Government Budget and The Economy

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Government Budget and The Economy in Detail

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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. 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.

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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, defence, etc.

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

  • Revenues:

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 deficit (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 program, revenue prospects, and 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 Government Budget:

  • Resource Reallocation:

With the social and economic condition of the country in mind, the government is able to 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 were generated.

Components of a Budget

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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. 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 asset and increases in its liabilities is termed as capital receipts. 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. 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.

FAQ (Frequently Asked Questions)

Q1. What are the Different Types of Government Budgets?

Ans: 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.

Q2.  What is Meant by Government Debt in Economics?

Ans: 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.