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Based on - Public debt & Goverment Budget, , 1.Define Public debt. Explain four ways of redemption, of public debt. (6 marks), , Answer- If the government expenditures are more than the, revenue, it either borrows money or imposes new tax. It can, borrow money by selling securities among the public this is, known as public debt of the country., , Methods of redemption of Public debt., , (1) Sinking Fund Approach: The Government at the regular, interval saves a certain amount of money from its budget to, meet up the debt obligations and uses this fund for the, same when they have accumulated enough money., , (2) Conversion Approach: Conversion of loans is another, method of redemption of public debt. It means that an old, loan is converted into a new loan. Under this system, 111, , high-interest public debt is converted into a low-interest, public debt. Prof. Dalton felt that debt conversion actually, relaxes the debt burden., , (3) Utilization of Budgetary Surplus: When the Government, earns surplus in the budget, it must be utilised for paying, the debt. A surplus occurs when public revenue exceeds, public expenditure. However, this method is rarely found., , (4) Terminal Annuity: |n this method. The government pays, off the public debt on a fee basis of a terminal annuity into

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equal annual instalments including interest along with the, principal amount. This is the easiest way of paying off the, public debt., , 2. What do yo mean by Deficit Financing? (2 marks), Answer- During the time of budget construction the, government first determine all the capital and revenue, expenditure. Then it tries to raise equal amount of revenue, through taxes, duties, public debt , public borrowings etc. If, the anticipated revenue becomes less than the target, expenditure, the gap is called deficit spending. The ways of, Financing deficit soending is Known as deficit financing., , 3.Explain Various components of budget. (6marks), Answer- Components of Budget: The budget has two, broad components, , (1) Revenue budget, , (2) Capital budget., , (1) Revenue budget includes revenue receipts and, expenditure of the government., , (a) Revenue Receipts: It refers to those receipts of the, government which neither create a liability nor leads to a, reduction in assets., , Tax Revenue: It consists of the proceeds of taxes and other, duties levied by the government., , Non Tax Revenue: It includes receipts from sources other, than tax.

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(b) Revenue Expenditure: \t refers to all those expenditures, of the government which do not result in the creation of, physical assets., , (2) Capital Budget includes capital receipts and expenditure, of the government., , (a)Capital Receipts: It is defined as any receipts of the, government which either create liability or reduce assets., , (b) Capital Expenditure: An expenditure which either, creates assets or reduce liabilities, , 4.Differentiate between the revenue and capital, components of the union budget. (6marks), Answer, Differences between revenue and Capital components are, as follows :, , 1. The revenue component of the union budget comprises, revenue receipts and revenue expenditure of the, government. The revenue receipts include revenue, generated from taxes, excise duty and interest receipts., The revenue expenditures include interest payment,, expenditure on salaries and expenditure on defence where, as the capital component of the union budget comprises, capital receipts and capital expenditure of the government., The capital receipts include loans taken by the government, and selling of its shares by the government. The capital, expenditures include the purchase of shares, expenditure, on machinery, land and building.

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2. The revenue receipts do not reduce the financial assets, or create any liabilities for the government. The revenue, expenditure does not create an asset for the government or, reduce liabilities of the government where as the capital, receipts reduce financial assets and create liabilities for the, government., , 5. What is mean't by budget of the goverment?, Differentiate between revenue expenditure and capital, expenditure. (6marks), , Answer- Budget is a statement of expected receipts and, expenditue of the government over the period of financial, year (i.e, April 1st to 31st March., , Differences between revenue expenditure and capital, expenditure, , 1.Revenue expenditure neither creates any asset nor, reduces any liability of the government but Capital, expenditure creates an asset and reduces the liability of, the government., , 2.Revenue expenditures are incurred for normal running of, government departments and provision of various services, whereas Capital expenditures are incurred mainly for, acquisition of assets and granting of loans and advances.

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3.Revenue expenditure is recurring in nature as such, expenditure is spent by government on day-to-day activities, whereas Capital expenditure is non-recurring in nature., , 4.Salary, pension, interest etc are examples of revenue, expenditure and repayment of borrowings, expenditure on, acquisition of capital asset, etc. are examples of capital, expenditure., , 6.Differentiate between Revenue deficit and fiscal, deficit. (marks), , Answer- Differences between Revenue and Fiscal deficit, are as follows:, , 1.Revenue deficit shows the excess of total expenditure, over total receipts excluding borrowings., , Fiscal Deficit = Total Expenditure — Total Receipts, excluding borrowings and Fiscal deficit shows the excess of, revenue expenditure over the revenue receipts., , Revenue Deficit = Revenue Expenditure — Revenue, Receipts., , 2. Revenue deficit measures the total borrowing, requirements of the government where as fiscal deficit, indicates the inability of the government to meet its regular, and recurring expenditure., , 3. Tax and non-tax revenue are sources of finance of, revenue deficit and borrowing and deficit financing are, sources of finance of fiscal deficit.