Meaning of Government Budget
Government budget is an annual final, statement showing item wise and expenditures of the government during a fiscal year
Fiscal year is taken from 1. April to 31. March.
A budget shows the financial accountants of the years, the budget and revised estimates of the current year a year.
Objectives of Government Budgets
1. Reallocation of Resources
(a) The government aims to reallocate resources according to econc through its budgetary policy.
(b) Government encourages the production of certain commodities by giving subsidies or tax reliefs.
For e.g. government encourages the use of khadi products by providing subsidies
(c) Government can discourage the production of harmful good,like cigarettes by imposing heavy duties or taxes.
2. Redistribution Activities
(a) Economics inequality is an inherent part of every economic system
The government aims to reduce such inequalities of income and wealth, through its budgetary policy
(b) The government can impose higher taxes on the rich people
(c) In India government uses progressive taxation i.e. people belonging to higher income level have to pay more proportion of their income as tax to the government.
(d) The government can provide subsidies and other amenities to poor people
(e) Expenditure incurred by the government on unemployment allowance, old age pension, social security etc to help poor people.
3. Stabilizing Economics Activities
(a) Government budget is used to prevent business fluctuations and to maintain economic stability.
(b) During excess demand, the government impose higher tax and reduce its expenditure to correct excess demand, This Implies that government follows, the policy of surplus budget during inflation.
(c) During deficient demand, the government increases expenditure its reduces taxes,
This implies that the government follows the policy of deficit budget during deflation
4. Management of Public Enterprises
(a) Government runs its own enterprises on commercial basis
(b) These enterprises behave like natural monopolies. A natural monopoly is a situation where there are economies of scale over a large range of output which reduces average cost
(c) These enterprises are managed by the government by the government i,e Their expenditures and revenues are accounted for in the budget.
5. Economic Growth
It implies a sustainable increase in real GDP of an economy, i.e. an increase in volume of and services produced in an economy.
Budget can be an effective tool to email, the ensure the economic growth in a country.
i) If the government provides tax rebates and other incentives for productive ventures and projects, it can stimulate savings and Investments In an economy.
ii) Spending on infrastructure of an economy enhances the production activity in different sectors of an economy.Government expenditure is a major factor that generates demand for different types of goods and services in an economy which induces growth in private sector too.
However. before planning such expenditure. rebates and subsidies government should check the rate of inflation and tax rates.
Also there may be the risk of debt trap if loans are too high to finance the expenditure.
Components of Budget
Budget has got 2 components i.e. Revenues Budget and Capital Budget.
Revenue Budget deals with the revenue aspect of the government budget.
It explains how revenue is generated by the government and then how it is allocated among various expenditure heads.
It has parts (i) Revenue Receipts (ii) Revenue Expenditures.
Capital Budget deals with the Capital aspect of the government budget.
It consists of (i) Capital Receipts (ii) Capital Expenditures.
Budget Receipts
Budget receipts refer to the estimated money receipts of the government from all sources during a fiscal year.
Revenue Receipts
Revenue Receipts refer to those receipts which neither creates any liability nor cause reduction in the assets of the government.Revenue Receipts are regular and recurring in nature and the government receives revenue receipts in the normal course of activities.
Direct Taxes |
Indirect Taxes |
| Direct taxes are levied on individuals and companies | Indirect taxes are imposed on goods and services |
| Direct taxes are paid by the same person on whom it is imposed. | Indirect taxes are not paid by the same person on whom it is imposed. |
| Its burden can’t be shifted e.g. income tax has to be paid by the person on whose income it is imposed. | Its burden can be shifted e.g. sales tax is imposed on the seller but paid by the consumer. |
| Direct tax are progressive in nature | Indirect tax are regressive in nature or fixed |
Non Tax Revenue
Non Tax Revenue refers to the receipts from all sources other then those of tax receipts. The main sources of non tax revenue are.
Capital Receipt
Capital receipt refer to the those receipt which either create a liability or cause a reduction in the assets of the government.
| REVENUE RECEIPTS | CAPITAL RECEIPTS |
| Revenue receipts neither create a liability nor reduce any asset. | Capital receipts either create a liability or reduce any asset. |
| Revenue receipts are regular and recurring in nature. | Capital receipts are non-recurring in nature. |
| There is no future obligation to return the amount of revenue receipt, | In case of certain capital receipts there exists |
Revenue Expenditure
Revenue Expenditure refers to the expenditure which neither creates any asset nor causes reduction in any liability of the government.
Revenue Expenditure is incurred on the normal functioning of the government and the provision for various services.
Some examples of revenue expenditures are: Payment of :lanes, pensions, health services, grants to state, education etc.
REVENUE EXPENDITURE |
CAPITAL EXPENDITURE |
| Revenue expenditure neither creates any asset nor reduces any liability. | Capital expenditure either creates an asset or reduces a liability.
|
| Revenue expenditure is incurred on the normal functioning of government departments and on the provisions for various services. | Capital expenditure is incurred for acquisition of assets, granting of loans and. Repayment of borrowings.
|
| Revenue expenditure is recurring in nature i.e. an expenditure is made by the government on its day-to-day activities. | However, capital expenditure is non recurring in nature. |
Types Of Budget
(i) Balance Budget: A government budget is said to be a balanced budget in which government estimated receipts (revenue and capital) are shown equal to government estimated expenditure.
Merits: It ensures financial stability and it avoids wasteful expenditure.
Demerits: Process of economic growth is hindered and scope of understanding welfare activities is restricted.
(ii) Surplus Budget: when government estimated receipts are more than government estimated expenditure in the budget, the budgets is called a surplus.
A surplus budget shows that government is taking away more money than what it is pumping in the economic system.
As a result arrogate demand tends to fall which helps in reducing price level.
(iii) Deficit Budget: When government expenditure exceeds government receipts in the budget, the budget is said to be deficit budget.
A deficit budget implies increase in government liability and fall in its reserves.
When an economy is in an under employment equilibrium due o deficient demand, a deficit budget is a good remedy to combat recession.
Revenue deficit
It refers to the excess of total revenue expenditure of the government over its total revenue receipts.
Revenue deficit = Revenue expenditures – Revenue receipts
Implication
It signifies that the government’s current expenses are greater than current income.
The bulk of these expenses is interest payment, wages for government employee and defense Personnel.
2. Government makes up this deficit from capital receipts i.e. through borrowings or disinvestment. It means, revenue deficit either leads to an increase in liability (in the form of borrowings) or reduces the assets (through disinvestment).
3. Use of capital receipts for meeting the extra consumption expenditure leads to an inflationary situation in the economy. Higher borrowings increase the future burden in term of loan amount and interest payments.
Fiscal Deficit
It is defined as excess of total expenditure over total receipts excluding borrowing during a fiscal year.
Fiscal deficit = Total expenditure — Total budget receipts excluding borrowings. Fiscal deficit = borrowings Implication of Fiscal deficit
1. Debt Trap: Fiscal deficit indicates the total borrowing requirements of the government. Borrowings create problem of not only repayment of loans, but also of regular interest payments. Interest payments raise the revenue expenditure, which leads to revenue deficit. The government takes more loans to repay the earlier loans.
2. Inflation: The government mainly borrows from the RBI to meet its fiscal deficit. RBI prints new currency to meet the deficit requirements of the government. This increases the circulation of money in the economy and creates inflationary pressure on the economy.
3. Foreign dependence: Government also borrows from the rest of the world, which raises it dependence on other countries.
4. Hampers the future growth: Borrowing increases the financial burden for future generation.
It adversely affects the future growth and development prospects of the country.
Primary deficit Primary deficit is defined as fiscal deficit minus interest payments on previous borrowings.
Primary deficit = Fiscal deficit — Interest payments
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