Government Budget and the Economy

 A government budget is financial statement of estimated revenue and estimated expenditure for the coming fiscal year.

OBJECTIVE OF GOVERNMENT BUDGET

The various objectives of government budget are:

1. Reallocation of Resources:

Through the budgetary policy, Government aims to reallocate resources in accordance with the economic (profit maximization) and social (public welfare) priorities of the country. Government can influence allocation of resources through:

(i) Tax concessions or subsidies:

To encourage investment, government can give tax concession, subsidies etc. to the producers. For example, Government discourages the production of harmful consumption goods (like liquor, cigarettes etc.) through heavy taxes and encourages the use of ‘Khadi products’ by providing subsidies.

(ii) Directly producing goods and services:

If private sector does not take interest, government can directly undertake the production.

2. Reducing inequalities of income and wealth:

(a) Economics inequality is an inherent part of every economic system

The government aims to reduce such inequalities of income and wealth, through its budgetary policy

(b) The government can impose higher taxes on the rich people

(c) In India government uses  progressive taxation i.e. people belonging to higher income level have to pay more proportion of their income as tax to the government.

(d) The government can provide subsidies and other amenities to poor people

(e) Expenditure incurred by the government on unemployment allowance, old age pension, social security etc to help poor people.

3. Economic Stability:

(a) Government budget is used to prevent business fluctuations and to maintain economic stability.

(b) During excess demand, the government impose higher tax and reduce its expenditure to correct excess demand, This Implies that government follows, the policy of surplus budget during inflation.

(c) During deficient demand, the government increases expenditure its reduces taxes,

This  implies that the government follows the policy of deficit budget during deflation

4. Management of Public Enterprises:

There are large numbers of public sector industries (especially natural monopolies), which are established and managed for social welfare of the public. Budget is prepared with the objective of making various provisions for managing such enterprises and providing those financial help.Their expenditures and revenues are accounted for in the budget.

5. Economic Growth:

It implies a sustainable increase in real GDP of an economy, i.e. an increase in volume of and services produced in an economy.

Budget can be an effective tool to email, the ensure the economic growth in a country.

 If the government provides tax rebates and other incentives for productive ventures and projects, it can stimulate savings and Investments In an economy.

Spending on infrastructure of an economy enhances the production activity in different sectors of an economy

The growth rate of a country depends on rate of saving and investment. Therefore, the government makes various provisions in the budget to raise overall rate of savings and investments in the economy.

6. Reducing regional disparities:

The government budget aims to reduce regional disparities through its taxation and expenditure policy for encouraging setting up of production units in economically backward regions.

                    Components of Budget

Budget can be classified as   

                

Revenue Budget	Capital Budget	OR	Budgetary Receipt	Budgetary Expenditure
1.Revenue Receipt	1.Capital Receipt		1.Revenue Receipt	1.Revenue Expenditure
2.Revenue Expenditure	2.Capital Expenditure		2.Capital Receipt	2.Capital Expenditure

 

                    Budgetary Receipts

Budgetary receipts refer to the estimated money receipts of the government from all sources during a given fiscal year.

                   

 Capital Receipts 

It  either create liability or reduce assets. 

It has three component

a. Borrowing -It create liability.

b.Recovery of loans- It reduce financial asset.

c. Disinvestment- It reduce financial asset.

Revenue Receipts

It  neither create liability nor reduce assets. It can be classified as-

1.     Tax Receipt    2. Non-Tax Receipt

REVENUE RECEIPTS	CAPITAL RECEIPTS
Revenue receipts refer to those receipts which neither create any liability nor cause any reduction in the assets of the government.	Capital receipts refer to those receipts which either create any liability or cause a reduction in the assets of the government.
They are regular and recurring in nature.	They are irregular and non-recurring.
Examples- Tax Revenue (like income tax, GST etc) and non-tax revenue (such as fee, interest, etc)	Examples- Borrowings,  Disinvestment, Recovery of loan etc.

                   

A.Tax Revenue (Receipts)

It refers to sum total of receipts from taxes and other duties imposed by the government. 

Tax 

 A tax is a legally compulsory payment imposed by the government on income and profit of persons and companies without reference to any benefit. 

Classification of taxes

1.     Direct & Indirect taxes

2.     Progressive & Regressive taxes

Direct Taxes	Indirect taxes
Direct taxes are those taxes which are imposed on income and properties of individuals and companies.	Indirect taxes are those taxes which are imposed on goods and services.
The burden of a direct tax cannot be shifted.	The burden of an indirect tax can be shifted.
They are generally progressive in nature.	They are generally proportional in nature.
Examples- Income tax,wealth tax,Corporation tax, capital gains tax etc.	Examples-GST, Excise duty etc.

Progressive & Regressive Taxes

1.     Progressive tax-

a.     Rate of tax increases with an increase in income

b.     Burden more on rich

2.     Regressive tax

a.     Rate of tax decreases with increase in income.

b.     Burden more on poor

                 B.Non-tax Revenue (Receipts)

It is the revenue earned by the government other than taxes.

Examples: Interest,  Receipts, Profits & Dividends, Fees, License Fee,  Fines & Penalties, Escheats, Gifts & Grants, Forfeitures etc.

                Budgetary Expenditure

A.Revenue Expenditure

They neither create assets nor reduce liability. They are-

1.     Recurring in nature.

2.     Incurred on normal functioning of government

Example: Interest payments on loan, Grants to states, Defense services, Salaries and pensions, Subsidies

B.Capital Expenditure

They either create assets or reduce liability.

1.     Non-recurring in nature.

2.     Adds to capital stock and productivity of economy.

Example: Investment in shares, Construction of school buildings, hospitals, Repayment of loans, Loans given by government to state governments, Acquisition of land, building, machinery

Revenue Expenditure	Capital Expenditure
Revenue expenditure refers to the expenditure which neither creates any asset nor causes reduction in any liability of the government.	Capital expenditure refers to the expenditure which either creates any asset or causes a reduction in any liability of the government
It is recurring in nature.	It is non-recurring in nature.
Examples- Salary, pension, Interest, etc.	Examples- Repayment of borrowings; Construction of  Metro, school, hospital etc.

Types of Budget

 1. Balanced Budget

 When Total Expenditure of government is equal to Total Receipts of government

 2. Surplus Budget

When Total Expenditure of government is less to Total Receipts of government

 3. Deficit Budget

When Total Expenditure of government is more to Total Receipts of government

Budgetary Deficits

There are three types of deficits

1. Revenue Deficit
2. Fiscal Deficit
3. Primary Deficit

                 

Revenue deficit refers to the excess of revenue expenditure of the government over its revenue receipts. Symbolically,
Revenue Deficit = Total Revenue Expenditure – Total Revenue Receipts

Implications of Revenue Deficit

1. It indicates the inability of the government to meet its regular and recurring expenditure
2. It implies that government is dis-saving
3. Government makes up this deficit by borrowing which increases future liabilities.
4. Government will have to curtail its expenditure on welfare.
5. Government is compelled to disinvestment

                 

Fiscal deficit is defined as excess of total expenditure over total receipts (revenue and capital receipts) excluding borrowing. In the form of an equation:
Fiscal deficit = Total budgetary expenditure - Total budgetary receipt excluding borrowings

Implications of Fiscal Deficit

1. It leads to debt trap.
2. Government resorts to deficit financing which leads to inflation.
3. It increases foreign dependence.
4. It hampers future growth

                     

It is the difference between Fiscal Deficit and Interest Payments

Primary  deficit= Fiscal Deficit – Interest Payments

Implications of Primary Deficit 

1. It indicates the government borrowing requirements to meet expenses other than the interest payments.
2. Zero Primary Deficit indicates that government is forced to borrow to repay interest on past borrowings.