7/8/2014 Mrunal Interim Budget 2014: Plan vs Non-Plan Expenditure http://mrunal.org/2014/02/budget-interim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-deficits-pdma-public-debt-management-agency.h… 1/22 [Budget] Interim Budget 2014: Plan vs Non-Plan Expenditure, Subsidies, Disinvestment, Deficits, PDMA Public Debt Management Agency 1. Prologue 2. Budget: Capital part: incoming (receipts) 1. [Table] Capital receipt 2. #EPICFAIL in disinvestment 3. Capital Expenditure 3. Plan vs Non Plan 1. Plan vs Nonplan budget: Incoming (Receipt) part 2. Plan vs Nonplan budget: Outgoing (Expenditure) part 3. [Table] Plan vs Non plan Expenditure in Interim Budget 4. [Table] Total Expenditure 5. [Table] Sub plans: Women, Children, SC/ST 6. [Table] Subsidies in Interim Budget 2014 4. Deficits 1. #1: Revenue Deficit and Effective Revenue Deficit 2. #2: Budgetary deficit 3. #3: Capital Deficit Surplus 4. Fiscal Deficit 1. Fiscal deficit targets and achievement 2. How did Chindu reduce fiscal deficit? 3. #1: increase incoming money 4. #2: Decrease outgoing money 5. Why did Chindu reduce fiscal deficit? 1. Main reason= to prevent Rating downgrade. 2. Consequences if India’s rating fell to junk status: 3. Secondary reasons= to save the economy 5. Primary deficit 6. [Table] Deficits Absolute figures 7. [Table] Deficits as % of GDP 5. PDMA: Public Debt Management Agency in Interim budget 6. Appendix 1. #1: FRBM: States succeed where Union fails 2. #2: Subsidies 3. #3: Structural deficit & Cyclic deficit Prologue so far in the [Budget] article series 1. Part I: Why interim budget, how is it different from vote on account, direct vs indirect taxes, shortfall in their collection.
Transcript
7/8/2014 Mrunal Interim Budget 2014: Plan vs Non-Plan Expenditure
BE2013 (Chindu originally hoped to earn this much) 40k
RE2013 (he actually earned this much) 16k
BE2014 (still Chindu is optimistic next year!) 36k
So why didn’t disinvestment fetch truckload of cash?
Chindu wanted todisinvest
But #EPICFAIL because (Data of Dec 2013)
10% from Indian OilCorporation (IOC)
Moily (Petroleum minister) opposed. and while the file waspending, IOC’s share prices went down.
all the shares of HindustanZinc and Balco
Mining ministry created obstacle about pricing mechanism.Now the matter has been postponed till after election.
Coal India trade unions opposed
Bharat Heavy ElectricalsLtd (BHEL) & NationalHydroelectric PowerCorporation (NHPC)
Praful Patel (Ministry Heavy industries) opposed saying“shares of power companies are down at the moment. So evenif we sell, it don’t fetch good prices. Better just wait andwatch for the sharemarket to go up.”
Neyveli LigniteCorporation (NLC), StateTrading Corporation(STC), MMTC, and ITDC.
Lukewarm response from investors. Barely got ~1300 crores.
Important: Disinvestment matter falls under Department of Disinvestment under Financeminister.
Capital Expenditure
Capital receipt (incoming) Capital Expenditure (outgoing)
But in the late 80s, Government comes up with a new method to classify Expenditure(outgoing money) => plan vs non-plan Expenditure. This new format of annual financialstatement, looks like this
total income (receipt) Total Expenditure
Revenue(Receipt)
capital income(Receipt)
Plan Expenditure Non Plan
RevenueExpenditure
CapitalExpenditure
RevenueExpenditure
CapitalExpenditure
Wait how can government change the format of annual financial statement?
Because as per Art. 112: AFS shall distinguish Expenditure on revenue part, from otherExpenditures.Meaning you can present AFS in any format you want…as long as Revenue expenditureis separately shown.Therefore, even above plan vs non-plan format is valid (even through planningcommission itself is not a ‘Constitutional’ body).
Others (sellinggoods/services)dividend-profitinterest receivedGrants received
internalexternal
disinvestmentloan (principal)recovered
The numbers, ascending descending order will remain same like earlier articles.
Plan vs Nonplan budget: Outgoing (Expenditure) part
Total Expenditure
Plan Expenditure Non plan
money given to Union’s own fiveyear plansmoney given to States’ five yearplans
anything that doesn’t fall into left side part (planExpenditure)
we further classify this plan Expenditure into two parts
Total Expenditure
Plan Expenditure Non Plan
Revenue Expenditure Capital Expenditure Revenue Expenditure Capital Expenditure
xx xx xx xx
The component classification method is same like in DevAnand’s case study (And three
judaad principles). The only change is…Five year plan related Expenditure = you put on left sideNon-plan Expenditure= you put on right hand side.Defense related capital Expenditure fall under “NON-plan” part.
PLAN ExpenditureNON-Plan Expenditure
Revenue Expenditure Capital Expenditure
1. Money spent onFive year plans (ofUnion)
2. Money given tostate/UT for theirFive year plans
(and their internalclassification asRevenue vs. capital)
1. Interest paid (on whateverloan Union had taken)
[Table] Plan vs Non plan Expenditure in Interim Budget
Expenditure BE 2013 RE 2013 BE 2014
Non-Plan 1109975 1114902 1207892
Plan 555322 475532 555322
Total 1665297 1590434 1763214
MCQ wisdom
1. Major portion of sarkaari money goes into non-plan Expenditure (and not in planExpenditure).
2. In 2013, the ministries failed to spend all of the plan Expenditure money given to them.(How much? 555322-475532=nearly 80k crores. And that in turn, helped Chindu reducefiscal deficit- because outgoing money reduced!
3. Observe that in budget estimates (BE) of 2013 vs 2014, the total Expenditure hasincreased but plan Expenditure remained the same (555322)=>Basic principles of CSATPaper II data interpretation: the % should have decreased. Observe the pie chart:
You can see, Plan Expenditure reduced from 33% to 31%. This is the main criticism given byOpposition parties that Chindu reduced plan Expenditure => Congies don’t care about thegrowth and Development.
[Table] Total Expenditure
Expenditure Crores Sub part BE 2013 RE 2013 BE 2014
Food 1.15 lakh cr (within that…88k for Food security Act)
other Hardly ~200 crore.
Total 2.5 lakh cr.
MCQ wisdom:
1. Almost all of the subsidies go to “NON-Merit” goods. [what are non-merit goods?explained in the appendix].
2. Within Non-merit goods subsidies: food >> fertilizer >> fuel.
We’ll see about the schemes and subsidies in fourth article. Let’s move to deficits.
Deficits
#1: Revenue Deficit and Effective Revenue Deficit
Already covered in last article, click me
#2: Budgetary deficit
This is the difference between total incoming money vs. total outgoing money
= Total expenditure MINUS total receipts
= (Revenue expenditure + Capital Expenditure) MINUS (Revenue receipt + Capital receipt)
official numbers: BE 2013 RE 2013 BE 2014
Total Receipts 1665297 1590434 1763214
Total Expenditure 1665297 1590434 1763214
Budget deficit 0 0 0
In ALL of above cases, budgetary deficit is ZERO. Because total income is same as totalExpenditure. How is this possible?
Recall that all the loans borrowed by government are counted as “capital incoming”(Capital receipts). So, even if government’s outgoing money (revenue + capital) is large, they’ll borrowenough money (capital receipt) to fill up this pothole => total receipt will equal totalexpenditure.
still doubt? Read the next topic..
#3: Capital Deficit Surplus
Take the difference between outgoing vs incoming.If this was a negative number, we’d call it “Deficit”. (2-4=-2)If this is positive number, we’d call it “surplus”. (4-2=+2)in the capital part, we’ve “Surplus” (Because all the market borrowing/loans are countedas “incoming” capital receipts)
But in case of capital part, we’ve as much surplus, as the deficit in Revenue part. that’s whybudget deficit becomes ZERO.
Fiscal Deficit
Since budgetary deficit is ZERO, it doesn’t show us the true picture of government’sfinancial “health”.Therefore, in late 90s: Sukhmoy Chakravarti Committee recommends new type ofdeficit, called…..
Fiscal deficit
= Budget deficit + Borrowing
= (Total Expenditure – Total Receipts) + Borrowing
Absolute number doesn’t give us a “big picture”, doesn’t help us compare two years or twocountries objectively. Hence experts prefer second method (GDP%) for doing the analysis,projections and ratings.
7/8/2014 Mrunal Interim Budget 2014: Plan vs Non-Plan Expenditure
official numbers (Actual) 2012-13 BE 2013 RE 2013 BE 2014
Fiscal Deficit in Crores 490597 542499 524539 528631
Fiscal deficit as % of GDP 4.9 4.8 4.6 4.1
from the above table, we can see that during Feb 2013, Chindu had estimated our fiscal deficitwould be 4.8% of the GDP. But in Feb 2014, when he revised that estimate. Now it turns outfiscal deficit for the year 2013-14= 4.6% of the GDP.
for GDP growth rate bigger number is better for the economy e.g. 10%>9%for Fiscal deficit, smaller number is better for economy e.g. 4.6 better than 4.8.
So million dollar question is: how did Chindu manage to perform so excellently despite allthe policy paralysis, shortfall in tax collection, shortfall in disinvestment targets- and overallhigh level of inflation and subsidies?
How did Chindu reduce fiscal deficit?
There are two ways to reduce fiscal deficit:
1. Increase incoming money (tax, non-tax revenue, disinvestment etc.)2. Decrease outgoing money (revenue and capital Expenditure)
Let’s check how Chindu used these three methods to bring fiscal deficit to 4.6% of GDP:
#1: increase incoming money
Part Receipt detail
did ithelpreducingfiscaldeficit?
Revenue
TAXWe’ve already seen, there was shortfall in thecollection of direct taxes and indirect taxes.
NO
Non TAX
Chindu had ordered the PSUs to declare specialdividends. e.g. Coal India gave Rs.29 dividend on 10rupees share => Government earned ~15k crores fromCoal India’s dividend alone. Same case with other PSUs.
YES
Capital Disinvestment
Chindu was hoping to get 40,000 Crore rupees throughdisinvestment (i.e. selling his shares from PSUs toprivate investors). But in reality, he managed to getbarely 16k cores.
NO
#2: Decrease outgoing money
Expenditure sub-type detailmoneysaved Cr.
Plan –Ministries failed to spend some of the money, returnedback.
80k
7/8/2014 Mrunal Interim Budget 2014: Plan vs Non-Plan Expenditure
Austerity measures on foreign travel, 5 star hotelconference, vehicle purchases.
20k
Postponed Oil subsidy payment 35k
Direct benefit transfer (DBT) prevented leakages ??
capital Defense ministry postponed the purchase of Rafael jet 60k
Thus, with many such measures, Chindu managed to reduce the fiscal deficit (@4.6% GDP)even better than his original target (4.8% GDP).
For the next financial year (1st April 2014 to 31st March 2015) he has made even moreambitious target: to bring down fiscal deficit to only 4.1% of GDP. Will he (or the successivegovernment) achieve it? Critiques say 4.1%= Mission Impossible. Because
1. Chidu already milked the PSUs by seeking special dividend. Next government cannot dothe same (else PSUs will be left with no money to expand business.)
2. Chindu postponed the subsidy payment to oil companies. Next government will have topay it sooner or later, else those companies will go out of business.
3. Moily increased subsidized LPG cylinders from 9 to 12. This is effective from Feb2014 (hence its negative impact doesn’t show on the accounts between 31/3/2013 to31/1/2014). But next government will be forced to continue this 12 cylinder game (Tokeep vote bank happy). But in their case, subsidy bill will be high for the entire financialyear from 1/4/2014 to 31/3/2015.
4. Some of the Sarkaari banks are loss making, and it’s beyond their aukaat to complywith BASEL-III norms without government help. e.g. United Bank of India needs 1000crore. IF economy doesn’t improve in 2014-15, the NPA will rise, more of the publicsector banks will fall in this danger zone=Government will have to dollout truckload ofcash to save them.
anyways, So far, we learned:
1. What is fiscal deficit?2. How did Chindu manage to reduce fiscal deficit?
Now the third question:
Why did Chindu reduce fiscal deficit?
Agreed that fiscal deficit is bad for economy, but if fiscal deficit had increased from 4.8to 4.9% ….then world wasn’t going to end next day.Besides, poor junta doesn’t understand fiscal deficit. He could simply launch anotherscheme named after **you know who**, to attract the voters during election year.So, Why did our finance minister make conscious attempts to reduce the fiscal deficit(remember- his “official” target was 4.8% but he performed even better 4.6%.)
why? why? why?
Main reason= to prevent Rating downgrade.
Every Saturday, Indianexpress gives “Rating” to movies:
7/8/2014 Mrunal Interim Budget 2014: Plan vs Non-Plan Expenditure
Lower the rating => less people likely to watch the movie. Similarly, Standard and Poor(S&P),Moody, Macgrawhill give ratings to companies and countries. Lower the rating=>lessinvestors coming.
Standard and Poor’s (S&P) ratings
Investment Grade from AAA, AA,…to BBB-
Non-investment grade (“junk status”) from BB, B, CCC, C….
In the recent months, India’s rating = BBB-That is just one rank above the junk status (Starting from BB).
So, what will happen if India’s rating is reduced to “BB” (junk status)
Consequences if India’s rating fell to junk status:
Foreign investors will pull out their money from India. (Especially the FIIs).But non-investment grade= High risk = high reward, right? Then why will foreigninvestors pull out money?Because, Most of these foreign investors don’t bring money from their pockets. Theyalso gather it from foreign junta e.g. American Pension fund company who collectsmonthly payments from nurses and teachers.The (SEBI like) regulatory bodies in US, Japan, EU etc. have made specific norms thatprevent such FIIs from investing client’s money into non-investment grade countries(BB and lower).
Had Chindu over crossed the fiscal deficit target (e.g. 4.9% or 5% instead of 4.8%) then S&Pwould have reduced our rating to junk status (BB) = foreign investors will have to pull outmoney from Indian market.
Therefore, to specifically appease S&P and other foreign rating agencies, Chindu madeconscious efforts to keep fiscal deficit lower than 4.8%. He even gave ambitious 4.1% targetfor 2014-15. (In hope that S&P is impressed and increases our rating from BBB to A =>more investment can come.).
Secondary reasons= to save the economy
In the current situation of Indian economy, if fiscal deficit is lowered, it’ll give us positiveimpact because
1. Lot of tax payer money wasted in non-productive subsidy (and its leakage). Whengovernment cuts down subsidies, implements DBT = saves tax payers’ money (That canbe used for other developmental work- such as new roads, bridges, schools anduniversities)
2. Subsidy leakage prevented= less corruption money going into gold and real estate=>demand lower=>prices go down. Gold demand reduced=>CAD reduced=>Rupeestrengthens =>Petrol cheaper.
3. Less fiscal deficit => S&P, Moody et al will give us better rating => more foreigninvestment => business expansion => more jobs =>social harmony, higher GDP.
4. More foreign investment => more demand of rupees (compared to dollars)=> rupeestrengthens against dollar => crude oil import becomes less expensive => inflationlowered.
5. more foreign investment=> business expansion =>More jobs=>more income formiddle class=>more demand of consumer goods and services=> higher collection ofindirect taxes.
6. More demand of consumer goods/services=> more profit for companies => highercollection of corporate tax. Recall that maximum amout of government’s direct taxrevenue comes from corporate tax.
7. More profit for companies => less NPA for banks => banks can re-loan the recoveredmoney to other needy entrepreneurs and families.
8. and so on….
Anyways enough of Fiscal deficit. Let’s move to the last topic of today’s article
Primary deficit
7/8/2014 Mrunal Interim Budget 2014: Plan vs Non-Plan Expenditure
1. To show deficit, I’ve used (-) sign in front of them. otherwise, in “Absolute” figures: youcan fiscal deficit is highest.
2. we cannot find “total deficit” here (i.e. BD+RD+ effective RD+FD+PD) because thosenumbers are implicitly counted / subtracted from each other. if we simply add them allup, it’ll lead to double / triple counting.
Again, observe that Revenue deficit = capital surplus (in every cell of above table). Why?Because government borrowed that much money (=incoming capital receipt) to fillup up therevenue deficit. that’s why Budgetary deficit became ZERO. (total expenditure-total income).
Again, observe Capital surplus = Revenue Deficit. e.g. for BE 2014, they’re +3% and -3%respectively.
PDMA: Public Debt Management Agency in Interim budget
@present, RBI is the debt manager of the Government. = Conflict of interest. How?
GOVERNMENT RBI
borrows money from market via issuing Government-securities (G-sec). This is one type of bond e.g. “pay me 1000, I’ll pay 8% interest fornext ten years, then I’ll repay entire principal.”
RBI uses the sameG-sec to controlmoney supply.
Government release Government securities (G-Sec) to borrow money from market. RBI usesthe same G-sec to control money supply.Example
1. Repo rate: recall that G-sec are used as “collateral”, so money can be recovered incase theclient doesn’t pay.
2. OMO (Open market operation): Here RBI buys/sells G-sec in open market, to controlmoney supply. (RBI buying G-sec from juntaa = money supply increased in juntaa’shand, and vice versa).
3. SLR: RBI requires the banks to invest part of their money in G-sec.
Therefore, monetary policy maker and debt manager should be two separate persons. Elsethere is conflict of interest, clouding of judgment. Although experts are divided
1. Only RBI has the necessary expertise, staff and tools to make macro-assessments aboutthe debt management (and its impact on money supply, banking and finance sector,foreign exchange rates etc). While An independent agency will not have the same levelof expertise. Their mindset will be “narrow”.
2. only RBI can harmonise the Debt management of union and State governments- and theirimpact on the economy. While the separate debt management office will only focus onunion government but not on the state governments. => this lack of coordination willhave negative impact on money supply
3. Even a separate debt management office cannot stop conflict of interest. Becausegovernment is the majority shareholder in public sector banks. (e.g. Government canorder its puppet Board of Directors in SBI, PNB etc to buy government securitiesbeyond the SLR requirement and thus government gets money.)
4. So far, RBI has effectively carried out that Debt management operation without problem.So why waste time in “Trial n Error” with a separate debt Management office?
Argument: RBI should not continue as debt manager
because:
1. Because there is conflict of interest (as explained in the beginning).
2. 13th Finance Commission (Vijay Kelkar) has recommended there should be separateNational debt Management agency.
3. In most of the advanced economies, monitoring policy and debt management are carriedout by two different agencies.
4. Since late 80s- Sweden, New Zealand have separate offices for Public debt Management(outside their RBI but inside their finance ministry).
5. Germany and Denmark are even one step ahead- they have separate financial companiesto look after the public debt management. (outside their RBI and finance ministry)
If those economies can run smoothly, then Indian economy can also run smoothly by having aseparate debt management office.
Timeline: PDMA
2007: FM makes announcement in the budget, “we’ll setup a statutory body for publicdebt management.” (meaning they’ll pass a law to create this body)2011: Public Debt Management Agency Bill2012: bill not passed2013: bill not passed2014, Feb: Interim Budget. Chindu says, no worries, we’ll set up a NON-StatutoryPublic Debt Management Agency (PDMA), they’ll look after debt Management from2014-15 (i.e. 1/4/2014 to 31/3/2015).
Note: at the moment, PDMA = non statutory, just like UIDAI. (Because there is no law/actbehind them).
Appendix
7/8/2014 Mrunal Interim Budget 2014: Plan vs Non-Plan Expenditure
2003: Fiscal Responsibility and Budget Management (FRBM) Act was enacted.FRBM gave following TARGETs to the Finance minister:
deficit target
Revenue deficit eliminate (0%) by 31/3/2008
fiscal deficit reduce it to 3% of GDP by 31/3/2009
2010: New concept of “Effective revenue deficit” introduced in the budget.2012: Chindu realizes, “It is beyond my aukaat to eliminate revenue deficit.” So, heamends the FRBM target. “I’ll not eliminate revenue deficit, I’ll eliminate “Effective”revenue deficit.”
deficit targets amended
EFFECTIVE Revenue deficit eliminate (0%) by 31/3/2015
fiscal deficit reduce it to 3% of GDP by 31/3/2017
FRBM: Success by State governments
while union government is yet to reach its targets,
target already achieved by
Revenue deficit = 0% Gujarat
Fiscal deficit = less than 3% of the state’s GDP Gujarat, MP, Odisha, Bihar and WB
#2: Subsidies
Back in the mid-90s, Chindu himself classified Subsidies in three types
#Type 1: Public Goods
Services given to everyone- be it rich or poor: Police, Defense, Judiciary etc.Any money spent on these public goods = not be counted under “subsidies” becausethese are essential services.Example, if government announced free electricity to all police station, or freeuniforms/shoes to all army personnel, we donot call it “Subsidy”.
#Type 2: Merit goods
Polio Vaccination, Primary Education, forest plantation, roads, bridges, R&D on Agro-Space-public Health, renewable energy etc.These have positive “externality” E.g. polio vaccine + free edu. =kid is saved, and 20years later, companies get healthier-more skilled labor force.Similarly, forest plantation = environment saved, wildlife saved. And simultaneously,more oxygen => healthier population =>more productive labour force=>higher GDP.
7/8/2014 Mrunal Interim Budget 2014: Plan vs Non-Plan Expenditure
In short, society at large, benefits. Therefore, subsidies given to Merit goods =not evil.They’re justified. Government should give subsidies to merit goods as and whenpossible.
#Type 3: Non-Merit Goods
Method example
Direct CashPension given to elder/widows.Wage payments under MNREGA
Subsides In“Kind”
Instead of giving “cash”, government gives some “item” (Goods) tobeneficiary. example
Cow, tractor, Diesel pumpset to small/marginal farmerFree wheelchair to physically challenged.Free laptops/tablets to college students. (subsidy beyond primaryeducation, is considered non-merit)taxi to unemployed youth
Procurement
Government declares Minimum support price (MSP) for wheat.if (private) trader offers less price, then farmer can sell wheat to FCI@MSPGovernment pays for the losses to FCI (for buying wheat @priceshigher than market level).
PriceRegulation
when government “fixes” the price e.g. (subsidized) LPG, Kerosene,fertilizer, electricity (to farmers)then oil/fertilizer/electricity company is forced to sell their product@cheap price and government pays for their “loss”.
InterestRelief
farmer, student, small businessman takes bank loan.Government pays a part of his loan interest rate.
Tax ReliefTax exemption given to BCCI and other cricket boards (hoping they’lluse the money thus saved, in the “promotion” of sports.)
These are called “non-merit” goods because society pays and individual benefits.
Where do these fall in the budget? Revenue Expenditure or capital Expenditure? Obviouslysubsidies= Revenue Expenditure.
(Free market) economists hate them because
#1: Non-merit subsides = “negative” externality.
7/8/2014 Mrunal Interim Budget 2014: Plan vs Non-Plan Expenditure
Diesel subsidy (meant for farmers): jeep & SUV-owners also get cheap diesel =>pollution (+ accidents from drunk driving)excessive use of diesel pumpsets= ground water depletionFertilizer subsidy => farmers use excessive amount of urea => soil fertility decline,water-pollution after monsoon.
#2: Non-Merit subsidies =often diverted & misused
MNREGA Bogus job cards, Sarpanch chows down the money.
Subsidies LPGbeneficiaries give them to restaurants and 5 star hotels @blackmarket
Subsidized kerosenePDS owner sell it to rickshaw-walla rather than poors=>misuse + pollution.
Food subsidies Black marketeering by PDS shop owner.
Fertilizer subsidy, freeelectricity
Most of the benefit goes to big farmers. The small marginalfarmer doesn’t get them.
#3: Non-Merit subsides =cascading effect
Government pays subsidy to oil/fertilizer/electricity companies to give cheap diesel,urea and electricity to Farmer.Government pays FCI to procure wheat from farmer @MSP (usually above the marketprices)Government also gives wheat/rice to the poor @cheap/free price.
Result? lot of overlapping, lot of leakage. But still, majority of the subisides go in the non-merit goods food>> fertilizer >> fuel
#3: Structural deficit & Cyclic deficit
Not given in the budget, but for stupid MCQs, we’ve to prepare. Because once in a while,Montek mentions it.
Suppose, we consider year1 as “standard”.
year Year1
total income 100
total Expenditure 110
deficit 10
In year2, there is recession like scenario. Government’s tax-income decreases, Andgovernment’s expenditure will increase (Because of various social security / unemploymentallowance/ MNREGA type schemes) to help the people during slowdown.
year Year1 year2 (downturn in economy)
total income 100 80
total Expenditure 110 120
deficit 10 40 (this is Cyclical deficit)
7/8/2014 Mrunal Interim Budget 2014: Plan vs Non-Plan Expenditure
In year3, economy recovers and there is FULL employment (Every person has got job).Economist believe that IF a country has FULL employment, then government’s tax Revenuewill automatically improve and there will be no deficit (in fact there will be surplus).
But in real life, even if there will full employment, still there will be deficit
year Year1year2 (downturn ineconomy)
year3 (economy recovers, fullemployment)
total income 100 80 100
totalExpenditure
110 120 105
deficit 1040 (this is Cyclicaldeficit)
5 (this is structural deficit)
why? because government still running some populist scheme/subsidies to farmers, fertilizercompanies, LPG to middle class and so on. This type of deficit, which exists EVEN during fullemployment = is called structural deficit. Structural deficit results when government is givingunnecessary subsidies and freebies- despite full employment.
Visit Mrunal.org/Economy For more on Money, Banking, Finance, Budget, Taxation andEconomy.
URL to article: http://mrunal.org/2014/02/budget-interim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-deficits-pdma-public-debt-management-agency.html
Posted By Mrunal On 26/02/2014 @ 15:33 In the category Economy
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