Government Budget and The Economy

Government Budget and The Economy in Detail

If you ever happen to observe any of your parents who are responsible for managing all the finance’s related matters, you would have noticed that all their economic decisions and activities are based on their budget. So, the budget here is nothing but the sum total of all the expenses and income. Every individual can have a different budget in accordance with their incomes and expenses. 

In a similar fashion, the government has to run a nation and requires finance to support all the developments and the economic activities. Article 312 of the Indian constitution mentioned in detail the procedure and process of the Annual Financial Statement i.e, the Budget of India. 

In this detail, we will discuss and learn about the following concepts - 

  • Government Budget - An Introduction

  • Need for Government Budget 

  • Importance of Government Budget

  • Components of Government Budget

  • Key points from the Chapter 

  • Frequently Asked Questions (FAQs)


Government Budget and The Economy in Detail

A budget is made to get an estimate of income and expenditure. It is different from an account which is a recording of a financial transaction. The budget is an extremely vital part of the economy of any nation since it helps in planning and controlling its financial affairs. The need for a government budget arises from the fact that income and expenditure do not happen at the same time. A revenue receipt and expenditure flow do not coincide in time. 

Introduction of Government Budget and the Economy

A government budget is made to approach and address the needs and issues of a country. It is an annual financial statement where an itemized estimate of revenue expected and expenditure anticipated are listed for the current fiscal year which runs from April 1 of one year to March 31 of the next year. The basic elements of a government budget are as follows:

  • Public Expenditure:

A national budget authorizes public expenditures under two categories:

  • Government purchase of goods and services to serve the public with services like health care, education, defense, etc.

  • Payment of social security and other such transfers to individuals and offering subsidies payment to industries and commercial companies.

  • Revenues:

The government finds ways and means to earn revenue to meet their expenditure. 

  • Actual Receipts and Expenditure List:

When the financial year closes on March 31st, a detailed list of actual revenue and expenditure is provided along with reasons for deficits (or surplus) that have occurred during that financial year.

  • Economics Government Budget:

The financial policy for the coming fiscal year is disclosed, which include taxation proposals, spending programs, revenue prospects, and the introduction of new schemes or projects.

 

The Need for Government Budget

A government budget is the means of providing control over expenditure and revenue by the government. Budgets help in maintaining stability and control over the government’s finances and are also a means of providing accountability through financial reporting. The following points can help you understand the importance of the Government Budget:

  • Resource Reallocation:

With the social and economic condition of the country in mind, the government can distribute resources properly.

  • Reduce the Difference in Income and Wealth:

The economic equality of different classes in the country can be better maintained by the government. They can impose taxes on the elite class and spend that money on the welfare of poor people.

  • Improvement in Economic Growth:

The overall rate of investment and savings can be raised by focusing on providing adequate resources to the public sectors. The rate of investment and savings determine a country’s economic growth.

  • Reduce Differences in Regional Development:

Region inequalities can be reduced by installing production units in underdeveloped areas.

 

The Importance of Government Budget

Every country aims to improve the standard of living of its people and eradicate issues like poverty, illiteracy, unemployment, income inequality, etc. Budget measures help the government in meeting these goals. A budget gives an overview of the fiscal policy of the government. The public can see how much and on what items the government spent in the last fiscal year. The budget also shows itemized receipt, which reveals the sources from the revenue for these expenditures that were generated.

 

Components of a Budget

There are mainly two components of a government budget:

  • Revenue Budget:

Revenue receipts and revenue expenditure make up the revenue budget.

  • Revenue Receipts:

The money which the government earns through taxes (excise tax, income tax, etc.) and other non-tax sources (such as dividend income, profits, interest receipts, etc.) come under this category of the budget component. The revenue receipts do not impact the assets and liabilities of the government directly.

  • Revenue Expenditure:

Expenses that do not impact the assets and liabilities of the government directly are called revenue expenditure. A few examples of this type of expenditure are pensions, salaries, administrative expenses, and interest payments.

  • Capital Budget:

This comprises capital receipts and expenditures. It is divided into two subparts:

  • Capital Receipts:

Any receipt which indicates a decrease in the government’s assets and increases in its liabilities is termed as capital receipt. Examples include:

  • Money that is received through repayments of loans by states.

  • Money earned through disinvestments like selling of shares of public enterprises.

  • Capital Expenditure:

This expenditure is done to reduce liabilities and create more assets. A few examples are:

  • Expenditure or long-term investments in creating assets such as hospitals, roads, etc.

  • Money lent by the government to states in the form of loans

Key Points from the Chapter

  • Every nation needs a budget for the optimum utilization of its resources and growth 

  • The budget represents the blueprint of the developmental plan of a nation

  • The Government in advance tell their income sources and the area of expenditure 

  • Economic Survey of India is presented before the presentation of the budget

  • Since 2016, the railway budget has been merged with the general budget 

  • In a democratic nation like India, the budget-making process is transparent and available for public scrutiny 

  • The budget is broadly divided as revenue receipt and expenditure, capital receipts and expenditure. 

  • The budget is divided into three parts - Revised budget, Actual Budget, and Estimated Budget

  • The budget is prepared on the first week of February every year

FAQs (Frequently Asked Questions)

1. What are the Different Types of Government Budgets?

Based on the feasibility of revenue and expenditure, the government budget is of three types:

  1. Balanced Budget - If the expected annual expenditure in the budget is equal to the expected revenue, then it is a balanced budget. Classical economists advocate this type of budget by attributing it with the “living within means” tag. But at times of economic inflation or depression, a balanced budget is not a surety for financial stability.

  2. Surplus Budget - In a particular financial year, if the expected revenue exceeds the expected expenditure, then it is termed as surplus budget. This means that the amount the government plans to spend on public welfare is less than what the government would obtain from taxes levied. If a government has a surplus budget, it shows its financial affluence. This budget is recommended during inflation or to reduce aggregate demand.

  3. Deficit Budget - The type of budget where government expenditure exceeds its revenue is called a deficit budget. This type of budget suits developing economies like India. At times of recession, a deficit budget helps generate more demand and accelerate economic growth.

2.  What is Meant by Government Debt in Economics?

The government needs to borrow money oftentimes when they do not have enough liquid cash for their expenditure. Government debt is issued when they borrow from the public and the total debt that a government owes at any time is the net borrowings the government has done in the past and present. The government gives securities to its creditors which states the term of the loan, i.e. the principal borrowed, the interest rate which is to be paid by the government, the time interval or schedule of making the interest payment, and the principal payment. So, a government debt = amount of outstanding securities = amount of unpaid debt.

3. How can you differentiate a capital expenditure from a revenue expenditure in the budget?

In the budget, the expenditures are divided into two parts which are capital and revenue. So, when an expenditure made adds value to the asset of the nation it is termed as capital expenditure. For example - expenses made for the construction of roads as it added to the infrastructure of the nation. Also, capital expenditures are non-recurring in nature.

Whereas, revenue expenditures are recurring, that is they keep on occurring year after year and don't add any value to the assets of the nation. For example - the salary of government employees.

4. What is a budget deficit?

In the budget when the expenses made by a nation are more than the source of income, then the difference between the income and expenses is termed as the budget deficit. 

Similarly, if the income exceeds the expenditure then it is termed as a budget surplus.        So, if a nation faces a budget deficit, they resort to borrowings to supplement their expenses.

5. What measures can a government take to keep the fiscal deficit in control?

When a government spends more than its income the deficit is called a fiscal deficit. In other words, the fiscal deficit is the total borrowings made by a government. 

Measure taken to avoid fiscal deficit are - 

Reduction in revenue expenditure

Cut down unnecessary subsidies 

Reduction in wastage of resources

Improve the sources of income collection

Increase tax base and tax collection

Thus, focusing on improving revenue sources and optimizing the source of expenditure.

6. What is the process of budget formation?

The formation of budget undergoes the following steps -

The budget is first presented in the Lok Sabha, after which it is presented in the second house

After the general presentation, it is laid open for general discussion where the finance minister answers a few questions

It is then given to Departmentally Standing Committee which analyzes the budget in detail

The budget is then presented to the Lok Sabha as a vote for Grant

After the vote both the house of the parliament pass the appropriation bill which is assented by the President

Finally, a financial bill is passed bringing the process of budget to an end

7. What is an effective revenue deficit?

Revenue deficit minus those revenue expenditures which add to the creation of assets of a nation leaves behind the effective revenue deficit. 

Thus, effective revenue deficit = revenue expenditure - revenue expenses which created assets.

Comment