Government Budget - Meaning and Components

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 – 

  1. Security, defence, staff salaries

  2. Providing goods and services to citizens

  3. 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 – 

  1. 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.

  1. 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.

  1. 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.

  1. 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. 

  1. 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.

To learn more about the structure of the government budget, you can refer to our online study materials. You can also enrol in our live classes to gain a deeper understanding of the subject. We, at Vedantu, ensure that you can approach your exam preparation a more systematic manner with our guidance. 

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FAQ (Frequently Asked Questions)

1. What is the Meaning of Government Budget?

Ans. The government budget is an annual financial statement that is prepared to account for the revenue and expenditure of a government for the upcoming fiscal year. This budget is sanctioned by the chief executive or president and is presented by the country’s finance minister in the Parliament, at the onset of every financial year.

2. What are the Components of Government Budget?

Ans. There are two primary components of a government budget, namely – the capital budget and revenue budget. Capital budget accounts for the assets and liabilities under the government. Revenue budget, on the other hand, accounts for the total revenue generated and the expenses met through this revenue.

3. How Does the Annual Budget Help in Income Redistribution?

Ans. The government makes use of fiscal instruments like taxes, public expenditure, subsidies, etc. to ensure that the country’s wealth is not concentrated on the hands of a select few. Income redistribution is one of the measures undertaken to reduce the income inequality between the country’s affluent and the poor.