BUDGETARY DEFICIT , UPSC PRELIMS 2015

RELEVANCE – UPSC GS PRELIMS & GS MAINS III
First go through the text (given after the questions) and then attempt the questions
UPSC PRELIMS 2015

QUES . There has been a persistent deficit budget year after year. Which of the following actions can be taken by the government to reduce the deficit?
1. Reducing revenue expenditure
2. Introducing new welfare schemes
3. Rationalizing subsidies
4. Expanding industries
Select the correct answer using the code given below.
(a) 1 and 3 only
(b) 2 and 3 only
(c) 1 only
(d) 1,2,3 and 4

ANSWER . (a) 1 and 3 only

Budgetary deficit

Budgetary deficit is the difference between all receipts and expenses in both revenue and capital account of the government.

Budgetary deficit is the sum of revenue account deficit and capital account deficit. If revenue expenses of the government exceed revenue receipts, it results in revenue account deficit. Similarly, if the capital disbursements of the government exceed capital receipts, it leads to capital account deficit. Budgetary deficit is usually expressed as a percentage of GDP.

How to reduce a Budget Deficit?

There are only two ways to reduce a budget deficit. either increase revenue or decrease spending.

Governments can only increase revenue by raising taxes or increasing economic growth. Tax increases are tricky. If they are too excessive, they will slow growth. Increasing growth can only be done moderately. If growth is faster than the ideal range , it will create a boom, which leads to a bust.

Cutting spending also has pitfalls. Government spending is a component of GDP. If the government cuts spending too much, economic growth will slow. That leads to lower revenues and potentially a larger deficit. The best solution is to cut spending on areas that do not create many jobs.