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What are Budgetary Deficit?

We have already studied that

Budgetary Deficit is excess of Expenditure over Receipts

Example

Revenue Deficit, Fiscal Deficit, Primary Deficit

How to Finance Budgetary Deficit - Teachoo.JPG

Option 1 Increase Taxation - Teachoo.JPG

Option 2 -Increase Borrowings - Teachoo.JPG

Option 3-Print Currency - Teachoo.JPG

How are Budgetary Deficit Financed

To fill the gap between Expenditure and Receipts, Government normally does one of the following

 

Taxation

Govt increases its Taxes (This increases Govt Receipts)

 

Borrowing (Debt)

Govt takes loans from Public or Foreign Institutions

This increases its debt and int liability

 

Printing Money

Govt asks RBI to print money

When Govt wants to print a currency, it gives securities to the RBI (called Govt Security) against which RBI issues currency

 

Which of above 3 methods is mostly used by Govt?

Borrowing Method is mainly used by Govt

Govt increases its debt by raising bonds on which it has to pay interest

If govt continues to borrow every year, it has to pay more and more interest on it

To Pay this int, govt has to take more loan and this circle continues

 

NCERT Question

Question 11

Explain the relation between government deficit and government debt.

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Other Books

Question 1

In the following questions, select the correct answers:

Budget deficit means:

  1. Total Expenditure - Total Receipts
  2. Capital Expenditure - Capital Receipts
  3. Total Expenditure - Total Receipts (excluding borrowings)
  4. Total Expenditure - Revenue receipts
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Transcript

How to Finance Budgetary Deficit EXPENDITURE LESS RECEIPTS DEFICIT 1000 800 200 How to Finance this Deficit? (How to meet the shortfall) Option 1 Increase Taxation Option 2 Increase Borrowing Option 3 Print Currency Option 1 -Increase Taxation Expenditure Less Receipts Deficit Earlier Now 1000 1000 800 1000 200 0 Govt increase taxes This Increases Govt Revenue (Receipts) Deficit Reduced Note- This Method is not popular as people don’t like to pay more taxes) Option 2 -Increase Borrowings Expenditure Less Receipts Deficit Borrowings Deficit After Borrowings 1000 800 200 200 0 Govt takes loan And pay interest This interest is extra expense It adds to Deficit of Next year Option 3 -Print Currency Expenditure Less Receipts Deficit Less Currency Printed Balance Deficit 1000 800 200 200 0 Govt issues treasury bonds to RBI RBI prints currency Increase Money Supply in Economy Causes Inflation

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CA Maninder Singh is a Chartered Accountant for the past 12 years. He also provides Accounts Tax GST Training in Delhi, Kerala and online.