt minus Revenue Expenditure. Primary Deficit equals Fiscal Deficit minus Interest Payment.
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Now it is time to practice with the exercises. Let us solve them together to prepare for your board examinations.
Section One: Fill in the blanks. Question one: The government manages public finance through fiscal policy. Question two: In the budget, when the government’s revenue is more than its expenditure, it is called a Surplus budget. Question three: The person who presents the Central Government Budget in the Lok Sabha is the Union Finance Minister. Question four: The revenue generated by the government through internal and external loans is Capital Receipts. Question five: GST stands for Goods and Services Tax.
Section Two: Answer in one sentence each. Question six: What is Public Finance? Public finance means the finances of the government, studying how it manages income, expenditure and debts. Question seven: What do you mean by Budget? It is the statement of estimated income and expenditure of a year prepared by the government. Question eight: Give the meaning of Deficit Budget. It is a budget where expenditure is more than income. Question nine: What are Direct Taxes? These are taxes paid by the individual on whom they are imposed, and the burden cannot be transferred to others. Question ten: Express fiscal deficit in the form of a formula. Fiscal deficit equals Revenue receipts plus Non-debt Capital Receipts minus Total Expenditure.
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Section Three: Answer in five to six sentences each. Question eleven: Explain the differences between personal finance and public finance. Personal finance relates to one person or family, where income is calculated first, transactions are confidential, and savings increase prosperity. Public finance relates to the government, where expenditure is calculated first, financial matters are discussed in legislative houses, and government savings can stunt growth, leading to higher developmental spending. Question twelve: Explain the significance of public finance. It is managed via fiscal policy for economic progress and stability. It equitably distributes natural wealth and capital to maximize production, ensures fair income distribution, enhances spending on agriculture and infrastructure, promotes balanced growth, eradicates poverty and unemployment, and uses financial policy to regulate economic upheavals. Question thirteen: List the plan expenditure of the Central Government. It covers financial services like agriculture, industry, communication, fuel, science, technology and rural development. It includes social services like education, health, hygiene, family welfare, water supply, housing and social welfare. It also funds general services for peace and law and order, alongside nation-building exercises and state development plans. Question fourteen: Explain non-tax revenue of the Central government. It includes net profits from the Reserve Bank of India and Indian Railways, revenue from Post and Telecommunications departments, Public Sector Industries, Coins and Mints, and various government fees and penalties. Question fifteen: What is fiscal deficit? Mention the four kinds. Fiscal deficit occurs when expenditure exceeds revenue and non-debt capital receipts, indicating the government's borrowing requirement. The four kinds are Budget Deficit, Revenue Deficit, Fiscal Deficit and Primary Deficit.
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Section Four: Activities. Activity one: Visit a nearby Grama Panchayat or Taluk Panchayat office and collect information about its budget. Activity two: Watch the presentation of the Central and State Budgets on television and discuss them in your class. Activity three: Collect newspaper reports about budget presentations and display them in your classroom.
Section Five: Project. Project one: Discuss with your family elders and prepare a budget detailing your family's sources of income and expenditure.
We have now comprehensively covered every concept, definition, table, and exercise from this chapter. For your board examinations, focus on memorizing the differences between private and public finance, the classifications of taxes and budgets, the components of public revenue and expenditure, and the precise formulas for calculating fiscal and primary deficits. Practice these numerical relationships and definitions regularly.
Thank you for listening! Keep revising and practicing. Goodbye! [CHAPTER_COMPLETE]