NCERT Solutions Class 12 Macro Economics Chapter 5

NCERT Solutions Class 12 Macroeconomics Chapter 5- Government Budget and the Economy

The role of the government in an economy is crucial. The government incurs expenditures and earns revenue from the people of the nation. It involves creating a regular budget that explains the nature and source of these revenues and the avenues of expenditures—the difference between what the government earns as revenues and spends as expenditures provide insights into the deficit. The government’s budget might be in deficit if the expenditures exceed revenues. Students must understand the different types of budget deficits and the kind of implications that they have over the economy of a country. Not only this, it is critical to find measures to keep the budget deficit under control.

NCERT Solutions Class 12 Macroeconomics Chapter 5 helps students understand the government and the budget of an economy. Students will study in-depth the meaning and components of the budget, objectives of the budget, kinds of budget deficits and fiscal policy.

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Key Topics Covered in NCERT Solutions Class 12 Macroeconomics Chapter 5

Government Budget and the Economy provides the students with a lot of insights regarding topics of the government budget. Students can understand more about the current economic conditions pertaining to budgetary deficits and surpluses if they clearly understand the concepts taught in this chapter. The NCERT Solutions Class 12 Macroeconomics Chapter 5 will introduce these core concepts that will help students understand the economy better and score good marks in the examinations.

Key topics covered in Ncert Solutions Class 12 Macroeconomics Chapter 5 are as follows:

  • Budget
  • The Objective of the Budget
  • Components of the Budget
  • Budget Receipts
  • Budget Expenditure
  • Meaning of Deficit
  • Measures of Government Deficit
  • Measures to Correct Deficit
  • Fiscal Policy of the Government

Students must thoroughly understand the economy and government budget topics outlined above. Students will get a fundamental understanding of each topic while learning in class. Students can still use the NCERT Solutions Class 12 Macroeconomics Chapter 5 offered by Extramarks as a trustworthy study partner for better exam preparation, which will help them get better grades in exams and tests.

Let us look at the in-depth information on each of the above-listed subtopics in the NCERT Solutions Class 12 Macroeconomics Chapter 5:


  • In India, it is required by the constitution (Article 112) to give an account of the government’s anticipated receipts and expenditures for each fiscal year, which runs from April 1 to March 31. The following “Annual Financial Statement” contains the main budget of the government of India.
  • A budget is a yearly financial report that details the itemised breakdown of expected future earnings and expenses. The budget outlines a nation’s income and expenses.

The Objective of the Budget 

The major objectives of the budget include the following points:

  • Resource reallocation: Every government makes an effort through its fiscal strategy to reallocate resources following the economic and social objectives of the nation, specifically maximising profits and general welfare. It accomplishes this through the direct production of goods and services, tax breaks and subsidies.
  • Income and wealth redistribution: Every economic system has some form of inequality. It is one of the major problems that a government must solve. The government’s budgetary policy strives to address wealth accumulation and income disparities. By raising taxes on the wealthy and allocating more money to social programmes for the needy, it seeks to disperse the wealth.
  • Public-sector management: Every nation has a sizable number of public-sector businesses that are developed and run for the general welfare of the populace. Including various provisions to boost the total rate of savings and investments in the country’s economy is one of the budget’s goals.
  • Economic Stability: Preventing business swings like inflation and deflation and paving the way for economic stability are two key challenges that a government budget addresses. The government does this by presenting a budget in surplus during periods of inflation and in deficit during periods of deflation to keep the pricing of products and services steady across the nation’s economy.
  • Economic Development: The level of investment and saving determines a nation’s overall growth. As a result, the government includes several budget initiatives aiming to boost the economy’s total rate of savings and investment.
  • Employment Creation: One of the budget’s main objectives is to create employment opportunities. By pushing the infrastructure and impetus to small and medium enterprises, the budget can help people find employment opportunities that will ultimately help in the GDP growth.

Components of the Budget

There are two major components of the budget. It is because even though the budget paper deals with the government’s income and expenses for a certain fiscal year, its impacts will be experienced in the years following. The components of the budget as mentioned in the NCERT Solutions Class 12 Macroeconomics Chapter 5 include the following:

  1. Revenue Budget: The revenue budget consists of the revenue collected by the Indian government and the expenses related to that revenue.
  2. Capital Budget: The capital budget includes capital inflows and outflows. These transactions are those that deal with the government’s assets and liabilities.

Budget Receipts 

The budget receipts can also be bifurcated into two:

  1. Revenue Receipts: Revenue receipts do not result in an obligation or a decrease in government assets. They are hence known as non-redeemable. They are further divided into two:

a. Receipts from tax revenues:

  • Direct Tax- A taxpayer pays all direct taxes to the government. It is sometimes known as a tax because the individual carries the duty and the payment burden. Direct taxes are collected by both the central government and state governments based on the type of tax imposed.
  • Indirect Tax- The end-user of products and services eventually bears indirect taxes. Given that taxes are imposed on goods and services, it is impossible to avoid them. As a result of convenient and frequent collections, it involves decreased administrative expenditures.

b. Receipts from non-tax revenues: Some examples of non-tax revenues for the government include; interest, commercial revenue, external grants, fines, penalties and so on.

  1. Capital Receipts: Capital receipts are government receipts that create liabilities or deplete financial assets. Loans from the general public, also known as market borrowings, loans from the Reserve Bank, commercial banks and some other financial institutions through the sale of treasury bills, loans from other governments and international organisations and loan recoveries are the main sources of capital receipts. Some additional items include small savings, provident funds and net proceeds from the sale of shares in PSUs.

Budget Expenditure

The budget expenditure is also divided into two sub-parts; namely.

  1. Revenue Expenditure: Revenue expenditures are typical of a current or short-term nature. They are expenses that the government must pay to run its regular business. These expenses do not depreciate over time; instead, they are fully charged in the year they are incurred. They could be recurring or non-recurring.
  2. Capital Expenditure: Capital expenditures are one-time financial or capital investments made by a government to grow in various sectors and businesses to make money. Usually, fixed assets or assets with a longer lifespan are purchased with these funds. These include tools for manufacturing, construction and infrastructure enhancement. These resources may or may not have a salvage value, but they are valuable to the government for the duration of their useful lives.

Meaning of Deficit

The amount by which the expenditures of a budget exceed its revenue is referred to as the budget deficit. This deficit is a trustworthy sign of how financially healthy the economy is.

Learn about the various measures of government deficit from the NCERT Solutions Class 12 Macroeconomics Chapter 5.

Measures of Government Deficit 

The various measures of government deficit are as follows:

  1. Revenue Deficit: The revenue deficit is the difference between total revenue collected and total revenue spent. The only items covered in this deficit are current income and current expenses. A significant deficit suggests that the government should cut back on spending. The government may be able to increase revenue by increasing tax revenue.

Revenue Deficit = Total Revenue Expenditure – Total Revenue Receipts

The implications of revenue deficit are as follows:

  • A big revenue shortfall reflects budgetary indiscipline.
  • It shows that the government is dissaving or using the savings from other parts of the economy to pay for its consumer expenditure.
  • It indicates the excessive spending on administration by the government.
  • Disinvestment causes a decrease in the government’s assets.
  • A substantial income shortfall warns the government that it needs to either reduce spending or increase revenue.

2. Fiscal Deficit: When the government’s total spending exceeds its total receipts, there is a fiscal deficit. However, fiscal deficits do not include government borrowings.

Fiscal deficit = Total Expenditure – Total Receipts (excluding borrowings)

Implications of Fiscal Deficits:

  • Fiscal deficits have several negative effects, one of which is the risk of debt traps.
  • It results in inflationary pressures.
  • Fiscal deficits hinder future development.
  • Fiscal deficits make us more dependent on foreign resources.
  • It increases the government’s responsibilities.

3. Primary Deficit: Primary deficit is a fiscal deficit without interest payment obligations.

Primary deficit: Fiscal deficit – Interest payments on previous loans

Implications of primary deficits:

  • It displays the proportion of the government’s borrowings that the government will utilise to pay expenses other than interest.

Measures to Correct Deficit

The measures to correct the government deficit are as follows:

  • Reductions will aid deficit reduction in government subsidies.
  • Disinvestment should be carried out where resources are not being utilised effectively.
  • Increased focus on tax-based income and taking the appropriate precautions to stop tax evasion can help correct the deficit.
  • Borrowing from domestic and foreign sources can also help correct government deficits.
  • The government’s deficit could be reduced by expanding the tax base.

Fiscal Policy of the Government

Fiscal policy is based on the Keynesian economics theory, which economist John Maynard Keynes created. It is the system by which a government changes its projected expenditure and tax rates to monitor and influence the performance of a country’s economy. It is carried out with monetary policy, by which the nation’s central bank influences the money supply. This policy effect helps to keep inflation under control, boost employment, and—most importantly—maintain a stable currency value.

NCERT Solutions Class 12 Macroeconomics Chapter 5: Exercise and Solutions

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Learn about all the important concepts related to government budgets and their impact on the economy with the NCERT Solutions Class 12 Macroeconomics Chapter 5 provided by Extramarks.

Key Features of NCERT Solutions Class 12 Macroeconomics Chapter 5

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FAQs (Frequently Asked Questions)

1. What is the Union Budget, and why is it important for India?

For the fiscal year from April 1 to March 31, the Union Budget keeps track of the government’s financial transactions. The revenue budget and capital budget are two categories of the Union Budget.

The overall goal of the Union Budget is to promote social justice and equality while fostering quick and balanced economic growth in our nation.

2. What is the relationship between revenue deficit and fiscal deficit?

Fiscal deficit is the difference between total expenditure and the total receipts of the government, while revenue deficit is the difference between revenue expenditure and revenue receipts. As it is quite evident from the meaning, the fiscal deficit is a much broader phenomenon than the revenue deficit, as it accounts for the government’s total deficit. As the revenue deficit increases, a proportional increase in the fiscal deficit will also be observed in the economy.

To learn more about the fiscal and revenue deficits and their implications on the economy, students can go through the NCERT Solutions Class 12 Macroeconomics Chapter 5 provided by Extramarks.

3. What is Debt?

Budget shortfalls must be funded through taxation, borrowing or creating money. Governments have primarily relied on borrowing, resulting in what is known as government debt. Debt and deficits share a lot of similarities. Deficits can be considered a flow that increases the stock of debt. If the government borrows every year, it would eventually accumulate debt and be forced to pay an increasing amount in interest. The debt is increased by these interest payments alone.