Question
What is the difference between revenue expenditure and capital expenditure? Explain how taxes and government expenditure can be used to influence.
Solution
| Basis of Difference | Capital Expenditure | Revenue Expenditure |
| Meaning | A decline in the government liabilities and creates assets for the government. | No decline in government liabilities and does not create assets for the government |
| Examples | Purchase of shares and bonds | Salaries, pensions and interest payments |
Taxes and government expenditure can be influenced as follows:
i. A tax is a legally compulsory payment imposed by the government on households and producers. The government imposes taxes on socially unsafe goods such as alcohol and tobacco. Thereby resources will be shifted to the production of socially essential goods.
ii. Subsidies do not reduce the liability of the government and it does not add to the assets of the government. The government also provides subsidies for necessary goods such as wheat, rice and sugar. Thereby the resources are shifted from the production of goods for the rich to the production of goods for the poor.
