A government runs a large revenue deficit year after year. Consider the following statements:
(A) The government is dissaving and using up the savings of the other sectors of the economy.
(B) The government has to borrow to finance not only its investment but also its consumption requirements.
(C) Stocks of debt and interest liabilities build up over time.
(D) Since most revenue expenditure is committed expenditure, it can easily be cut to remove the deficit.
(E) When the government later cuts expenditure, it often reduces productive capital expenditure, which leads to higher growth.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (B) and (C) only
A revenue deficit means the government borrows to meet its consumption spending. Debt and interest then pile up, and spending has to be cut later.
(A) The government is dissaving and using up the savings of the other sectors of the economy. — Correct. Its revenue spending exceeds its revenue receipts, so it dissaves.
(B) The government has to borrow to finance not only its investment but also its consumption requirements. — Correct. The gap on the revenue account is met by borrowing.
(C) Stocks of debt and interest liabilities build up over time. — Correct. Borrowing every year adds to debt and interest.
(D) Since most revenue expenditure is committed expenditure, it can easily be cut to remove the deficit. — Incorrect. Committed expenditure cannot be reduced.
(E) When the government later cuts expenditure, it often reduces productive capital expenditure, which leads to higher growth. — Incorrect. Cutting capital expenditure leads to lower growth.
NCERT (2026-27): “5.2.1 Measures of Government Deficit … When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure. This situation means that the government will have to borrow not only to finance its investment but also its consumption requirements. This will lead to a build up of stock of debt and interest liabilities and force the government, eventually, to cut expenditure. Since a major part of revenue expenditure is committed expenditure, it cannot be reduced. Often the government reduces productive capital expenditure or welfare expenditure. This would mean lower growth and adverse welfare implications.” |