Classification of Expenditure

What is Expenditure?

Expenditure is the expend or spending of money on some commodities or the money that is being spent on something.

Revenue Expenditure

Revenue Expenditure is an expenditure incurred for the basis other than the creation of physical or financial assets of the central government. It associates to those expenses incurred for the normal operations of the government divisions and various services, interest payments on debt sustained by the government and grants given to state governments and other parties (even though some of the endowments may be meant for creation of assets).

Budget documents allocate total expenditure into plan and non-plan expenditure. This is shown in item 6 on the table within revenue expenditure, a distinction is made between plan and non-plan. According to this categorization, plan revenue expenditure associates to central Plans (the Five-Year Plans) and central aid for State and Union Territory plans. Non-plan expenditure, the more significant component of revenue expenditure, covers a broad degree of general, economic and social services of the government. The main objects of non plan expenditure are interest payments, defence services, subsidies, salaries and pensions.

Classification of Expenditure

Capital Expenditure

There are expenditures of the government which results in the creation of physical or financial assets or depletion in financial liabilities. This incorporates expenditure on the investment of building, land, equipment, machinery, investment in shares and loans and advances by the central government to state and union territory governments, Public Sector Undertakings (PSUs) and other parties. Capital expenditure is also classified as plan and non-plan in the budget documents. Plan capital expenditure, like its revenue equivalent, associates to central plan and central assistance for state and union territory plans. Non-plan capital expenditure covers different general, social and economic services furnished by the government.

The Medium-term Fiscal Policy statement sets a 3 year rolling target for specific fiscal indicators and examines whether revenue expenditure can be financed through revenue receipts on a sustainable basis and how productively capital receipts market borrowings are being consumed. The Fiscal Policy Strategy statement sets the preferences of the government in the fiscal sector, examining current policies and justifying any deviation in important fiscal measures. The Macroeconomic Framework Statement assesses the prospects of the economy with respect to the GDP growth rate, the fiscal balance of the central government and external balance.

DISTINGUISH BETWEEN REVENUE EXPENDITURE AND CAPITAL EXPENDITURE.
ANSWER:
BASIS REVENUE EXPENDITURE CAPITAL EXPENDITURE
(a)MEANING Revenue expenditure refers to the expenditure which neither creates assets nor reduces the liability of the government. Capital expenditure refers to the expenditure which either creates an asset or reduces the liability of the government.
(b)NATURE They are regular and recurring in nature. They are irregular and non-recurring in nature.
(c)TERM Short term Long term
(d)EXAMPLE Payment of salaries, maintenance of roads, street light, etc. Repayment of loans, Purchase of machinery, etc.
GIVING REASONS IDENTIFY THE FOLLOWING AS REVENUE EXPENDITURE OR CAPITAL

EXPENDITURE:

(a) SALARY PAID TO ARMY OFFICER

(b)LOAN GIVEN TO UNION TERRITORIES.

(c) PENSION PAID TO RETIRED GOVERNMENT EMPLOYEES.

(d) INTEREST PAID ON NATIONAL DEBT.

(e) REPAYMENT OF LOAN IS TAKEN FROM WORLD BANK.

ANSWER:
(a) SALARY PAID TO ARMY OFFICE Revenue expenditure

Reason: It neither creates any asset nor reduces the liability of the government.

(b) LOAN GIVEN TO UNION TERRITORIES Capital expenditure

Reason: It increases the assets of the government.

(c) PENSION PAID TO RETIRED GOVERNMENT EMPLOYEES

 

Revenue expenditure

Reason: It neither creates an asset nor reduces the liability of the government.

(d) INTEREST PAID ON NATIONAL DEBT

 

Revenue expenditure

Reason: It neither creates an asset nor reduces the liability of the government.

(e) REPAYMENT OF LOAN TAKEN FROM THE WORLD BANK Capital expenditure

Reason: It reduces the liability of the government.

1 MARK QUESTIONS
Q.1 WHAT IS MEANT BY CAPITAL EXPENDITURE?
ANSWER:

Capital expenditure refers to the expenditure which either creates an asset or reduces the liability of the government.

Q.2 GIVE TWO EXAMPLES OF CAPITAL EXPENDITURE IN A GOVERNMENT BUDGET.
ANSWER:

Construction of Metro and Dams, Repayment of loans to IMF.

Q.3 DEFINE REVENUE EXPENDITURE.
ANSWER:

Revenue expenditure refers to the expenditure which neither creates an asset nor reduces the liability of the government.

Q. 4 GIVE TWO EXAMPLES OF REVENUE EXPENDITURE IN A GOVERNMENT BUDGET.
ANSWER:

Payment of salaries by the government, Maintenance of street lights & roads, etc.

RECEIPTS EXPENDITURE
REVENUE RECEIPTS CAPITAL RECEIPTS REVENUE EXPENDITURE CAPITAL

EXPENDITURE

Creates liability No

e.g. Income tax

Yes

e.g. Borrowings

Reduces liability No

e.g. Payment of salaries

Yes

e.g. Repayment of loans

Reduces Assets No

e.g. Sales tax

Yes

e.g. Disinvestment

Creates Assets No

e.g. Payment of pension

Yes

e.g. Purchase of machinery

The above mentioned is the concept that is explained in detail about Classification of Expenditure for the class 12 students. To know more, stay tuned to BYJU’S.

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