To analyse the meaning of government budget, it is first important to learn what the term “budget” denotes. The budget refers to an estimation of expense and revenue generated over a certain period. A budget is evaluated and compiled periodically.
Budgets can be made for a person’s income and expenses, as well as, that for a business, a group of people, and most importantly, the government.
Following is an analysis of the government budget definition, its components and its structure.
What is the Government Budget?
Government budget refers to an annual financial statement that denotes its anticipated expenditure and expected revenue generation in a fiscal year. It is presented by the government in Lok Sabha at the beginning of every fiscal year, to give an estimate of its expenditure and receipts for the upcoming year.
The term “Annual Financial Statement” of a nation is often used to define government budget.
How is this Budget Planned?
A government plans its budget by gauging its foreseeable expenditure and planning to raise resources to meet these expenses.
A country’s government generates revenue primarily through tax collection, interest on loans provided to states, from fines and fees, alongside dividends collected from public sector enterprises.
In turn, government spends on –
Security, defence, staff salaries
Providing goods and services to citizens
Maintaining law and order
A budget is prepared by keeping these expenditures and revenue into consideration. The Indian constitution mandates this budget for an ensuing financial year to be presented before the Parliament.
A financial year begins on April 1st and ends on March 31st of the following year.
What are the Components of a Government Budget?
Government budget and its components can be divided into two parts –
Capital budget
Revenue budget
What are these?
Capital Budget – These refer to receipts that reduce assets for a government and create financial liabilities. Conversely, capital expenditure on a government’s part helps to create assets and reduce liabilities. The capital budget, thus, is an account of these liabilities and assets under the government, which denote a change in total capital.
Revenue Budget – As its name suggests, the revenue budget refers to revenue receipts generated and expenses met through this revenue. These receipts include both tax and non-tax revenue earned by a government.
What are the Objectives of Government Budget?
While rapid economic growth and social justice are primary goals of any policy undertaken by any government, a budget’s general objectives are given below –
Promoting Economic Growth
Economic growth of a country refers to sustained growth in its GDP. The primary objective of the government budget is, thus, to boost GDP growth by promoting balanced economic development and improving people’s standard of living. That is done by considering general public welfare.
Poverty Alleviation and Employment Generation
Social welfare is the most crucial objective of setting a country’s budget. This budget is set in a way to ensure that every Indian can meet basic requirements like housing, clothing, food, alongside basic education and healthcare. Further, a budget is also set by keeping in consideration goals like eradication of poverty by generating employment.
Resource Reallocation
Each year, the government allocates more resources to the socially productive sector where there is a shortage of private initiatives, like – providing electricity to rural areas, health, education, public sanitation, etc. Further, the government also undertakes initiatives for promotion of India’s indigenous industry, like Khadi, while drawing away from a few other sectors to ensure balanced growth in every sector.
Reducing Inequality and Income Redistribution
To reduce inequality in the country, the government can undertake measures like imposing taxes or granting subsidies. The government usually imposes taxes on the country’s affluent to reduce their disposable income and undertakes schemes to aid the country’s poor. The government also provides amenities and subsidies to those in need. Redistribution of income is another measure undertaken by the government to promote economic welfare.
What is Redistribution of Income?
Income redistribution means allocating income in a way to bridge the gap of income inequality and ensure that there is no concentration of wealth among a select few. To implement this, the government makes use of fiscal instruments like subsidies, taxation, public expenditure, etc.
Management of Public Enterprises
The government budget is put forth to manage and finance enterprises like power generation, railways, water lines, etc.
Thus, the government budget is prepared by considering these objectives.
What is the Impact of Government Budget?
The government budget has a three-way impact on society –
Resource allocation based on public welfare and social priorities.
It helps to promote fiscal discipline by micro-managing expenditure.
Introduces effective programmes to ensure that there is an efficient distribution of goods and services among all.
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FAQs on Government Budget: Meaning, Objectives, and Components
1. What is a Government Budget as per the CBSE Class 12 Economics syllabus?
A Government Budget is an annual financial statement that outlines the estimated receipts and anticipated expenditures of the government for a specific fiscal year, typically from April 1st to March 31st. It serves as a comprehensive plan for the government's financial activities, reflecting its policies and objectives for the upcoming year.
2. What are the main objectives of a government budget?
The primary objectives of a government budget are to guide the country's economic and social development. Key objectives include:
- Reallocation of Resources: Directing resources towards socially productive sectors through taxation, subsidies, and public expenditure.
- Reducing Income and Wealth Inequalities: Using progressive taxation and social welfare programs to create a more equitable distribution of income.
- Economic Stability: Controlling inflation and deflationary trends to maintain price stability and economic growth.
- Management of Public Enterprises: Providing financial support and setting policies for government-owned corporations.
- Economic Growth: Promoting investment and savings by creating a favourable economic environment.
3. What are the two main components of the Government Budget?
The Government Budget is primarily divided into two components:
- Revenue Budget: This component includes the government's estimated revenue receipts (like taxes) and the expenditure that is met from these revenues. It deals with recurring financial transactions.
- Capital Budget: This component includes the government's capital receipts (like borrowings and disinvestment) and capital expenditures, which involve the creation of assets or reduction of liabilities.
4. How are Revenue Receipts different from Capital Receipts?
The key difference lies in their impact on the government's assets and liabilities. Revenue Receipts are receipts that neither create any liability nor cause any reduction in the assets of the government. Examples include income tax, GST, fines, and fees. In contrast, Capital Receipts are those that either create a liability for the government (e.g., borrowings from the public) or cause a reduction in its assets (e.g., proceeds from disinvestment).
5. What is the difference between Revenue Expenditure and Capital Expenditure? Provide examples.
Revenue Expenditure refers to expenses that do not result in the creation of any physical or financial assets or cause a reduction in liability. It is incurred for the normal functioning of government departments. For example, salaries, pensions, and interest payments. On the other hand, Capital Expenditure is an expense that either creates a physical or financial asset (e.g., construction of schools, roads, and hospitals) or leads to a reduction in liability (e.g., repayment of loans).
6. How does the government budget aim to achieve economic stability?
The government uses the budget as a tool for its fiscal policy to maintain economic stability. During times of inflation (when prices are high), the government can implement a surplus budget policy by increasing taxes and reducing public expenditure to curb aggregate demand. Conversely, during a recession or deflation, it can adopt a deficit budget policy by decreasing taxes and increasing public spending to boost aggregate demand and stimulate the economy.
7. What is a Fiscal Deficit and what does it indicate?
Fiscal Deficit is the excess of the government's total expenditure over its total receipts, excluding borrowings. It represents the total amount of borrowing required by the government during a fiscal year. A high fiscal deficit indicates that the government's spending is significantly higher than its non-borrowed income, highlighting the extent of its dependence on borrowing to meet its expenses.
8. Why is it important for a government to manage its Primary Deficit?
Managing the Primary Deficit (Fiscal Deficit minus interest payments on previous borrowings) is crucial because it shows the current year's borrowing requirements, excluding the interest burden from past debts. A low or zero primary deficit indicates that the government's current fiscal policy is sustainable and it is not adding to the future debt burden to finance its current consumption or investment expenditure. It is a key indicator of present fiscal discipline.
9. What are the key differences between direct taxes and indirect taxes?
The main differences between direct and indirect taxes are:
- Incidence and Impact: In a direct tax (e.g., Income Tax, Corporate Tax), the burden is borne by the person on whom it is levied; it cannot be shifted. In an indirect tax (e.g., Goods and Services Tax - GST), the burden can be shifted from the initial payer (like a manufacturer) to the final consumer.
- Nature: Direct taxes are generally progressive, meaning they increase with the taxpayer's income. Indirect taxes are often regressive as they are applied uniformly, impacting lower-income individuals more.
