Government Budget

Meaning

government budget is a declaration of the government's

expected receipts and expenditures for a fiscal year.
The two major components of the budget are Revenue
Budget and Capital Budget. In India, the government
delivers its budget to the Lok Sabha at the start of
each year, outlining expected receipts and expenses for
the coming fiscal year. The fiscal year begins on April
1st and ends on March 31st of the following year.
On the last working day of February ( Now 1st feb) by the
Finance Minister of India in Parliament.
 Capital Budget

• The Capital Budget covers non-recurring transactions through capital

expenditures and incomes through the sale of assets.

• These refer to receipts that reduce assets for a government and

increase financial liabilities.

• Government capital expenditure, on the other hand, aids in the creation

of assets and the reduction of liabilities.

• As a result, the capital budget is an account of the government's

liabilities and assets, which represent a change in total capital.
• Examples: Market borrowings by the government
from the public, Borrowings from the RBI,
Borrowings from commercial banks or financial
institutions through the sale of T-BILLS, loans
received from foreign governments or international
financial institutions, post office savings, post office
saving certificates, and PSU’s Disinvestment.
 Revenue Budget

• A revenue budget is a statement of the government's anticipated

revenue receipts and expenditures for a fiscal year.

• This budget relates to revenue receipts and expenses incurred as a

result of these receipts. The revenue received by a government
includes both tax and non-tax revenue.

• Examples of revenue budget items: Salaries of employees, Interest

payments on past debts, grants given to state governments, etc.
 Revenue Receipts
These are the incomes which are received by the government from all sources
in its ordinary course of governance. These receipts do not create a liability or
lead to a reduction in assets.

Revenue receipts are further classified as tax revenue and non-tax revenue.
Revenue Expenditure

Revenue expenditure is the expenditure incurred for the

routine, usual and normal day to day running of
government departments and provision of various services
to citizens. It includes both development and non-
development expenditure of the Central government.
Usually expenditures that do not result in the creations of
assets are considered revenue expenditure.
 Expenses included in Revenue Expenditure :-
In general revenue expenditure includes following :-

Expenditure by the government on consumption of goods and services.

Expenditure on agricultural and industrial development, scientific research,
education, health and social services.
Expenditure on defence and civil administration.
Expenditure on exports and external affairs.
Grants given to State governments even if some of them may be used for
creation of assets.
Payment of interest on loans taken in the previous year.
Expenditure on subsidies.
Capital Receipts

Receipts which create a liability or result in a

reduction in assets are called capital receipts.
 Items included in Capital Receipts
The main items of Capital receipts (income) are :-

Loans raised by the government from the public through the sale of bonds
and securities. They are called market loans.
Borrowings by government from RBI and other financial institutions through
the sale of Treasury bills.
Loans and aids received from foreign countries and other international
Organisations like International Monetary Fund (IMF), World Bank, etc.
Receipts from small saving schemes like the National saving scheme,
Provident fund, etc.
Recoveries of loans granted to state and union territory governments and
other parties
Disinvestment
Capital Expenditure

Any projected expenditure which is incurred for

creating asset with a long life is capital
expenditure.
Examples

expenditure on land,
machines, equipment,
irrigation projects,
oil exploration and
expenditure by way of investment
in long term physical or financial
assets are capital expenditure.
Plan Expenditure

:
Any expenditure that is incurred on
programmes which are detailed under the
Five Year Plan or Niti Ayog plans of the
centre or centre’s advances to state for
their plans is called plan expenditure.
Provision of such expenditure in the budget
is called Plan Expenditure.
Example
expenditure on electricity generation,
(ii) irrigation and rural developments,
(iii) construction of roads, bridges, canals and
(iv) science, technology, environment, etc.
( V) assistance given by the Central Government for the
plans of States and Union Territories (UTs)

It includes both revenue expenditure and capital

expenditure. Again, the is also a part of plan expenditure.
Non-Plan Expenditure:
This refers to the estimated expenditure provided in the budget for
spending during the year on routine functioning of the government.
Non- Plan expenditure is all expenditure other than plan expenditur
of the govt. Such expenditure is a must for every country, planning
or no planning.

.
Example

• protecting the lives and properties of the

people
• and protecting the country from foreign
invasions.
• on police, Judiciary, military, etc.
• running of government departments
• providing economic and social services
Objectives of Government Budget

Reallocation of resources – It helps to distribute resources,

keeping in view the social and economic advantages of the country.
The factors that influence the allocation of resources are:

Allowance or Tax concessions – The government gives allowance

and tax concessions to manufacturers to encourage investment.

Direct production of goods and services – The government can

take the production process directly if the private sector does not
show interest.
Minimise inequalities in income and wealth – In
an economic system, income and wealth inequality is an
integral part. So, the government aims to bring equality by
imposing a tax on the elite class and spending extra on the
well-being of the poor.

Economic stability – The budget is also utilised to avoid

business fluctuations to accomplish the aim of financial
stability. Policies such as deficit budget during deflation and
excess budget during inflation assist in balancing the prices
in the economy.
Manage public enterprises – Many public sector
industries are built for the social welfare of people. The
budget is planned to deliver different provisions for
operating such business and imparting financial help.

Economic growth – A country’s economic growth is

based on the rate of investments and savings. Therefore,
the budgetary plan focuses on preparing adequate
resources for investing in the public sector and raising the
overall rate of investments and savings.
Decrease regional differences – It
aims to diminish regional inequalities
by implementing taxation and
expenditure policy and promoting the
installation of production units in
underdeveloped regions.
types of Budget
Balanced budget – A government budget is assumed to be
balanced if the expected expenditure is similar to the
anticipated receipts for a fiscal year.

Surplus budget – A budget is said to be surplus when the

expected revenues surpass the estimated expenditure for
a particular business year. Here, the budget becomes
surplus when taxes imposed are higher than the expense.

Deficit budget- A budget is on deficit if the expenditure

surpasses the revenue for a designated year
Zero-Based Budget“
Zero-based budgeting” is an approach to planning
and preparing the budget from the beginning. As the
name suggests, it refers to planning and preparing
the budget from scratch or ‘zero bases’.
Outcome Based Budget
Outcome-Based Budget is a process of budgeting done at
micro levels that sets measurable physical targets to be
allocated on every planned project under various ministries.
The outcome budget becomes a means to establish a linkage
between the fund spent by a government and the outcome that
follows.
It works as the progress card on what various Ministries and
departments have done within a particular year.It measures
quantitative and qualitative aspects of the budget.It makes the
budget more accountable and transparent
Gender Budget
Gender Budget is not an accounting practice but rather a
continuous process of keeping a gender perspective in
policy formulation, implementation, and review. It entails
dividing the government budgets to establish its gender-
differential impacts and ensuring that gender commitments
are translated into budgetary commitments. It is an
effective method for achieving gender equity to ensure that
development benefits reach women as much as men.
 Fiscal Policy

● Fiscal policy refers to use of governments

spending and taxation to stabilize the
economy. So how much income it has
coming in through taxes, and how much it
has going out through spending such as
welfare, defense, and education.
Objectives
To promote economic growth

● setting up basic and heavy industries like steel, chemical, fertilizers, machine
tools, etc builds infrastructure like roads, canals, railways, airports, education
and health services, water and electricity supply, telecommunications, etc.
● Government promotes economic growth by setting up basic and heavy
industries like steel, chemical, fertilizers, machine tools, etc. It also builds
infrastructure like roads, canals, railways, airports, education and health
services, water and electricity supply, telecommunications, etc. that foster
economic growth. Both basic and heavy industries and infrastructure require
huge amount of investment which normally the private sector does not take
up. Since these industries and infrastructure facilities are essential for
economic growth in the country, the burden to set up and develop them falls
on the government.
To reduce income and wealth inequalities:

● Government reduces inequalities in income and wealth by taxing the rich

more and spending more on the poor. Further, it provides for the employment
opportunities to poor that help them to earn.
To provide employment opportunities:

● Employment opportunities are increased by the government in various ways,

One, jobs are created when it sets up public sector enterprises. Two, it
provides subsidies and other incentives like tax holidays, low rates of taxes
etc. to private sector that encourage production and employment. It also
encourages setting up of small scale, cottage and village industries by people
which are employment oriented. This it does by providing them tax
concessions, subsidies, grants, loans at low rates of interest, etc. Finally, it
creates jobs for poor when it undertakes public works programmes like
construction of roads, bridges, canals, buildings, etc.
To ensure stability in prices:

● Government ensures stability of prices of essential goods and services by

regulating their supplies. Hence, it incurs expenditure on ration and fair price
shops that keep sufficient stock of food grains. If also subsidizes cooking gas,
electricity, water and essential services like transport and maintains their
prices at low level affordable to the common man.
To correct balance of payments deficit:
● The balance of payments account of a country records its receipts and
payment with foreign countries. When payments to foreigners are more than
receipts from foreigners, the balance of payments account is said to be in
deficit. Quite often this deficit is caused when a country imports more than it
exports. Consequently, the payments on imports to foreigners are more than
the receipts from exports. In such a situation, to reduce the deficit in balance
of payment account, the government discourages imports by increasing taxes
on them and encourages exports by increasing subsidies and other export
incentives. However, it should be noted that tax on import is not a popular
measure now as it is treated as an obstacle to free flow of goods and services
between countries.
To provide for effective administration:

● Government incurs expenditures on police, defence, legislatures, judiciary,

etc. to provide effective administration
components of the Fiscal Policy

● There are following components of the Fiscal Policy of India:

● Government Receipts
● Government Expenditure
● Public Debt
● Fiscal Consolidation
Government Receipts
● The categorisation of the government receipts is given below:
● Revenue Receipt
○ Tax Revenue
■ Direct Tax
■ Indirect Tax
○ Non Tax Revenue
■ Fees
■ License and Permits
■ Fines and Penalties, etc
● Capital Receipt
○ Loans Recovery
○ Disinvestments
○ Borrowing and other liabilities
● Debt Trap – Situation where the borrower has to borrow again for the payment of
an instalment on the previous debt. A borrower unable to meet debt service
obligations without borrowing is known to be in a debt trap.
● Disinvestment
When the government sells or liquidates its assets of Central Public Sector
Enterprises, State Public Sector Enterprises or other assets; it is referring to
disinvestment. This approach caters to the objective of fiscal burden reduction.
Government Expenditure

● There are two classifications of public expenditure:

● Revenue Expenditure – It is a recurring expenditure:
○ Interest Payments
○ Defence Expenses
○ Salaries to Central Government employees, etc are examples of revenue expenditure
● Capital Expenditure – It is a non-recurring expenditure
○ Loans repayments
○ Loans to public enterprises, etc.
Fiscal Consolidation

● The measures that are taken to improve the fiscal deficit comes under the
process of fiscal consolidation. Through fiscal consolidation, the government
tries for:
● Improvement in revenue receipts
● Better alignment in the public expenditure
Role of Fiscal policy in economic development of the
country
To Mobilize Resources

● Generally, the national income and per capita income is very low due to low
rate of savings.
● progressive taxation, heavy duty on luxury imports, ban on the manufacture of
luxury and semi-luxury goods are other measures which help to mobilize the
resources, Therefore, progressive taxation on windfall gains, on unearned
incomes on capital gains, on expenditure and real estates etc. can go a long
way in equitable distribution of wealth.
To Accelerate the Rate of Growth
● Fiscal policy helps to accelerate the rate of economic growth by raising the
rate of investment in public as well as private sectors
● Government promotes economic growth by setting up basic and heavy
industries like steel, chemical, fertilizers, machine tools, etc. It also builds
infrastructure like roads, canals, railways, airports, education and health
services, water and electricity supply, telecommunications, etc. that foster
economic growth. Both basic and heavy industries and infrastructure require
huge amount of investment which normally the private sector does not take
up. Since these industries and infrastructure facilities are essential for
economic growth in the country, the burden to set up and develop them falls
on the government.
Inducement to Investment and Capital Formation:
Fiscal policy plays crucial role in underdeveloped countries
by making investment in strategic industries and services
of public utility on one side and induces investment in
private sector by giving assistance to new industries and
introduces modern techniques of production. Thus,
investment on social and economic overheads are helpful
in increasing the social marginal productivity and thereby
raising the marginal productivity of private investment and
capital formation. Here, optimum pattern of investment can
also go a long way to yield fruitful results of economic
development.
To Provide more Employment Opportunities

● Since in less developed countries, population grows at a very fast rate, the
aim of fiscal policy in such countries is to make high doses of expenditures
which are helpful to raise employment opportunities. Generally under
developed economies suffer from unemployment.
Promotion of Economic Stability:

● Still another role played by the fiscal policy in developing countries is of

maintaining reasonable internal and external economic stability. Generally, a
developing country is prone to the efforts of international cyclical fluctuations.
Such countries mainly export primary products and import manufactured and
capital goods. However, in order to minimize the effects of international
cyclical fluctuations, fiscal policy should be viewed from a longer perspective.
● It must aim at the diversification of all sectors of the economy. For bringing
balanced growth and reducing the effects of cyclical fluctuations, a contra-
cyclical fiscal policy of deficit budgeting in depression and surplus budgeting
in inflation are most suitable measures.
To Check Inflationary Tendencies

● Inflationary tendencies is one of the main problems of developing countries as

these countries make heavy doses of investment for their development
activities. Thus, there is always an imbalance between the demand for and
the supply of real resources.
● With additional injection of purchasing power, the demand rises and supply
remains inelastic on account of its structural rigidities, market imperfections
and other bottlenecks which in turn lead to inflationary pressures on the
economy. Aggregate demand as a result of rise in the income of the people
exceeds the aggregate supply. Capital goods and consumption goods fail to
keep pace with the rising income
National Income and Proper Distribution:
● The importance of increasing national income and removing inequalities of income
and wealth can hardly be exaggerated. According to Prof… Raja J. Chelliah, a
mere increase in per capita income does not necessarily lead to an increase in
the welfare of all sections of the people, unless an equitable distribution is usually
taken to mean a reduction in the existing inequalities of income and wealth.
● The existence of extreme inequalities in income and wealth create social
cleavages, lead to economic and political instability and the biggest hindrance in
the way of economic development of an economy. As a result, few rich roll in
wealth and misuse their income on conspicuous consumption and inventories,
real estate, gold and speculation, while poor masses grow under poverty and
misery.
● Subsidies in Consumption and Production:
● Fiscal instruments are also used in under developed economies to provide
subsidized food and production inputs to the poor people. Government
programmes like public distribution system, price support policy, procurement
of food grains, marketing facilities to the producers, input supply schemes,
etc. are all directed to help the poorer sections to enable them to be more
productive so that the income level is raised. For example, in India, many of
poverty alleviation programmes like IRDP, NREP, RLEGP etc. have been
directed to improve the position of the poorer sections and to create
permanent community assets in order that the national and per capita income
can grow with the passage of time.
● Reallocation of Resources:
● Allocation of resources are not proper in the underdeveloped countries. Much
of the resources in private sector are directed to the production of those
goods which meet the need of richer sections of society and yield higher
profit. It is very important that the fiscal tools are employed in such a way as
to divert resources from less useful production to more useful channels. This
can be done by various tax incentive measures and government subsidy
programmes.
● Incentive to Production:
● Increase in production and productivity can be influenced by fiscal policy to a
greater extent. Through grant of tax holiday or tax concessions relating to
output produced from desirable lines of production, the industrial activity can
be enhanced. On the other hand, discriminatory fiscal policy against the
output on undesirable lines of business activity will help more essential
commodities to grow because the resources will be released for their use in
such production.
● Balanced Growth:
● Most of the underdeveloped countries suffer acutely from regional imbalance
in the matter of economic development. Private sector in these countries
normally concentrates its production on those luxury goods which are
consumed mostly by richer sections who live in the urban areas. Hence,
backward areas will not be developed unless government interferes into the
decision making relating to industrial location. By providing fiscal incentives to
the private sector and by setting up industries in the public sector in these
geographical areas, the government can achieve balanced development of
the country.
Reduction of Inequality
● Since inequality of income and wealth is vast in the underdeveloped countries,
fiscal policy has an important role to play in reducing inequality. Taxation of
income and property at progressive rates, imposition of heavy taxes on goods
consumed by the rich and exemption from tax or tax concession granted to
commodities of mass consumption, government expenditure on relief
programmes, supply of inputs for small industries and agricultural farms, provision
of essential commodities to the poor at subsidized prices, etc. are the fiscal
measures directed to the reduction of the gap between poverty and prosperity.
Hence, the role of fiscal policy becomes significant to frame such policy to remove
these inequalities of income and direct these misused resources into productive
channels for economic development.
Deficit Finance

● Deficit financing is nothing but financing the budget deficit incurred due to excess
government expenditures.
Objectives

1. Economic Stimulus
2. Infrastructure Development
3. Unemployment Reduction
4. Social Welfare Programs
5. Investment in Human Capital
6. Debt Management
● Economic Stimulus: Deficit financing can be used to stimulate economic activity during
periods of sluggish growth or recession. By increasing government spending or reducing
taxes, the government injects money into the economy, which can lead to increased
consumer spending, business investment, and job creation.
● Infrastructure Development: Deficit financing can fund large-scale infrastructure projects such
as roads, bridges, railways, and airports. These investments not only create immediate jobs
in construction and related industries but also enhance long-term economic productivity and
competitiveness by improving transportation, communication, and energy networks.
● Unemployment Reduction: By funding job creation programs or providing unemployment
benefits during economic downturns, deficit financing can help alleviate unemployment. This
can prevent long-term economic damage by maintaining consumer spending levels and
preserving worker skills and morale.
● Social Welfare Programs: Deficit financing can support social welfare programs
such as healthcare, education, housing, and food assistance. These programs
help reduce poverty, improve social mobility, and enhance overall societal well-
being by ensuring access to essential services for vulnerable populations.
● Investment in Human Capital: Deficit financing can be used to invest in education,
training, and workforce development programs. By improving the skills and
capabilities of the workforce, governments can enhance productivity, innovation,
and economic growth over the long term.
● Debt Management: While deficit financing involves borrowing money, effective
debt management strategies can mitigate its negative effects. Governments can
use a combination of measures such as prudent borrowing practices, debt
restructuring, and fiscal discipline to ensure that debt levels remain sustainable
and do not undermine macroeconomic stability or future generations' well-being.