Click on the Title of the chapters below to read that particular topic.
I. INTRODUCTION -
- An Introduction to MacroEconomics
- Economic Agents
- Emergence of Macro Economics
- Basic Concepts of MacroEconomics
- National Income and Methods of Calculating National Income
- Product Method (or) Value Added Method
- Expenditure Method
- Income Method
- Some MacroEconomic Identities
- Goods and Prices
III. MONEY & BANKING -
- Introduction to Money and Banking
- Functions of Money
- Demand for Money
- Supply of Money
- Narrow and Broad Money
- Money Creation by the Banking System
- RBI and the Monetary Policy
- Income Determination
- Analysis of the Product Market
IV. BUDGET -
- The Government - Functions & Scope
- Components of Budget
- Revenue Receipts
- Revenue Expenditure
- The Capital Account
- Measures of Deficit
VI. PUBLIC DEBT
Budgetary deficits must be financed by either taxation, borrowing or printing money. Governments have mostly relied on borrowing, giving rise to what is called government debt. The concepts of deficits and debt are closely related. Deficits can be thought of as a flow which add to the stock of debt. If the government continues to borrow year after year, it leads to the accumulation of debt and the government has to pay more and more by way of interest. These interest payments themselves contribute to the debt.
Perspectives on the Appropriate Amount of Government Debt:
Other Perspectives on Deficits and Debt:
One of Keynes’s main ideas in The General Theory of Employment, Interestand Money was that government fiscal policy should be used to stabilise the level of output and employment. Through changes in its expenditure and taxes, the government attempts to increase output and income and seeks to stabilize the ups and downs in the economy. In the process, fiscal policy creates a surplus (when total receipts exceed expenditure) or a deficit budget (when total expenditure exceed receipts) rather than a balanced budget (when expenditure equals receipts). In what follows, we study the effects of introducing the government sector in our earlier analysis of the determination of income. The government directly affects the level of equilibrium income in two specific ways – government purchases of goods and services (G) increase aggregate demand and taxes, and transfers affect the relation between income (Y) and disposable income (YD) – the income available for consumption and saving with the households. We take taxes first. We assume that the government imposes taxes that do not depend on income, called lump-sum taxes equal to T.
Changes in Government Expenditure
We consider the effects of increasing government purchases (G) keeping taxes constant. When G exceeds T, the government runs a deficit. Because G is a component of aggregate spending, planned aggregate expenditure will increase. The aggregate demand schedule shifts up to AD′ . At the initial level of output, demand exceeds supply and firms expand production. The new equilibrium is at E′ . The multiplier mechanism (described in Chapter 4) is in operation.
We find that a cut in taxes increases disposable income (Y – T ) at each level of income. This shifts the aggregate expenditure schedule upwards by a fraction c of the decrease in taxes. Because a tax cut (increase) will cause an increase (reduction) in consumption and output, the tax multiplier is a negative multiplier. We find that the tax multiplier is smaller in absolute value compared to the government spending multiplier. This is because an increase in government spending directly affects total spending whereas taxes enter the multiplier process through their impact on disposable income, which influences household consumption (which is a part of total spending).
When a government spends more than it collects by way of revenue, it incurs a budget deficit. There are various measures that capture government deficit and they have their own implications for the economy.
Revenue deficit = Revenue expenditure – Revenue receipts
The revenue deficit includes only such transactions that affect the current income and expenditure of the government. When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure. This situation means that the government will have to borrow not only to finance its investment but also its consumption requirements. This will lead to a build up of stock of debt and interest liabilities and force the government, eventually, to cut expenditure. Since a major part of revenue expenditure is committed expenditure, it cannot be reduced. Often the government reduces productive capital expenditure or welfare expenditure. This would mean lower growth and adverse welfare implications.
Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts)
Non-debt creating capital receipts are those receipts which are not borrowings and, therefore, do not give rise to debt. Examples are recovery of loans and the proceeds from the sale of PSUs. The fiscal deficit will have to be financed throughborrowing. Thus, it indicates the total borrowing requirements of the government from all sources. From the financing side,
Gross primary deficit = Gross fiscal deficit – net interest liabilities
Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending.
The Capital Budget is an account of the assets as well as liabilities of the central government, which takes into consideration changes in capital. It consists of capital receipts and capital expenditure of the government. This shows the capital requirements of the government and the pattern of their financing.
There is a constitutional requirement in India (Article 112) to present before the Parliament a statement of estimated receipts and expenditures of the government in respect of every financial year which runs from 1 April to 31 March. This ‘Annual Financial Statement’ constitutes the main budget document. Further, the budget must distinguish expenditure on the revenue account from other expenditures. Therefore, the budget comprises of the (a) Revenue Budget and the (b) Capital Budget.
In a mixed economy, apart from the private sector, there is the government which plays a very important role. In this chapter, we shall not deal with the myriad ways in which it influences economic life but limit ourselves to three distinct functions that operate through the revenue and expenditure measures of the government budget.
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