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Karnataka Class 12 Commerce Economics Chapter 11 Government Budget And The Economy Notes

Karnataka Class 12 Commerce Economics Chapter 11 Government Budget And The Economy Notes

Karnataka Class 12 Commerce Economics Chapter 11 Government Budget And The Economy :  The university was recognized with the “Potential for Excellence” by the University Grants Commission. The university is the second oldest university in the state of Karnataka after the University of Mysore. The Karnatak university once used to serve most of the Karnataka region including Dharwad, Belagavi, Uttara Kannada, Bijapur, Gulbarga, Raichur, Bidar and Bellary. until the 1980s (Manipal Institute of Technology and the Kasturba Medical College of Manipal were affiliated with Karnatak University at Dharwad and all degrees were awarded by Karnatak University in between the years from 1953 to 1965)

The bifurcation of districts and establishment of new universities in this region has reduced the affiliation coverage of Karnatak university to the present day districts of Dharwad, Uttara Kannada, Haveri and Gadag.

Karnataka Class 12 Commerce Economics Chapter 11 Government Budget And The Economy Notes

Karnataka Class 12 Commerce Economics Chapter 11 Government Budget And The Economy : A government budget is an annual financial statement presenting the government’s proposed revenues and spending for a financial year that is often passed by the legislature, approved by the chief executive or president and presented by the Finance Minister to the nation. The budget is also known as the Annual Financial Statement of the country. This document estimates the anticipated government revenues and government expenditures for the ensuing (current) financial year. For example, only certain types of revenue may be imposed and collected. Property tax is frequently the basis for municipal and county revenues, while sales tax and/or income tax are the basis for state revenues, and income tax and corporate tax are the basis for national revenues.

Karnataka Class 12 Commerce Economics Chapter 11 Government Budget And The Economy Notes

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Karnataka Class 12 Commerce Economics Budget Complete Notes

We give below some of the most used budget terminologies for the benefit of our readers which will help them understand better the Union Budget.  These are budget basics.

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Karnataka Class 12 Commerce Economics Budget-What is a Union Budget ?

 In simple terms we can say that the Union Budget is a statement of financial position for a future period, setting out proposed expenditure and means of financing it.

In other words, Union Budget actually lays down the statement of the estimated receipts and expenditure of the Govt. of India for the coming financial year.  It sets out exactly how the Govt. proposes to allocate the financial resources among the various agencies that make claim on it and how it proposes to raise the finances for this.    Union Budget is undoubtedly the most extensive account of the government’s finances, in which revenues from all sources and expenses of all activities undertaken are aggregated. It comprises the revenue budget and the capital budget.

Union Budget and Economic Survey :

Economic Survey in India is presented in the Parliament by the Finance Ministry just a day before the Union Budget.   It is a flagship annual document of the Ministry of Finance, and reviews the developments in the Indian economy over the previous 12 months, summarizes the performance on major development programs, and highlights the policy initiatives of the government and the prospects of the economy in the short to medium term. It is the ministry’s view on the annual economic development of the country.

Karnataka Class 12 Commerce Economics Fiscal Policy Complete Notes

Fiscal policy , taking the scope of budgetary policy , refers to government policy that attempts to influence the direction of the economy through changes in government taxes, or through some spending (fiscal allowances). Fiscal policy can be contrasted with the other main type of macroeconomic policy , monetary policy , which attempts to stabilize the economy by controlling interest rates and the supply of money . The two main instruments of fiscal policy are government spending and taxation .

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Fiscal policy therefore refers to the overall effect of the budget outcome on economic activity. The three possible stances of fiscal policy are neutral, expansionary and contraction:

A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue). Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.

An expansionary stance of fiscal policy involves a net increase in government spending (G > T) through a rise in government spending or a fall in taxation revenue or a combination of the two. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had, or a deficit if the government previously had a balanced budget. Expansionary fiscal policy is usually associated with a budget deficit.

A Contraction stance fiscal policy (G < T) occurs when net government spending is reduced either through higher taxation revenue or reduced government spending or a combination of the two. This would lead to a lower budget deficit or a larger surplus than the government previously had, or a surplus if the government previously had a balanced budget. Contraction fiscal policy is usually associated with a surplus.

Among the various tools of fiscal policy, the following are the most important:

Reflationary Fiscal Policy: It may be used to boost the level of economic activity during periods of recession or deceleration in economic activity. This is done by lowering taxes or increasing government expenditure. Deflationary Fiscal Policy: During a boom, i.e., when the economy is growing beyond its capacity, inflation and balance of payment problems might result. This can be achieved by increasing taxes or by reducing government expenditure.

Karnataka Class 12 Commerce Economics Instruments Of Fiscal Policy Complete Details

Karnataka Class 12 Commerce Economics Some of the major instruments of fiscal policy are as follows: A. Budget B. Taxation C. Public Expenditure D. Public Works E. Public Debt.

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A. Budget:

The budget of a nation is a useful instrument to assess the fluctuations in an economy.

Different budgetary principles have been formulated by the economists, prominently known as:

(1) Annual budget,

(2) cyclical balanced budget and

(3) fully managed compensatory budget.

Let us briefly explain them:

1. Annual Balanced Budget:

The classical economists propounded the principle of annually balanced budget. They defended it with force till the deep rooted crisis of 1930’s.

The reasons for their reacceptance of this principle are as under:

(i) They maintained that there should be balance in income and expenditure of the government;

(ii) They felt that automatic system is capable to correct the evils;

(iii) Balanced budget will not lead to depression or boom in the economy;

(iv) It is politically desirable as it checks extravagant spending of the state;

(v) This type of budget assures full employment without inflation;

(vi) The principle is based on the notion that government should increase the taxes to get more money and reduce expenditure to make the budget balanced.

However, this principle is subject to certain objections.

These objection are as under:

(i) Classical version that balanced budget is neutral is not well based. In practice, a balanced budget can be expansionary.

(ii)The assumptions of full employment and automatic adjustment are too untenable in a modern economy.

(iii)Some economists also argue that annually balanced budget involves lesser burden of the taxes.

2. Cyclically Balanced Budget:

Karnataka Class 12 Commerce Economics Instruments Of Fiscal Policy :  The cyclical balanced budget is termed as the ‘Swedish budget’. Such a budget implies budgetary surpluses in prosperous period and employing the surplus revenue receipts for the retirement of public debt. During the period of recession, deficit budgets are prepared in such a manner that the budget surpluses during the earlier period of inflation are balanced with deficits.

The excess of public expenditure over revenues are financed through public borrowings. The cyclically balanced budget can stabilize the level of business activity. During inflation and prosperity, excessive spending activities are curbed with budgetary surpluses while budgetary deficits during recession with raising extra purchasing power.

This policy is favored on the following account:

(i) The government can easily adjust its finances according to the needs;

(ii)This policy works smoothly in all times like depression, inflation, boom and recession;

(iii) Cyclically balanced budget simply ensures stability but gives no guarantee that the system will get stabilized at the level of full employment.

3. Fully Managed Compensatory Budget:

 This policy implies a deliberate adjustment in taxes, expenditures, revenues and public borrowings with the motto of achieving full employment without inflation. It assigns only a secondary role to the budgetary balance. It lays down the emphasis on maintenance of full employment and stability in the price level. With this principle, the growth of public debt and the problem of interest payment can be easily avoided. Thus, the principle is also called ‘functional finance.’

Karnataka Class 12 Commerce Economics Budget Deficits Complete Notes

Budget deficits are an important policy issue facing the United States. In this lesson, you’ll learn about what a budget deficit is, its causes and its history in the United History. You’ll also have a chance to take a short quiz.

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Types Of Budget

  • Sales budget – an estimate of future sales, often broken down into both units and currency. It is used to create company sales goals.
  • Production budget – an estimate of the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labor and material. Created by product oriented companies.
  • Capital budget – used to determine whether an organization’s long-term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing.
  • Cash flow/cash budget – a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short-term future. The cash flow budget helps the business to determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.
  • Marketing budget – an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.
  • Project budget – a prediction of the costs associated with a particular company project. These costs include labour, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each. A cost estimate is used to establish a project budget.
  • Revenue budget – consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies.
  • Expenditure budget – includes spending data items..
  • “Flexibility budget – it is established for fixed cost and variable rate is determined per activity measure for variable cost.
  • Appropriation budget – a maximum amount is established for certain expenditure based on management judgment.
  • Performance budget – it is mostly used by organization and ministries involved in the development activities .This process of budget takes into account the end results.
  • Zero based budget – It has clear advantage when the limited resources are to be allocated carefully and objectively.

Karnataka Class 12 Commerce Economics Chapter 11 Government Budget And The Economy Notes

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