Read the following statements and select the appropriate option:
Statement 1: A budget deficit is encountered when the total expenditure of the government is greater than its total revenue, excluding borrowings.
Statement 2: A budget deficit is faced when the total revenue of the government is greater than its expenditure in a fiscal year.
Show answer & explanation
Correct answer: A
Explanation
Answer: Only Statement 1 is correct.
Explanation:
A budget deficit arises when the government's total estimated expenditure exceeds its total estimated revenue. Statement 1 is technically closer to the concept of a 'fiscal deficit'; however, in a general sense, a budget deficit signifies an excess of expenditure over revenue. When expenditure exceeds revenue, the government is compelled to borrow funds or sell its assets to bridge this gap. Statement 2 is incorrect because when revenue exceeds expenditure, the resulting situation is termed a 'budget surplus.'
Additional Points:
Fiscal Deficit: This represents the difference between total expenditure and (revenue receipts + non-debt capital receipts). It indicates the government's total borrowing requirements.
Revenue Deficit: This occurs when the government's revenue expenditure exceeds its revenue receipts.
Primary Deficit: The balance obtained by deducting interest payments from the fiscal deficit.
Potential Exam Questions and Answers:
Question: When was the Fiscal Responsibility and Budget Management (FRBM) Act passed in India?
Answer: In 2003.
Question: What is the meaning of 'Zero-Based Budgeting'?
Answer: Re-evaluating every item from scratch for each new budget cycle.