Daily Quiz – 02nd May 2024

Explanation:

• Statement 1 is incorrect: A balanced budget occurs when the government's total revenue equals its total expenditure, ensuring fiscal equilibrium, not when revenue exceeds expenditure.
• Statement 2 is incorrect: The significance of a balanced budget lies in controlling inflation by ensuring that the government does not spend more money than it earns, thus preventing excess money infusion into the economy.
• Statement 3 is incorrect: A balanced budget indeed enhances investor confidence by showcasing the government's financial responsibility through its disciplined spending and fiscal equilibrium. Balanced Budget
• Definition: A balanced budget refers to a situation where the government's total revenue equals its total expenditure.
• Implication: This implies that the government is not spending more than it earns,
• Importance: which helps to maintain fiscal discipline and ensures financial stability.
• Control inflation: it helps to control inflation by ensuring that the government does not pump more money into the economy than it can absorb.
• Confidence to investors: It provides a sense of confidence to investors by showing that the government is financially responsible.
• Reduce debt burden: A balanced budget can help to reduce the country's debt burden by preventing the accumulation of excessive debt

Explanation:

Statement 1 is correct: The essence of the Outcome Budget lies in allocating resources based on the expected outcomes of government programs and services, aligning budget allocations with the anticipated results.

Statement 2 is incorrect: The Outcome Budget is not a separate document but a part of the overall budget structure in India, reflecting the anticipated outcomes within the budget.

Statement 3 is incorrect: The implementation of Outcome Budgeting in India encompasses two stages - preparation by ministries/departments for the upcoming fiscal year and subsequent monitoring and evaluation of program performance.

Outcome based Budget

Definition: The Outcome Budget is a document that outlines the expected outcomes of government programs and services.

Resource Allocation: Where resources are allocated based on the outcomes that are expected from the programs and services.

Aim: To ensure that budget resources are allocated based on the priorities of the government and the needs of citizens.

Outcome Budget in the India

About: In India, the Outcome Budget is a part of the overall budget document.

Importance: The Outcome Budget provides details about the expected outcomes of government programs and services in the upcoming fiscal year.

Presentation: It is presented in a format that highlights the linkages between the budget and the expected outcomes of government agencies.

Process: The implementation of Outcome Budgeting in India is a two-step process:

1. Preparation: Each ministry or department of the government prepares an Outcome Budget for the upcoming fiscal year.
2.  Monitoring and Evaluation: The performance of government programs and services is monitored and evaluated on a regular basis.
3.  Importance: This helps in identifying the strengths and weaknesses of the programs and services and making necessary changes.

Outcome Budget

• An outcome budget is a budgeting method that highlights specific outcomes or results, rather than just allocating resources to programs.
• It sets clear goals and performance indicators, identifies the costs and allocates resources based on expected outcomes. For example, Delhi government measures its outcome on 1932 performance indicators.
• It measures whether the money that was sanctioned was utilised for the purpose it was sanctioned for.

Advantages:

• Improves accountability and transparency as the outcomes are easy to track and measure.
• Resource allocation is well aligned with the priorities of the government.
• Increased focus on outcomes ensure efficient and effective use of resources.
• Engagement of multiple stakeholders to identify goals and measure the performance.
• As of 2021, 11 states in the country have implemented outcome-based budgeting; it was first adopted in India in the year 2005.

Explanation:

Statement 1 is incorrect: Zero-based budgeting was introduced by Edward Hilton Young, but not in the USA during the 1960s. It was introduced by Edward Hilton Young in Britain in 1924.

Statement 2 is correct: The process indeed involves identifying goals, determining activities, and creating budgets based on various funding levels.

Statement 3 is incorrect: Zero-based budgeting does involve evaluating budget scenarios based on costbenefit analysis, ensuring alignment with organizational goals.

Zero base Budgeting

Definition: “Zero-based budgeting” is an approach to planning and preparing the budget from the beginning.

Background:

British: British budget authority Edward Hilton Young introduced the Zero-based budgeting concept in 1924.

USA: In the 1960s, ZBB was formally initiated in the Department of Agriculture of the USA and turned out to be more popular in the 1970s.

Peter Pyhrr: The Zero-Based Budgeting applicable today was developed at Texas Instruments Inc. in 1969 by Peter Pyhrr.

Process: The zero-based budgeting process typically involves the following steps:

1.  Identification: Identify the organization's goals and objectives, and the cost drivers for each activity
2.  Determining: Determine the activities necessary to achieve the goals and objectives
3.  Alternative budget: Develop alternative budget scenarios based on different levels of funding
4.  Evaluation: Evaluate each budget scenario based on cost-benefit analysis and alignment with the organization's goals and objectives

Explanation:

Statement 1 is incorrect: During a recession, economic activity decreases, causing a decline in tax revenue for the government. This decline typically contributes to a deficit budget rather than a surplus, as reduced economic activity negatively impacts tax collection.

Statement 2 is correct: Increased government spending on social programs and infrastructure can result in a surplus budget. When government expenditure remains lower than the revenue generated, it leads to a surplus budget scenario.

Statement 3 is correct: Decreased tax revenue, which might result from tax reduction by the government, could indeed contribute to a deficit budget. When a reduction in tax revenue leads to a situation where total expenditure surpasses total revenue, it results in a deficit budget.

Deficit Budget

Definition: It is a situation where a government's total expenditure exceeds its total revenue.

Causes of Deficit Budget:

Recession: During a recession, the government may experience a decrease in tax revenue due to lower economic activity, leading to a deficit budget.

Increased Government Spending: Governments may increase spending on social programs, infrastructure, and defense, leading to a deficit budget.

Decreased Tax Revenue: If the government reduces taxes, it may lead to a decrease in revenue, leading to a deficit budget.

Surplus Budget:

Surplus Budget: It is a situation where a government's total revenue exceeds its total expenditure.

Example: the Uttaranchal Budget for 2006–07 was a surplus budget

Causes of Surplus budget:

Increase in Tax Revenue: Lead to a surplus budget as the government receives more revenue than it spends.

Decrease Government Spending: Lead to a surplus budget as the government spends less than it receives in revenue.

Explanation:

Statement 1 is correct: Government bonds are an avenue for raising funds where the government promises to repay the principal amount upon maturity. This mechanism enables the government to secure finances through bonds, attracting domestic and foreign investors. However, the return is limited to the principal amount invested.

Statement 2 is incorrect: Treasury bills are short-term debt instruments issued by the government, commonly purchased by the central bank. When the central bank buys these bills, it injects money into the economy, thereby increasing the money supply, potentially leading to inflation, rather than causing a decline.

Statement 3 is incorrect: Borrowing from international organizations like the World Bank or IMF often accompanies conditions like economic reforms and fiscal measures. Such borrowing can significantly impact the country's economy in the long term. These conditions might lead to structural changes, affecting economic policies and fiscal decisions, thereby influencing the economy's trajectory.

Deficit Financing

Definition: The act/process of financing/supporting a deficit budget by a government is deficit  financing.

Need for Deficit Financing: To stimulate economic growth by increasing government spending, which can create jobs and encourage private investment.

Means of Deficit Financing:

Issuing Government Bonds: Governments can issue bonds as a way of raising funds.

Return: At maturity, the government returns the principal amount to the investor.

Investor: Government bonds can be bought by domestic or foreign investors, depending  on the bond's characteristics.

Borrowing: Governments can also borrow from the central bank by issuing treasury bills.

Short-term debt: Treasury bills are short-term debt instruments issued by the government with a maturity period of less than a year.

Impact: The central bank buys these treasury bills, which increases the money supply, leading to inflation.

Printing Money: Governments can print more money to finance their expenditures.

Impact: This practice can lead to inflation as it increases the money supply without a corresponding increase in goods and services.

Borrowing from International Organizations: Governments can also borrow from international organizations like the World Bank or IMF

Conditions: These loans usually come with conditions, including economic reforms and fiscal austerity measures.

Impact: Borrowing from international organizations can have long-term implications on the country's economy