Very Short Question Answer

1. Define the government budget.

Government budget is defined as the estimate of income and expenditure by government for the coming fiscal year.

2. What are contains of the government budget?

Contains of the budget are as follows:

i. Actual income and expenditure of the previous fiscal year.
ii. Revised income and expenditure of the current fiscal year.
iii. Estimate of income and expenditure for the coming fiscal year.
iv. New tax proposals and rates.

3. How and from which language the word Budget has been derived?

The word ‘Budget’ has been derived from the French word “Bougette” which refers a small leather bag or wallet. In 18th century, while Walpole, chancellor of exchanger of England; used to carry leather bag to the ‘House of Commons’ keeping the financial proposals inside the leather bag. So the leather bag itself was called as the financial proposals of the government. In this way, the meaning of the English word is not leather bag but the financial proposal kept the bag.

4. Point out components of government budget.

The components of government budget are as follows:

i. Government revenue
ii. Government expenditure
iii. Sources of deficit financing

5. What do you mean by economic classification of budget?

Economic classification of budget is defined as the classification of economic expenditure and receipts by economic categories that are significant for analyzing short-run effects of government transaction in the working of the economy.

Short Question Answer

1. Define the meaning government budget? What are its different classifications?

Government budget is defined as the statement of financial plan for a given period relating to the income and expenditure of the government. In other words, government budget is the statement of expected revenue and proposed expenditure of the government for the coming fiscal year. It is also known as the public budget. It is formulated by finance ministry.

There are many types or classifications of government budget which are as follows:

i. General Classification: The general classification of budget consists of following headings:

⦁ Revenue and capital budget: The revenue budget is related with current financial transactions of the government which are of recurring nature. It is also known as the current budget. On the other hands, capital budget is related to the acquisition and disposition of capital assets.
⦁ Conventional and cash budget: The conventional budget is also known as the administrative budget. It represents a set of accounts established within the framework manner i.e., through the levy of taxes. On the other hand, the cash budget consists of all the cash receipts from and payments to the government.

⦁ Deficit, surplus and balanced budget: The government budget in which total revenue is less than total expenditure is called deficit budget and the government budget in which total revenue is more than the total expenditure is called surplus budget. On the other hand, when total government revenue is equal to total government expenditure, the budget is called balanced budget.

ii. Economic Classification: Economic classification of budget is the classification of government expenditure and receipt by economic categories that are significant for analyzing short-run effects of government transaction in the working of the economy. It shows economic character of government expenditure. The components of government budget according to economic classification are current expenditure on goods and services, interest payments, subsides and other current transfers, capital expenditure and net lending including net acquisition of equities.

iii. Functional Classification: While presenting the budget before the legislature for approval, the finance minister has to satisfy himself that the allocated government expenditure helps to achieve objective or intension of the government. This is expenditure side of the budget. On the revenue side, he must see that the burden of taxation is distributed in accordance with the accepted principle of social justice. The components of government budget according to functional classification are general public services, defense, education, economic services, agriculture etc.

iv. Organizational Classification: Organizational classification is a classification of budget according to the organizational units of the government like department or ministries. These units of the government make plans and execute budget programs.

2. What do you mean by government budget? What are its components?

DEFINITION OF GOVERNMENT BUDGET
Please refer to Q. No. 1.

Since, government budget is the estimate of government expenditure and revenue; its main components are revenue, expenditure and sources of deficit financing. These components of government budget have been explained as follows

i. Government Revenue (Sources of Financing): The various sources from which the revenue will be collected for the coming fiscal year are mentioned in the government revenue or sources of financing. The government revenue is divided into following three types:

⦁ Tax revenue: A tax is the compulsory payment to the government irrespective of benefit derived from the state. Tax revenue is the most important sources of government revenue. Taxes are divided into two types: direct taxes and indirect taxes. Direct taxes are such that their burden cannot be shifted to others and that person pays to whom tax is e imposed. For example, income tax, house tax, profit tax etc. are the direct taxes. On the other hand, indirect taxes are those whose burden can be shifted from one person to another. For example, VAT, excise duty etc. are indirect taxes. In all most all countries of the world, tax revenue is major sources of government revenue or financing government budget.

⦁ Non-tax revenues: Non-tax revenue is another source of financing government expenditure. Non-tax revenue includes items like grants and gifts to the government, fees collected from different sources such as services of education, health, license etc., income from public properties and enterprises, property without successor etc.

⦁ Foreign grant: The government of a developing country can receive funds from the foreign countries. Such grants carry neither rate of interest nor have to be paid back.

ii. Government Expenditure: Government expenditure is another important component of government budget. It is related to the expenses of public authorities. The main objective of government expenditure is to maintain peace and security in the country and promote social and economic welfare of the people. The government expenditure is divided in to two types:

⦁ Regular expenditure: Regular expenditure of government is related to the expenditure made on regular activities like payment of salaries, pensions, interest on internal and external loans etc.

⦁ Development expenditure: Development expenditure refers to the expenditure made by government on development activities such as construction of road, bridge, building etc. It is linked with expansion of capital formation of the country.

iii. Sources of Deficit Financing: The third component of budget is source of deficit financing. The source of deficit financing is caused by the inadequacy of revenue and foreign grants. Such deficit is met from bilateral and multilateral foreign loans and the internal loans raised from the banking and non-baking sector. If this is still insufficient, it is spent from nation’s reserve.

3. What are the various sources of government revenue?

The various sources from which the revenue will be collected for the coming fiscal year is mentioned in the government revenue or sources of financing. The government revenue is divided into following three types:

i. Tax revenue: A tax is the compulsory payment to the government irrespective of benefit derived from the state. Tax revenue is the most important sources of government revenue or sources of financing government expenditure. Taxes are divided into two types: direct taxes and indirect taxes. Direct taxes is such that its burden can not be shifted to others and that person pays to whom tax is imposed. For example, income tax, house tax, profit tax, etc. are the direct taxes. On the other hand, indirect taxes are those whose burden can be shifted from one person to another. For example, VAT, excise duty, etc. are indirect taxes. In all most all, countries of the world, tax revenue is major sources of government revenue or financing government budget.

ii. Non-tax revenues: Non-tax revenue is another sources of financing government expenditure. Non-tax revenue includes following items:

a. Grants and gifts to the government.
b. Fees collected from different sources such as services of education, health, license, etc.
c. Fines and penalties charged on those persons who violate rules and regulations of the state.
d. Income from public properties and enterprises.
e. Property without successor or escheats.
f. Interest income given to the public enterprises, etc.

iii. Foreign grant: A government of a developing country can receive funds from the foreign countries. In recent times, foreign grant consists of a large in the budget of such countries. In such grants carries neither rate of interest nor has to be paid back.

4. Define deficit financing. What are its objectives?

Deficit financing is defined as the method used by a government to finance its budget deficit. In other words, it is the practice in which a government spends more money than it receives as revenue. Nowadays, deficit financing has emerged as an important tool of financing government expenditure.

The objectives of deficit financing are as follows:

i. To meet the financial need of crisis period: The deficit financing is a method of meeting financial need of the government during crisis period such as war natural disaster etc. During such periods, government needs quick command over resources to meet growing expenses.

ii. To-mobilize domestic resources: In the backward countries like Nepal, borrowing from internal sources is insufficient and inadequate. Therefore, deficit financing is recognized as a tool to the low income spread among the vast masses to mobilize domestic resources on a massive scale.

iii. To achieve the desired output and employment: In the underdeveloped or backward countries, it is impossible to achieve desired output and employment from the domestic resources. Therefore, to achieve the desired output and employment, most of the countries are adopting deficit financing.

iv. Promoting rapid economic growth: The objective of deficit financing is also to promote rapid economic growth. It is advocated for the mobilization of surplus, idle and unutilized resources for promoting rapid economic growth in the developing countries.

v. Financing development plans: The developing countries are adopting planned development. For planned development, they need huge resources. Deficit financing helps them to mobile resources for financing economic planning.

vi. To divert resources: The objective of deficit financing is also to divert undesirable and unproductive use of sources into channel of desirable and productive channel of the economy.

vii. Political objective: Nowadays, almost countries of the world, are adopting democratic political system. In the democratic countries, it is very difficult to mange resources only through taxation. Therefore, deficit financing is preferable to taxation due to political reason.

viii. Raise effective demand and stimulate private investment: Deficit financing is also very important to raise level of effective demand and stimulate private investment. This tool is very effective during economic depression.

5. Define deficit financing. What are its different methods?

DEFINITION OF DEFICIT FINANCING
Please refer to Q. No. 4.

There are different methods of deficit financing like withdraw of cash balance from central bank, issue of new currency, i.e., printing of more notes and putting into circulation, and government borrowing. However, government generally chooses borrowing rather withdraw of cash balance from central bank and issue of new currency. Thus, methods of deficit financing can be classified into two types, which as follows:

i. Internal borrowing: The loan taken by the government from internal sources like individuals, public or private organizations, central bank, commercial banks and other financial institutions within the country is called internal borrowing. Internal borrowing is raised within the country. Internal loan is received in terms of domestic currency and it may be raised voluntarily or compulsorily. Internal borrowing is raised in two ways:

a. Market Borrowing: Market borrowing refers to that loan, which is raised by selling transferable securities like treasury bills and development bonds. These credit instruments are issued and floated in the market and sold to the individuals, firms or financial institutions. Short-term loan is received by means of treasury bills and long-term loan by means of development bonds. Certain rate of interest is provided to the lenders. Purchasing of government securities means the loan provided to the government, which is returned back with interest after the maturity of the period.

b. Non-Market Borrowing: The loan received by means of non-transferable credit instrument is called non-market borrowing. The credit instruments are issued in the name of different sources and the loan is received from these sources. The sources are of two types. They are described as follows:

⦁ Public sector: Government can receive loan from the public financial institutions, insurance companies, postal saving banks, provident funds etc. The idle funds remained with these public institutions can be transferred to be the government in terms of loan.

⦁ Private sector: Private institutions like commercial banks, finance companies, or other firms can provide loan to the government. Government can draw non-transferable credit instruments in the name of such private institutions and can receive loan from them.

ii. External- Borrowing: The loan borrowed by government from foreign individuals, foreign government and international organizations is called external borrowing. It is received in terms of foreign currency. Generally, the international multilateral organizations like World Bank, International Monetary Fund, Asian Development Bank etc. and developed countries provide loan to the developing countries at a low rate of interest or without interest. If the government borrows loan by making agreement with various countries, it is called bilateral borrowing. On the other hand, if the government takes loan from international organizations, it is called multilateral borrowing.

6. Define fiscal policy. Explain its objectives.

Fiscal policy is defined as the means by which a government adjusts its levels of spending in order to monitor and influence a nation’s economy. In other words, fiscal policy is the policy for the government revenues, public expenditures and borrowing to meet the goals targeted by the government.

The major objectives of fiscal policy are as follows:

⦁ Full employment: The most important objective of fiscal policy is to increases employment opportunities and avoids unemployment and under-employment. In order to reduce unemployment and under-employment, the government expenditure should be direct to the development of social and economic overheads, like education, health, drinking water, irrigation, road, electricity, communication etc., which would help to create more employment opportunities.

⦁ Economic growth and development: The principal objective of fiscal policy is to ensure rapid economic growth and development. This objective of economic growth and development can be achieved by

⦁ efficient mobilization of financial resources: The government uses fiscal policy to mobilize resources. The financial resources can be mobilized by taxation, public saving and private saving

⦁ Price stability: One of the objectives of fiscal policy is to achieve price stability which means control of inflation and deflation. High rate of inflation is very harmful. Therefore, inflation should be controlled through contractionary fiscal policy i.e. reducing government expenditure, increasing tax rates, increasing public borrowing etc. These measures reduce aggregate demand and control inflation. On the other hand, during deflation, government should adopt expansionary fiscal policy in order to increase aggregate and control falling price level.

⦁ Reduction in inequalities of income and wealth distribution: Fiscal policy aims at achieving equity or social justice by reducing income inequalities among different sections of the society. The progressive tax is best tool to reduce inequality. The government invests a significant proportion of its tax revenue in the implementation of Poverty Alleviation Programs to improve the conditions of poor people in society.

⦁ Capital formation: Capital formation is one of the main objectives of fiscal policy. Without capital formation, economic development and growth are not possible. Therefore, fiscal policy must be designed in a manner to perform two functions as of expanding investment in public as well as private sector diverting resources from socially less desirable to more desirable investment channels.

⦁ Economic stability: Economic stability is also an important objective of fiscal policy. As a result of this, economic fluctuation, i.e., the states of prosperity, recession, depression and recovery, occur in the economy. These create instability in the economy, which drags economy towards the worse state. During recession and depression period, government should adopt . expansionary fiscal policy whereas during prosperity and inflation period, government should adopt contractionary fiscal policy.


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