Summary

This chapter — Government Budget and the Economy, Chapter 5 of the NCERT Class 12 Introductory Macroeconomics textbook — can be summed up in six key points:

1. Public goods must be provided by the government. Unlike private goods, public goods are collectively consumed: they are non-rivalrous (one person's use does not reduce what is available to others) and non-excludable (no one can be kept from enjoying them). These features make it impossible to charge users effectively, so private enterprise will not supply them and the government must.

2. The budget performs three functions. The functions of allocation, redistribution and stabilisation are all carried out through the government's expenditure and its receipts.

3. The budget has two parts. It is divided into the revenue budget and the capital budget so as to separate the government's current financial needs from its investment in the country's capital stock.

4. A rising revenue deficit signals poor-quality spending. When the revenue deficit grows as a percentage of the fiscal deficit, it points to a deterioration in the quality of government expenditure — more borrowing is going into consumption and less into capital formation.

5. Proportional taxes shrink the multiplier. A proportional income tax reduces the autonomous expenditure multiplier, because taxing income lowers the marginal propensity to consume out of that income.

6. Public debt is burdensome only if it lowers future growth. Public debt is a burden to the extent that it reduces the economy's future growth in output; debt that finances productive investment need not be a burden at all.

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