Budget
Meaning of Budget: "Budget is an item-wise statement of the estimated income and estimated expenditure of the government in the coming financial year.
In simple terms, the budget is a statement of the anticipated expenditure under various heads and the proposed sources of raising resources for the expenditure. It has two parts:
1. Receipts
2. Expenses
The objective of the budget
1. Economic development
- To increase the economic development of the country so that the standard of living of the people can be improved.
- Only through economic development there is a continuous increase in the production capacity of goods and services in the economy.
- India is a welfare country which has to adopt budget policies that are favorable to the welfare of the common people.
2. To eliminate income inequality
- To reduce income inequality, the government can eliminate income and wealth inequality through progressive taxes and financial assistance.
- For example, the disposable income of the rich can be reduced by imposing higher taxes on their income and the goods consumed by them.
- Income inequality can be reduced by giving financial help to the poor, providing free education and health services and providing ration at cheap rates.
3. Redistribution of income
- Redistribution of income means that wealth should not be concentrated among rich people and the real income of poor people should increase.
- For this, measures like taxes, financial aid and public expenditure can be used.
- Redistribution of income is very important to increase social welfare.
4. Fair distribution of resources
- Allocating the country's resources to ensure balanced social and economic development of different sectors as per priorities is an important objective of the budget.
- To influence investment, tax policy and financial assistance policy can be adopted by the government.
- The government can balance the development of different sectors by giving more funds to the productive sectors and withdrawing from other sectors.
5. Economic stability
- The government can control the situation of recession and boom by controlling the general price level, thereby bringing economic stability.
- For this, taxes, financial aid and public expenditure can be used.
6. Management and Financing of Public Enterprises
- The budget needs of the country can be well met by efficiently managing and financing the public enterprises like Railways, Bharat Petroleum, Power Companies, Food Corporation of India etc.
Components of the Government Budget
budget receipts of the government
- The government's budget receipts are of two types.
1. Revenue Receipts: These are the government receipts from which the government
I. Liabilities do not arise.
II. Assets do not decrease.
2. Capital Receipts: These are those Government Receipts which help the Government to
I. Liabilities arise.
II. Assets decrease.
budget (government) receipts
I. Revenue Receipts
1. Tax Revenue: Tax revenue is the sum of all the taxes and duties imposed by the government. Tax is a legally mandatory payment imposed by the government on the income and profits of individuals and companies without any government service in return. It is of two types
I. Direct tax:- When the liability to pay tax and the burden of tax fall on the same person, then that tax is called direct tax. Such as- income tax, corporate tax, expenditure tax, wealth tax, gift tax
II. Indirect Tax: - Indirect tax is that whose initial burden or effect falls on one person, but that burden is transferred to another person. Like - GST, sales tax, customs duty, excise duty, service tax, value addition
2. Non-tax revenue: - This is also an important source of income (revenue) of the government which is generated from the administrative work of the government. It includes the income received from the goods sold by government enterprises and the services provided by government departments. Such as -
1. Interest Receipts:- The Central Government receives huge amount of interest on the loans given to the State Governments, Union Territories, Local Government, Private Enterprises and the people.
2. Profit and dividend:- The government has established public enterprises which produce goods and services and earn profit from their sale. For example, nationalized banks, Industrial Finance Corporation of India, Indian Insurance Corporation (LIC), etc. The government also receives dividends from these.
3. Acquisition or Autonomy:- Which is obtained from the property left by the people without any legal heir. There is no claimant for such property. The government acquires it
4. Special assessment:- When the government constructs roads, drains and parks or provides sewerage system in a particular area, then it collects a part of the expenditure incurred on improvements from the house owners by making a special assessment of the benefit to their property. This is called special assessment which becomes a source of income for the government.
5. Foreign aid grants: The government receives financial assistance from foreign governments and international organizations (such as WHO, UNESCO, etc.) in the form of grants, gifts and contributions. This is also a source of non-tax revenue.
6. Fees and fines:- The government gets income from various administrative works. Such as - fees for studying in school, fees for making a card in the hospital, fees for registering land, fees for making a passport, court fees, fees for getting a license to drive a scooter or a car, etc. Similarly, the government also gets income in the form of fines from those who break the law.
II. Capital Receipts
- Those receipts of the government which create liabilities or which reduce assets are called capital receipts. Capital receipts of the government
1. Internal and foreign debt: To meet its expenditure, the government borrows from the open market, the Reserve Bank of India, foreign governments and international institutions (such as the World Bank). This amount of borrowing is capital receipt, because the government's liability is involved in it.
2. Recovery of Loans and Advances: Recovery of loans given in the past by the Central Government to the State Governments and Union Territories, Public Sector Enterprises and Foreign Governments is a part of capital receipts.
3. Disinvestment: The government obtains capital by selling shares of some selected public sector enterprises either fully or partially. This is also called disinvestment or privatization, because through this the ownership of government enterprises is transferred to the private sector.
4. Small Savings: It includes small savings such as deposits in post office savings accounts, deposits in General Provident Fund (GPF), deposits in National Savings Scheme (NSS), deposits in the form of Kisan Vikas Patras.
budget expenditure of the government
Budget (government) expenditure
1. Revenue Expenditure
- Revenue Expenditure The expenditure which neither creates assets nor decreases liabilities is considered as revenue expenditure.
- The revenue expenditure which is incurred on the general functions of the government departments, various services, interest payments and financial assistance etc.
- Revenue expenditure does not create any assets
- Revenue expenditure is met from the account of revenue receipts (income from tax revenue and non-tax revenue).
Examples of revenue expenditure are –
1. Salary of government employees
2. Interest income on loan taken
3. Pension, financial aid, grants
4. Rural development, education and health
5. Defence Services
2. Capital expenditure
Expenditure which results in creation of assets or reduction of liabilities is considered capital expenditure. Capital expenditure is made from the account of capital receipts of the government (which also includes capital transfers from the rest of the world).
1. Expenditure on acquisition of capital assets like land, buildings, machinery, equipment etc.
2. Expenditure on purchase of shares When the government purchases shares of a domestic or multinational corporation, the government's assets increase.
3. Loans given to state and union territory governments and government companies are included.
budget deficit
Budgetary deficit means that the total expenditure of the government (revenue expenditure + capital expenditure) is more than the total receipts (revenue receipts + capital receipts). In other words, when the sum of the current revenue receipts and net capital receipts of the government is less than the total expenditure, it is called budgetary deficit (or total budget deficit).
Budget deficit: total expenditure - total receipts
Measures of Budgetary Deficit
1. Revenue deficit
2. Fiscal deficit
3. Primary deficit
1. Revenue deficit
Revenue deficit means that the government's revenue expenditure is more than its revenue receipts (tax revenue + non-tax revenue). When the government spends more than the revenue received, it has to bear a revenue deficit.
Revenue deficit = Total revenue deficit – Total revenue receipts
Effect :-
1. Revenue deficit reflects the savings of the government, as this deficit is met by the government by borrowing from its capital receipts or by selling its assets.
2. Since the government finances its excess consumption expenditure mainly by borrowing from the capital account, there is a danger of an inflationary situation (continuous rise in prices) arising.
3. The loan taken to meet the revenue deficit further increases the debt burden, because the loan amount and the interest on it have to be repaid, which further increases the revenue deficit in future.
2. Fiscal deficit
Fiscal deficit means the total expenditure of the government (revenue expenditure + capital expenditure) exceeds the total receipts without borrowing (revenue receipts + capital receipts without borrowing).
Fiscal deficit = Total expenditure – Total receipts without borrowing
= Total Expenditure - Revenue Receipts - Non-borrowing Capital Receipts
Note :- Fiscal deficit is actually equal to borrowing.
Effect :
1. Inflationary situation: - (Continuous rise in prices) There is a possibility of it arising, because to meet the deficit, the government takes loan from RBI for which RBI prints new notes. As a result, due to increase in the quantity of money in the economy, a situation of increase in prices arises.
2. Dependence on foreign countries:- Due to taking loan from foreign countries, the economic and political interference of countries in India increases.
3. Debt Trap - Fiscal deficit is met by borrowing. This increases the amount of debt taken by the government, the liabilities to repay the debt in future also increase with increasing interest, which ultimately takes the form of a debt vicious circle or trap.
4. Vicious circle of high fiscal deficit and low GDP growth: Persistently high fiscal deficit leads to a situation where –
i. GDP growth remains low due to high fiscal deficit
i i. Fiscal deficit remains high due to low GDP growth.
5. Decrease in Government Credibility:- High fiscal deficit (rising national debt) reduces the credibility of the government in the domestic and international currency market. The 'credit rating' of the government (and the economy) decreases. Due to low credit rating, global investors start withdrawing their investments from the domestic economy. As a result, GDP growth decreases.
3. Primary deficit
This fiscal deficit is the difference between the government and the interest to be paid. Hence, it is estimated by subtracting interest payments from the fiscal deficit.
Primary deficit = Fiscal deficit – Interest payments
Importance
- The difference between the two is clear. While fiscal deficit shows the government's borrowing requirement including interest, primary deficit shows the government's borrowing requirement without interest.
Balanced budget and unbalanced budget
1. Balanced budget
The government budget in which the estimated receipts (revenue and capital) of the government are shown equal to the estimated expenditure of the government is called a balanced budget.
Balanced Budget: Estimated Receipts = Estimated Expenditures
The main features of a balanced budget are -
- It ensures financial stability
- This saves from unnecessary expenditure.
The drawbacks of balanced budget are-
- The process of economic development gets blocked
- The scope of welfare measures becomes limited.
2. Unbalanced budget
- An unbalanced budget is a budget in which the receipts and expenditure of the government are not equal. This can be any of the following situations
1. Savings budget.
2. Deficit budget.
1. Savings budget:
When the government's receipts are shown more than the government's expenditure in the budget, then that budget is called a savings budget. The government's revenue is more than the government's expenditure.
Savings Budget : Estimated Government Receipts > Estimated Government Expenditure
Merits of Savings Budget
1. Savings in the government budget increases the financial stability of the country.
2. Part of the savings in the budget can be invested in future development projects like infrastructure, education, health, and other important sectors
3. Inflation can be controlled by controlling unnecessary expenditure through government savings budget.
Disadvantages of Savings Budget
1. Government saving budget may lead to reduction in government expenditure, which may slow down the pace of economic growth.
2. If important projects are cut, public discontent may spread.
3. Confidence in the government may decrease.
2. Deficit Budget :
When the government expenditure is shown more than the government receipts in the budget, then that budget is called a deficit budget. In a deficit budget, the government expenditure is more than the income of the government.
Budget Deficit: Estimated Government Receipts < Estimated Government Expenditure
A deficit budget has special benefits for a developing economy.
1. It increases the pace of economic growth
2. It is helpful in implementing welfare programmes for the people.
A deficit budget also has special disadvantages for a developing economy.
1. It increases unnecessary and wasteful expenditure of the government
2. There is a fear that this may create financial and political instability.
In a boom (continuously rising prices) a savings budget should be adopted and in a recession (fall in prices and employment) a deficit budget should be adopted.
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