In the context of Budget, which of the following is NOT an example of capital expenditure of government?
- AOption (a)
Acquisition of land
- BOption (b)
Investment in shares
- COption (c)
Building for development
- DOption (d)
Subsidies
View answer & explanationHide answer & explanation
Correct answer
Subsidies
Why this answer is correct
The correct answer is Subsidies.
Key Points
- Capital expenditure refers to spending by the government on assets that have a long-term utility and contribute to the economic growth of the country. Examples include acquiring land, investing in infrastructure, and creating development projects.
- Subsidies, on the other hand, are classified as revenue expenditure because they are recurring payments made by the government to support specific sectors, individuals, or industries and do not create long-term assets. Hence, subsidies are NOT considered capital expenditure.
- Expenditures such as acquisition of land, investment in shares, and constructing buildings for development are capital expenditures as they result in the creation of physical or financial assets.
- Revenue expenditure, including subsidies, is focused on maintaining the daily functioning of the government or providing immediate economic support rather than creating enduring economic value.
- Subsidies are a form of financial assistance provided by the government to reduce the cost of goods or services, ensuring affordability for certain sectors or the public. They do not contribute to the creation of permanent assets.
- Hence, the correct answer is Subsidies.
Additional Information
- Capital expenditure:
- Capital expenditure is incurred by the government for acquiring assets such as land, buildings, machinery, equipment, or investments that contribute to long-term economic benefits.
- Examples include infrastructure development, setting up industries, and acquiring physical or financial assets.
- It is non-recurring in nature and reflects in the country’s balance sheet, improving its economic capacity.
- Investment in shares: Investing in shares by the government is considered capital expenditure as it leads to the creation of financial assets that may provide future returns.
- Revenue expenditure:
- Revenue expenditure refers to expenses incurred for the day-to-day running of government operations and services.
- It includes payments such as salaries, interest payments, subsidies, and welfare schemes. These expenditures are recurring and do not contribute to asset creation.
- Subsidies: Subsidies are a classic example of revenue expenditure. These financial aids are provided to support sectors such as agriculture, education, health, and industry.
- Subsidies are aimed at reducing the cost burden on citizens or businesses but do not result in the creation of physical or financial assets.
- Building for development: Constructing buildings for development purposes is classified under capital expenditure because it involves the creation of infrastructure that contributes to economic growth.
- Fiscal policy: The classification of expenditure into capital and revenue categories is critical for fiscal policy. Governments aim to balance these expenditures to ensure economic growth while maintaining fiscal discipline.
Important Points
- Key characteristics of capital and revenue expenditure:
- Capital expenditure: Non-recurring, creates assets, contributes to long-term economic benefits.
- Revenue expenditure: Recurring, supports day-to-day government functions, does not create assets.
- Government budget classifications: The classification of expenditure is critical in understanding how the government allocates resources and prioritizes economic development versus operational needs.
- Economic significance: Capital expenditure boosts economic growth by creating infrastructure, while revenue expenditure ensures smooth functioning and immediate welfare benefits.
