What is a Budget ?

Meaning and Concept

Government has several policies to implement in the overall task of performing its functions to meet the objectives of social & economic growth. For implementing these policies, it has to spend huge amount of funds on defence, administration, and development, welfare projects & various other relief operations. It is therefore necessary to find out all possible sources of getting funds so that sufficient revenue can be generated to meet the mounting expenditure. Planning process of assessing revenue & expenditure is termed as Budget. The term budget is derived from the French word "Budgette" which means a "leather bag" or a "wallet". It is a statement of the financial plan of the government. It shows the income & expenditure of the government during a financial year, which runs generally from 1stApril to 31st March. Budget is most important information document of the government. One part of the government's budget is similar to company's annual report. This part presents the overall picture of the financial performance of the government. The second part of the budget presents government's financial plans for the period upto its next budget. So, every citizen of a nation from the common man to the politician is eager to know about the budget as they would like to get an idea of the :Financial performance of the government over the past one year. To know about the financial programmes & policies of the government for the next one year. To know how their standard of living will be affected by the financial policies of the government in the next one year. Definitions of Budget

According to Tayler, "Budget is a financial plan of government for a definite period". According to Rene Stourm, "A budget is a document containing a preliminary approved plan of public revenues and expenditure". Components of Government Budget

The main components or parts of government budget are explained below.

1. Revenue Budget

This financial statement includes the revenue receipts of the government i.e. revenue collected by way of taxes & other receipts. It also contains the items of expenditure met from such revenue.

(a) 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.

i. Tax Revenue :Tax revenue consists of the income received from different taxes and other duties levied by the government. It is a major source of public revenue. Every citizen, by law is bound to pay them and non-payment is punishable. Taxes are of two types, viz., Direct Taxes and Indirect Taxes. Direct taxes are those taxes which have to be paid by the person on whom they are levied. Its burden can not be shifted to some one else. E.g. Income tax, property tax, corporation tax, estate duty, etc. are direct taxes. There is no direct benefit to the tax payer.

Indirect taxes are those taxes which are levied on commodities and services and affect the income of a person through their consumption expenditure. Here the burden can be shifted to some other person. E.g. Custom duties, sales tax, services tax, excise duties, etc. are indirect taxes.

ii. Non-Tax Revenue :Apart from taxes, governments also receive revenue from other non-tax sources. The non-tax sources of public revenue are as follows :1. Fees : The government provides variety of services for which fees have to be paid. E.g. fees paid for registration of property, births, deaths, etc. 2. Fines and penalties : Fines and penalties are imposed by the government for not following (violating) the rules and regulations. 3. Profits from public sector enterprises : Many enterprises are owned and managed by the government. The profits receives from them is an important source of non-tax revenue. For example in India, the Indian Railways, Oil and Natural Gas Commission, Air India, Indian Airlines, etc. are owned by the Government of India. The profit generated by them is a source of revenue to the government. 4. Gifts and grants : Gifts and grants are received by the government when there are natural calamities like earthquake, floods, famines, etc. Citizens of the country, foreign governments and international organisations like the UNICEF, UNESCO, etc. donate during times of natural calamities. 5. Special assessment duty : It is a type of levy imposed by the government on the people for getting some special benefit. For example, in a particular locality, if roads are improved, property prices will rise. The Property owners in that locality will benefit due to the appreciation in the value of property. Therefore the government imposes a levy on them which is known as special assessment duties. iii. India's Revenue Receipts :The tax revenue provides major share of revenue receipts to the central government of India. In 2006-07 tax revenue (direct + indirect taxes) of central government was Rs. 3,27,205 crores while non-tax revenue was Rs. 76,260 crores.

(b) Revenue Expenditure

i. What is 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 nondevelopment expenditure of the Central government. Usually expenditures that do not result in the creations of assets are considered revenue expenditure.

ii. Expenses included in Revenue Expenditure :In general revenue expenditure includes following :1. Expenditure by the government on consumption of goods and services. 2. Expenditure on agricultural and industrial development, scientific research, education, health and social services. 3. Expenditure on defence and civil administration. 4. Expenditure on exports and external affairs. 5. Grants given to State governments even if some of them may be used for creation of assets. 6. Payment of interest on loans taken in the previous year. 7. Expenditure on subsidies. iii. India's Defence Expenditure :In 2006-07, Defence expenditure of the central government of India was Rs. 51,542 crores.

2. Capital Budget

This part of the budget includes receipts & expenditure on capital account projected for the next financial year. Capital budget consists of capital receipts & Capital expenditure.

(a) Capital Receipts

i. What are Capital Receipts ? Receipts which create a liability or result in a reduction in assets are called capital receipts. They are obtained by the government by raising funds through borrowings, recovery of loans and disposing of assets.

ii. Items included in Capital Receipts :The main items of Capital receipts (income) are :1. Loans raised by the government from the public through the sale of bonds and securities. They are called market loans. 2. Borrowings by government from RBI and other financial institutions through the sale of Treasury bills. 3. Loans and aids received from foreign countries and other international Organisations like International Monetary Fund (IMF), World Bank, etc. 4. Receipts from small saving schemes like the National saving scheme, Provident fund, etc. 5. Recoveries of loans granted to state and union territory governments and other parties. (b) Capital Expenditure

i. What is Capital Expenditure ? :Any projected expenditure which is incurred for creating asset with a long life is capital expenditure. Thus, 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.

Conclusion On Budget

Thus, we see that the budget mirrors projected receipts and expenditures. Different Types of Government Budget - Diagram A. Balanced Budget

Balanced budget is a situation, in which estimated revenue of the government during the year is equal to its anticipated expenditure. Government's estimated Revenue = Government's proposed Expenditure. For individuals and families, it is always advisable to have a balanced budget.

Most of the classical economists advocated balanced budget, which was based on the policy of 'Live within means'. According to them, government's revenue should not fall short of expenditure. They also favoured balanced budget because they believed that government should not interfere in economic activities and should just concentrate on the maintenance of internal and external security and provision of basic economic and social overheads. To achieve this, government has to have enough fiscal discipline so that its expenditures are equal to revenue. Unbalanced Budget

The budget in which income & expenditure are not equal to each other is known as Unbalanced Budget. Unbalanced budget is of two types :Surplus Budget Deficit Budget 1. Surplus Budget

The budget is a surplus budget when the estimated revenues of the year are greater than anticipated expenditures. Government expected revenue > Government proposed Expenditure. Surplus budget shows the financial soundness of the government. When there is too much inflation, the government can adopt the policy of surplus budget as it will reduce aggregate demand. Increase in revenue by levying taxes on people reduces their disposable incomes, which otherwise could have been spend on consumption or saved and devoted to capital formation. Since government spending will be less than its income, aggregate demand will decrease and help to reduce the price level. However, in modern times, when governments have so many social economic & political responsibilities it is virtually impossible to have a surplus budget.

2. Deficit Budget

Deficit budget is one where the estimated government expenditure is more than expected revenue. Government's estimated Revenue < Government's proposed Expenditure. According to Prof. Hugh Dalton, "If over a period of time expenditure exceeds revenue, the budget is said to be unbalanced".

Such deficit amount is generally covered through public borrowings or withdrawing resources from the accumulated reserve surplus. In a way a deficit budget is a liability of the government as it creates a burden of debt or it reduces the stock of reserves of the government. In developing countries like India, where huge resources are needed for the purpose of economic growth & development it is not possible to raise such resources through taxation, deficit budgeting is the only option. In Underdeveloped countries deficit budget is used for financing planned development & in advanced countries it is used as stability tool to control business & economic fluctuations. What is a Budget Deficit ? Meaning

When the government expenditure exceeds revenues, the government is having a budget deficit. Thus the budget deficit is the excess of government expenditures over government receipts (income). When the government is running a deficit, it is spending more than it's receipts. Types of Budgetary Deficit

The different types of budgetary deficit are explained in following points :-

1. Revenue Deficit

Revenue Deficit takes place when the revenue expenditure is more than revenue receipts. The revenue receipts come from direct & indirect taxes and also by way of non-tax revenue. The revenue expenditure takes place on account of administrative expenses, interest payment, defence expenditure & subsidies. 2. Budgetary Deficit

Budgetary Deficit is the difference between all receipts and expenditure of the government, both revenue and capital. This difference is met by the net addition of the treasury bills issued by the RBI and drawing down of cash balances kept with the RBI. The budgetary deficit was called deficit financing by the government of India. This deficit adds to money supply in the economy and, therefore, it can be a major cause of inflationary rise in prices 3. Fiscal Deficit

Fiscal Deficit is a difference between total expenditure (both revenue and capital) and revenue receipts plus certain non-debt capital receipts like recovery of loans, proceeds from disinvestment.

In other words, fiscal deficit is equal to budgetary deficit plus governments market borrowings and liabilities. This concept fully reflects the indebtedness of the government and throws light on the extent to which the government has gone beyond its means and the ways in which it has done so. Conclusion

All these budgetary deficit reveal fiscal imbalance. Fiscal imbalance & budget deficit result in harmful consequences like mounting inflation, deficit inbalance of payment, etc. It has also adversely affect the growth of the economy. The government must introduce fiscal correction policies to overcome the deficit budget and fiscal crisis. What is government Budget? Explain its objectives? Government Budget:A government budget is an annual statement of the estimated receipts and estimated expenditure of the government during a fiscal year. Objective of the Government Budget The objective that are pursued by the government through the budget areI. Reallocation of resources -:It means managed and proper distribution of resources. As private sector can not provide all the goods and services the government has to provide these goods. II. To reduce inequalities in income and wealth-: Through budget government tries to reduce the gap between Rich and poor. This is achieved through taxing the rich and subsidizing the needs of poor people. Taxing the income of rich people reduces their purchasing power and subsidies to poor people increases real income of poor people. III. To achieve economic stability -: There may be inflation or depression in the economy. Inflation is the situation of rise in price level whereas depression is lack of demand. Both the situations are undesirable. During depression government reduces rate of tax and borrowing and increases public expenditure. During inflation government increases the rate of tax and borrowing and decreases public expenditure. IV. Management of Public Enterprises V. To achieve economic growth What are Components of Government Budget? Components of Government Budget:1. Budget Receipts 2. Budget Expenditure Classification of Budget Receipts:1. Capital Receipts: - Capital Receipts refer to those receipts of the government which i) tend to create a liability or ii) Causes reduction in its assets. All the Capital receipts are broadly classified into three categories. 1) Recovery of loans :- These are Capital receipts because they reduce financial assets of the government

2) Borrowings: - Funds raised by the government form the borrowing are treated as capital receipts such receipts creates liability. 3) Other Receipts: - Funds raised through disinvestment are included in this category. By this government assets are reduced. 2. Revenue Receipts:Any receipts which do not either create a liability or lead to reduction in assets is called revenue receipts. Revenue receipts consist of 1) Tax Revenue and 2) Non-Tax Revenue. 1) Tax Revenue: - A tax is a legal compulsory payment imposed by the government on the people. All taxes are broadly classified into i) Direct Tax and ii) Indirect Tax. When the liability to pay a tax and the burden of that tax falls on the same person, the tax is called direct tax. e.g. Income tax, corporation tax, Gift tax etc. When the liability to pay a tax falls on one person and burden of that tax falls on some other person, the tax is called an Indirect tax. e.g. Sales tax, Custom duties, Service tax etc. 2) Non-Tax Revenue: - Non tax revenue consists of all revenue receipts other than taxes. For eg.:i) Interest ii) Profit and dividend iii) Fees and fines iv) External grant-in-aid Meaning of Budget Expenditure:Budget expenditure refers to the estimated expenditure to be incurred by the government under different heads in a year. Revenue Expenditure:An expenditure which do not creates assets or reduces liability is called Revenue Expenditure. Examples are Salaries of government employees, interest payment on loan taken by the government, pension, subsidies, grants etc. Capital Expenditure:It refers to the expenditure which leads to creation of assets and reduction in liabilities eg. Expenditure incurred on construction of building, roads, bridges etc. Balanced Budget:A Government budget is said to be a balanced in which government receipts are shown equal to government expenditure Surplus Budget:When government receipts are more than government expenditure in the budget, the budget is called a surplus budget.

Budget Deficit Deficit Budget:When government expenditure exceeds government receipts in the budget is said to be a deficit budget. Types:Revenue Deficit:Revenue deficit refers to the excess of revenue expenditure of the government over its revenue receipts. Revenue deficit = Total revenue expenditure Total revenue receipts. Importance: - Since it is largely related with the recurring expenditure. Therefore, high revenue deficit gives a warning to the government either to cut expenditure or to increase revenue receipts. It also implies requirement burden in future.

Fiscal Deficit:Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowings. Fiscal Deficit = Total budget expenditure - Total budget receipts net of borrowings. Importance: - Fiscal deficit is a measure of total borrowings required by the government. Greater fiscal deficit implies, greater borrowings by the government. This creates a large burden of interst payments in the future that leads to increase in revenue expenditure, causing an increase in revenue deficit. Thus a vicious circle sets in. In the present, a large fiscal deficit may also lead to inflationary pressures. Primary Deficit:Primary deficit is defined as fiscal deficit minus interest payment. It is equal to fiscal deficit reduced by interest payment. Primary deficit = Fiscal deficit interest payment. Importance: - Primary deficit signifies borrowing requirements of the government. A low or zero primary deficit means that while governments interest requirement on earlier loans hav e compelled the government to borrow but it is aware of the need to tighter its belt. Government Budget and the Economy Very Short Answer Question ( 1 Mark) Q1. Give the meaning of budget. Ans. A budget is an annual statement of the estimated receipts and Expenditure of the government over the fiscal year. Q2. Name the two components of budget. Ans. 1) Budget Receipts 2) Budget Expenditure. Q3. Why is borrowings considered as Capital receipt? Ans. It increases the liability of the government, so it is considered as Capital receipt. Q4. Define tax Ans. Tax is legal compulsory payment imposed by the government on the people.

Q5. Give two example of direct tax. Ans. 1) Income tax 2) Gift tax Q6. Give two example of indirect tax. Ans. 1) Sales tax 2) Custom duty Q7. Give two example of non-tax revenue. Ans. 1) dividend 2) Fees and fines Q8. When Budget is normally presented in the Parliament? Ans. On 28th February. Q9. Why is tax not a Capital receipt? Ans. Tax neither creates liability nor reduces assets, so it is not Considered as capital receipt. Q10. Give two example of revenue expenditure. Ans. 1) Payment of Salaries 2) Interest payment Q11. Give two example of Capital expenditure. Ans. 1) Loan to public 2) Acquiring land, building, machine and investment in shares etc. Q12. What is balanced budget? Ans. A Government budget is said to be a balanced in which government receipts are shown equal to government expenditure Q13. What is Surplus budget? Ans. When government receipts are more than government expenditure in the budget, the budget is called a surplus budget. Q14. What is deficit budget? Ans. When government expenditure exceeds government receipts in the budget is said to be a deficit budget. Q15. Give the formula to calculate revenue deficit. Ans. Revenue deficit = Total revenue expenditure Total revenue receipts. Q16. Give the formula to calculate fiscal deficit. Ans. Fiscal Deficit = Total budget expenditure = Total budget receipts net of borrowings. Q17. Give the formula to calculate primary deficit. Ans. Primary deficit = Fiscal deficit interest payment. Q18. Define Capital receipts. Ans. Capital Receipts refer to those receipts of the government which i) tend to create a liability or ii) Causes reduction in its assets. Q19. Define revenue receipts. Ans. A revenue receipts are those receipts which neither create a liability nor reduce assets of the government. eg. Tax and non-tax receipts. Q20. Define revenue expenditure. Ans. It does not result in creation of assets or reduction in liabilities eg. Payment of salaries. Q21. Define Capital expenditure. Ans. It refers to the expenditure which leads to creation of assets and reduction in liabilities eg. Expenditure incurred on construction of building, roads, bridges etc. Q22. Give two sources of Capital receipts. Ans. 1) Recovery of loans 2) Borrowings. Q23. Give one objective of budget.

Ans. To reduce inequalities of income and wealth. Q24. Define direct tax. Ans. These taxes are those tax in which liability to pay and burden of tax falls on same person. Q25. Define indirect tax. Ans. Liability to pay and burden of indirect tax falls on different persons. Short Answer Question (3/4 Mark) Q1. Write any three objective of government Budget. Ans. The objective that are pursued by the government through the budget arei) To achieve economic growth. ii) To reduce in equalities in income and wealth. iii) To achieve economic stability. Q2. Explain the basis of classifying government receipts into revenue receipts and capital receipts. Ans. Revenue Receipts :-A government revenue receipts are those receipts i) which neither create liability ii) nor reduce assets of the government eg. Dividend. Capital Receipts :- Capital Receipts refer to those receipts of the government which i) tend to create a liability or ii) Causes reduction in its assets of the government. eg. Borrowings Q3. Distinguish between direct tax and indirect tax Ans. direct tax indirect tax 1. Liability to pay and burden of direct tax falls on 1. Liability to pay and burden of direct tax falls on same person. some other person. 2. Levied on income and property of person. 2. Levied on goods and services on their 3. eg. Income tax sale, production, import and export. 3. eg. Sales tax

Q4. Define revenue receipts. Write the groups in which they are classified. Ans. Any receipts which does not either create a liability or lead to Reduction in assets is called revenue receipts. Revenue receipts consist of 1) Tax Revenue and 2) Non-Tax Revenue. Q5. Distinguish between Revenue and Capital expenditure. Ans. Revenue Expenditure Capital expenditure 1. It does not result in creation of assets 1. It result in creation of assets 2. It is for short period and recurring in nature 2. It for long period and non-recurring in nature 3. eg. Expenditure on salaries of employees 3. eg. Expenditure on acquisitionof assets like land, building etc.

Q6 What is primary Deficit? Primary Deficit is the difference between Fiscal deficit and interest payments. It determines whether the fiscal deficit in government budget has arisen due to interest payment or any other activity of the government. A large primary deficit indicates that the difference between fiscal deficit and interest payment is more. It means government is spending more than its receipt on other activities. The government may be spendthrift. A zero primary deficit indicates that interest payments and fiscal deficit is equal. The fiscal deficit has arisen due to interest payment.