Fiscal Policy — GK Questions with Answers

1. Fiscal deficit in the Union budget means — (IAS, 1994)
   1. difference between current expenditure and current revenue
   2. net increase in the Union Government’s borrowings from the Reserve Bank of India
   3. the sum of the budgetary deficit and net increase in internal and external borrowing
   4. the sum of the monetised deficit and the budgetary deficit
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   Answer: (C) the sum of the budgetary deficit and net increase in internal and external borrowing

   Fiscal deficit = budgetary deficit + the net increase in internal and external borrowing; this is its older but still exact definition.

2. There has been a persistent deficit budget year after year. Which action can the government take to reduce the deficit — (UPSC, 2015)
   1. Reducing revenue expenditure and rationalising subsidies
   2. Introducing new welfare schemes
   3. Expanding industries
   4. All of the above
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   Answer: (A) Reducing revenue expenditure and rationalising subsidies

   Cutting revenue expenditure and rationalising subsidies directly shrink the deficit; new schemes or expansion only add to spending.

3. Through what is fiscal policy expressed
   1. A meeting of the Monetary Policy Committee
   2. The budget
   3. The Economic Survey
   4. A Finance Commission recommendation
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   Answer: (B) The budget

   The government’s policy on receipts and expenditure is presented to Parliament every year as the budget.

4. Which of these is not one of the five parts of public finance
   1. Public debt
   2. Financial administration
   3. The money multiplier
   4. Public expenditure
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   Answer: (C) The money multiplier

   The money multiplier belongs to the study of money supply, not to public finance.

5. What correctly describes revenue expenditure
   1. It raises the government’s assets
   2. It neither raises assets nor cuts liabilities
   3. It always cuts a liability
   4. It is always bigger than capital expenditure
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   Answer: (B) It neither raises assets nor cuts liabilities

   Revenue expenditure is the government’s consumption spending; it neither creates an asset nor reduces a liability.

6. Which of these is not an example of a capital receipt
   1. Money from disinvestment
   2. Borrowing raised from the market
   3. Income tax collected
   4. Recovery of a loan given
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   Answer: (C) Income tax collected

   Income tax is a tax and falls under revenue receipts, not capital receipts.

7. What is the strongest argument for deliberately keeping a deficit in the budget
   1. It always keeps inflation under control
   2. Higher government spending in a slowdown can build demand
   3. It always raises tax collection
   4. It removes the need for foreign borrowing
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   Answer: (B) Higher government spending in a slowdown can build demand

   Following Keynes, the main argument is that higher government spending in a slowdown creates demand and gets the economy moving again.

8. What does Part B of the budget speech carry
   1. General announcements about the economy
   2. Changes to taxation
   3. Next year’s Vote on Account
   4. Recommendations of the Finance Commission
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   Answer: (B) Changes to taxation

   Part A carries general announcements, and Part B carries the changes made to taxation.

9. What is presented in Parliament one day before the budget
   1. The Annual Financial Statement
   2. The Economic Survey
   3. The Appropriation Bill
   4. The Medium-term Fiscal Policy Statement
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   Answer: (B) The Economic Survey

   The Economic Survey, prepared by the Chief Economic Adviser, is laid a day before the budget.

10. What is subtracted from the revenue deficit to get the effective revenue deficit
    1. Interest payments
    2. Grants given for building capital assets
    3. Subsidies
    4. Non-debt capital receipts
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    Answer: (B) Grants given for building capital assets

    Subtracting the grants given for building capital assets brings out the real deficit from consumption alone.

11. What does the fiscal deficit include that the primary deficit does not
    1. Interest payments
    2. Salaries and pensions
    3. Subsidies
    4. Defence spending
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    Answer: (A) Interest payments

    Primary deficit = fiscal deficit − interest payments, so interest payments are exactly the difference.

12. Which deficit was used before 1997, and always stands at zero today
    1. Revenue deficit
    2. Primary deficit
    3. Budget deficit
    4. Effective revenue deficit
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    Answer: (C) Budget deficit

    The budget deficit (total expenditure − total receipts) was dropped in 1997; it is now always treated as zero.

13. What does monetising the deficit mean
    1. Raising the tax rate
    2. The government borrowing from the market
    3. The RBI printing fresh currency against ad hoc treasury bills
    4. Carrying out disinvestment
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    Answer: (C) The RBI printing fresh currency against ad hoc treasury bills

    This very method used to push up inflation, which is why it was discontinued from 1997.

14. Under which Act are Ways and Means Advances given
    1. The FRBM Act, 2003
    2. The RBI Act, 1934
    3. The Banking Regulation Act, 1949
    4. Article 112 of the Constitution
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    Answer: (B) The RBI Act, 1934

    It is a short-term facility resting on the RBI Act, 1934, and whatever is drawn must come back inside 3 months.

15. What is the crowding-out effect
    1. Higher government spending leaving less room for private borrowing
    2. Foreign investment rising in India
    3. Revenue rising when the tax rate falls
    4. Demand rising when inflation falls
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    Answer: (A) Higher government spending leaving less room for private borrowing

    When the government borrows very heavily from the market, the room left for private borrowing shrinks.

16. What does a high debt-to-GDP ratio suggest
    1. Greater confidence in the country’s ability to repay
    2. Less confidence in the country’s ability to repay
    3. GDP always rises as a result
    4. The revenue deficit always falls to zero
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    Answer: (B) Less confidence in the country’s ability to repay

    The higher the ratio, the smaller the earning looks next to the borrowing, and confidence in repayment falls.

17. According to the Laffer curve, what happens as the tax rate rises
    1. Revenue always rises
    2. Revenue always falls
    3. Revenue rises up to a point, then starts to fall
    4. Revenue is not affected at all
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    Answer: (C) Revenue rises up to a point, then starts to fall

    Past that point, people start looking for ways around the tax, and revenue begins to fall.

18. Which of these is not one of the three pillars of fiscal consolidation
    1. Maximising revenue
    2. Rationalising expenditure
    3. Managing debt effectively
    4. Changing the tax rate again and again
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    Answer: (D) Changing the tax rate again and again

    Changing the tax rate repeatedly is not a tool of consolidation; the other three are its actual pillars.

19. When was the FRBM Act passed, and for which year was its original target set
    1. Passed in 2003, target for 2008-09
    2. Passed in 2005, target for 2010-11
    3. Passed in 2003, target for 2015-16
    4. Passed in 2012, target for 2020-21
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    Answer: (A) Passed in 2003, target for 2008-09

    The Act was passed in 2003, and its original target (3% fiscal deficit, 0% revenue deficit) was set for 2008-09.

20. How much deviation is allowed under the FRBM escape clause
    1. 0.2%
    2. 0.5%
    3. 1%
    4. 2%
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    Answer: (B) 0.5%

    Following the recommendation of the N. K. Singh committee, a deviation of up to 0.5% is allowed in four fixed situations.

21. What debt-to-GDP target did the N. K. Singh committee suggest
    1. 50%, for the centre alone
    2. 60%, centre and states combined
    3. 70%, for the states alone
    4. 40%, for the centre alone
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    Answer: (B) 60%, centre and states combined

    Within the 60%, the centre’s share was fixed at 40% and the states’ at 20%; this was the target set for 2023.

22. What is the fiscal deficit in Budget 2026-27
    1. 3.0%
    2. 4.3%
    3. 4.5%
    4. 5.6%
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    Answer: (B) 4.3%

    Budget 2026-27 fixes the fiscal deficit at 4.3% of GDP, a little lower than the previous year’s 4.4%.

23. What is the new target for central government debt by 2031
    1. 60% of GDP
    2. 50 ± 1% of GDP
    3. 40% of GDP
    4. 70% of GDP
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    Answer: (B) 50 ± 1% of GDP

    This new target, announced after Budget 2025, is different from and stricter than the older 60% (centre + states) target.

24. What has become the main target of fiscal consolidation from Budget 2026-27
    1. The revenue deficit alone
    2. The primary deficit alone
    3. The central government’s debt-to-GDP ratio
    4. The amount raised through disinvestment alone
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    Answer: (C) The central government’s debt-to-GDP ratio

    Each year’s deficit will now be set so that the centre’s debt, as a share of GDP, keeps falling.

25. What is the correct meaning of fiscal space
    1. The government’s total budget size
    2. The room to spend without putting financial stability at risk
    3. The rate of tax collection
    4. The size of the foreign exchange reserves
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    Answer: (B) The room to spend without putting financial stability at risk

    It shows how much more the government can spend without upsetting its own financial stability.

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