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y 1.Public goods, as distinct from private goods, are collectively consumed. a m Two important features of public goods are – they are non-rivalrous in that m one person can increase her satisfaction from the good without reducing u that obtained by others and they are non-excludable, and there is no S feasible way of excluding anyone from enjoying the benefits of the good. These make it difficult to collect fees for their use and private enterprise will in general not provide these goods. Hence, they must be provided by the government. 2.The three functions of allocation, redistribution and stabilisation operate through the expenditure and receipts of the government. 3.The budget, which gives a statement of the receipts and expenditure of the government, is divided into the revenue budget and capital budget to distinguish between current financial needs and investment in the country’s capital stock. 4.The growth of revenue deficit as a percentage of fiscal deficit points to a deterioration in the quality of government expenditure involving lower capital formation. 5.Proportional taxes reduce the autonomous expenditure multiplier because taxes reduce the marginal propensity to consume out of income. 6.Public debt is burdensome if it reduces future growth in output. s p Public goods c Automatic stabiliser n C Discretionary fiscal policy y Ricardian equivalence e K Box 5.2: Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) In a multi-party parliamentary system, electoral concerns play an 81 important role in determining expenditure policies. A legislative provision, d Go it is argued, that is applicable to all governments – present and future – h re is likely to be effective in keeping deficits under control. The enactment E m of the FRBMA, in August 2003, marked a turning point in fiscal reforms, o n binding the government through an institutional framework to pursue a o B prudent fiscal policy. The central government must ensure inter- y d generational equity and long-term macro-economic stability by achieving t sufficient revenue surplus, removing fiscal obstacles to monetary policy and effective debt management by limiting deficits and borrowing. The rules under the Act were notified with effect from July, 2004. Main Features 1. The Act mandates the central government to take appropriate measures to reduce fiscal deficit to not more tha8 3 percent of GDP and to eliminate the revenue deficit by March 31, 2009 and thereafter build up adequate revenue surplus. 2. It requires the reduction in fiscal deficit by 0.3 per cent of GDP each year and the revenue deficit by 0.5 per cent. If this is not achieved 8This has been rescheduled by one year to 2009-10, primarily on account of a shift in plan priorities in favour of revenue expenditure - intensive programmes and schemes. Reprint 2026-27