Government Budget and its Components

Abstract

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".

Government of India Budget

Meaning
“A government budget is an annual financial statement showing item wise estimates of expected revenue and
anticipated expenditure during a fiscal year.”

Just as your household budget is all about what you earn and spend, similarly the government budget is a statement
of its income and expenditure. In the beginning of every year, government presents before the Lok Sabha an
estimate of its receipts and expenditure for the coming financial year.

The government plans expenditure according to its objectives and then tries to raise resources to meet the
proposed expenditure. Government earns money broadly from taxes, fees and fines, interest on loans given to
states and dividend by public sector enterprises. Government spends mainly on (i) securing and providing goods
and services to citizens, (ii) on law and order and (iii) internal security, defence, staff salaries, etc. In India there

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is constitutional requirement to present budget before Parliament for the ensuing financial year. The financial
(fiscal) year starts on April 1 and ends on March 31 of next year. For example, fiscal or budget year 2017-18 is
from April 1, 2017 to March 31, 2018. Obviously, the budget is the most important information document of the
government because government implements its plans and programmes through the budget.

Main Elements of the Budget:

• It is a statement of estimates of government receipts and expenditure.
• Budget estimates pertain to a fixed period, generally a year.
• Expenditure and sources of finance are planned in accordance with the objectives of the government.
• It requires to be approved (passed) by Parliament or Assembly or some other authority before its
implementation.

Objectives of a Government Budget:

It should be kept in mind that rapid and balanced economic growth with equality and social justice has been the
general objective of all our policies and plans. General objectives of a government budget are as under:

(i) Economic growth:

To promote rapid and balanced economic growth so as to improve living standard of the people Economic growth
implies a sustained increase in real GDP of the economy, i.e., a sustained increase in volume of goods and
services. Public welfare is the main guide.

(ii) Reduction of poverty and unemployment:

To eradicate mass poverty and unemployment by creating employment opportunities and providing maximum
social benefits to the poor .In fact, social welfare is the single most important objective. Every Indian should be
able to meet his basic needs like food, clothing, housing (roti, kapda, makaan) along with decent health care and
educational facilities.

(iii) Reduction of inequalities/Redistribution of income:

To reduce inequalities of income and wealth, government can influence distribution of income through levying
taxes and granting subsidies. Government levies high rate of tax on rich people reducing their disposable income
and lowers the rate on lower income group.

Again, government provides subsidies and amenities to people whose income level is low. Again public
expenditure can be useful in reducing inequalities. More emphasis is laid on equitable distribution of wealth and
income. Economic progress in itself is not a sufficient goal but the goal must be equitable progress.

Redistribution of income:

Equalities in income distribution mean allocating the income distribution in such a way that reduces income
inequalities and also there is no concentration of income among few rich. It primarily requires that rate of increase
in real Income of poor sections of society should be faster than that of rich sections of society. Fiscal instruments
like taxation, subsidies and public expenditure can be made use of to achieve the object.

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(iv) Reallocation of resources:

To reallocate resources so as to achieve social and economic objectives .Again, government provides more
resources into socially productive sectors where private sector initiative is not forthcoming, e.g., public sanitation,
rural electrification, education, health, etc. Moreover govt. allocates more funds to production of socially useful
goods (like Khadi) and draws away resources from some other areas to promote balanced economic growth of
regions. In addition govt. undertakes production directly when required,

(v) Price stability/Economic stability:

Government can bring economic stability, i.e., control fluctuations in general price level through taxes, subsidies
and expenditure. For instance, when there is inflation (continuous rise in prices), government can reduce its
expenditure. When there is depression, government can reduce taxes and grant subsidies to encourage spending
by the people.

(vi)Financing and management of public enterprises:

To finance and manage public enterprises which are of the nature of national monopohes like railways, power
generation and water lines etc.

Impact of the budget:

A budget impacts the society at three levels,

• It promotes aggregate fiscal discipline through controlled expenditure, given the quantum of revenues,
• Resources of the country are allocated on the basis of social priorities,
• It contains effective and efficient programmes for delivery of goods and services to achieve its targets and
goals.

Types of Budget:

To recall, a budget is defined as an annual statement of the estimated receipts and expenditure of the government
over the fiscal year. Budgets are of three types: balanced, surplus and deficit budgets—depending upon whether
the estimated receipts are equal to, less than or more than estimated receipts, respectively its three types are
explained hereunder.

(a) Balanced Budget:

A government budget is said to be a balanced budget in which government estimated receipts (revenue and
capital) are equal to government estimated expenditure. Let us suppose for the sake of convenience that the only
source of revenue is a lump sum tax. A balanced budget will then imply that the amount of tax is equal to the
amount of expenditure.

Estimated Govt. Receipts = Estimated Govt. Expenditure

Two main merits of a balanced budget are:

(a) It ensures financial stability and
(b) It avoids wasteful expenditure.

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Two main demerits are:
(a) Process of economic growth is hindered and
(b) Scope of undertaking welfare activities is restricted.

According to Adam Smith, public expenditure should never exceed public revenues, i.e., he advocated a balanced
budget. But Keynes and modern economists do not agree with the policy of a balanced budget. They argue that
in a balanced budget, total expenditure (public and private) falls short of the amount necessary to maintain full
employment.

Therefore, government should increase its expenditure to close the gap between the expenditure essential for full
employment and expenditure that actually takes place. Ideally, a balanced budget is a good policy to bring the
near full employment economy to a full employment equilibrium.

Unbalanced Budget:

When government estimated expenditure is either more or less than government estimated receipts, the budget is
said to be an unbalanced budget. It may be either surplus budget or deficit budget.

(b) Surplus Budget:

When government receipts are more than government expenditure in the budget, the budget is called a surplus
budget. In other words, a surplus budget implies a situation where in government revenue is in excess of
government expenditure.
Symbolically:
Surplus Budget = Estimated Govt. Receipts > Estimated Govt. Expenditure

A surplus budget shows that government is taking away more money than what it is pumping in the economic
system. As a result, aggregate demand tends to fall which helps in reducing the price level. Therefore, in times of
severe inflation, which arises due to excess demand, a surplus budget is the appropriate budget. But in situation
of deflation and recession, surplus budget should be avoided. Mind, balanced budget and surplus budget are rarely
used by the government in modern-day world.

(c) Deficit Budget:

When government estimated expenditure exceeds government receipts in the budget, the budget is said to be a
deficit budget. In other words, in a deficit budget, government estimated revenue is less than estimated
expenditure.
Symbolically:
Deficit Budget = Estimated Govt. Expenditure > Estimated Govt. Receipts

These days’ popular democratic governments adopt mostly deficit budget to meet the growing needs of the people.
It may be mentioned that Keynes had advocated a deficit budget to remedy the situation of unemplo3mient and
under-employment.

Government covers the gap either through borrowing or through withdrawals from its reserves. Thus, a deficit
budget implies increase in government liability and fall in its reserves. When an economy is in under-employment
equilibrium due to deficient demand, a deficit budget is a good remedy to combat recession.

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Merits and Demerits of Deficit Budget:

A deficit budget has its own merits especially for developing economy For example
(a) It accelerates economic growth,
(b) It enables to undertake welfare programmes of the people, and
(c) It is a cure for deflation as it checks downward movement of prices. At the same time.

It has demerits also such as:

(a) It encourages unnecessary and wasteful expenditure by the government,

(b) It may lead to financial and political instability,
(c) It shakes the confidence of foreign investors

The situation of excess demand leading to inflation (continuous rise in prices) and the situation of deficient
demand leading to depression (fall in prices, rise in unemployment, etc.). A surplus budget is recommended in
the situation of inflationary trends in the economy whereas a deficit budget is suggested in the situation of
recession.

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.
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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 cannot be
shifted to someone 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:-

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.

Fines and penalties: Fines and penalties are imposed by the government for not following (violating) the rules
and regulations.

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.

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.

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 2017-18 tax
revenue (direct + indirect taxes) of central government was ₹23,27,205 crores while non-tax revenue was
₹1,76,260 crores.

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(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 non-
development 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:-

Expenditure by the government on consumption of goods and services.

Expenditure on agricultural and industrial development, scientific research, education, health and social services.
Expenditure on defence and civil administration.
Expenditure on exports and external affairs.
Grants given to State governments even if some of them may be used for creation of assets.
Payment of interest on loans taken in the previous year.
Expenditure on subsidies.

iii. India's Defence Expenditure:-

In 2017-18, Defence expenditure of the central government of India was ₹ 9,51,542 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:-

Loans raised by the government from the public through the sale of bonds and securities. They are called market
loans.
Borrowings by government from RBI and other financial institutions through the sale of Treasury bills.
Loans and aids received from foreign countries and other international Organisations like International Monetary
Fund (IMF), World Bank, etc.
Receipts from small saving schemes like the National saving scheme, Provident fund, etc.
Recoveries of loans granted to state and union territory governments and other parties.

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(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

A good budget conclusion shows that the inhabitants of that country are enjoying increased prosperity and
wellbeing. The strong performance and effort aim for the improvement of productivity and labor force
participation.

A strong economy is a clear sign of development and implementation of policy for making a better use of natural
resources as well as human resources which results in future growth and prosperity.

These strong policies will be proved as best weapons against the effects of future problems. Some of those policies
will refine the past reforms. The challenges to improve the economic growth will find solutions.