GOVERNMENT BUDGET AND THE

ECONOMY

Contents

Government Budget – Meaning, Objective • Components of Government Budget • Classification of receipts – Capital and revenue • Classification of expenditure - Capital and revenue • Balanced budget surplus budget, deficit budget - meaning and implication • Revenue deficit, Fiscal deficit, primary deficit - Meaning and implication.

Meaning of Government Budget

• A government budget is an annual statement of the estimated receipts and estimated expenditure of the government during a fiscal year

• Fiscal year is taken from 1st April to 31st March.

Objective of the Government Budget

• It means managed and proper distribution of resources. As private sector can not provide all the goods and services the government has to provide these goods.

• Through budget government tries to reduce the gap between Rich and poor. This is achieved through taxing the rich and subsidizing the needs of poor people.

• There may be inflation or depression in the economy. Inflation is the situation of rise in price level whereas depression is lack of demand. Both the situations are undesirable. During depression government reduces rate of tax and borrowing and increases public expenditure. During inflation government increases the rate of tax and borrowing and decreases public expenditure.

Reallocation of

resources -:

To reduce

inequalities in income

and wealth-:

. To achieve

economic stability -:

Objective of the Government Budget

IV. Large no: of Public

Enterprises which are

established and managed for

social welfare of the public.

V. depends upon rate of saving

and investment• Through taxation and

expenditure policy.

Management of

Public Enterprises

. To achieve

economic growth

Reducing regional

disparities.

Components of Government Budget:

Components of budget refer to structure of the

budget. Two main components are:

• Revenue Budget

• Capital Budget

Components of budget can also be categorized

according to receipts and expenditures

• Budget Receipts

• Budget Expenditure.

Budget ReceiptsBudget receipts

refer to the

estimated money

receipts of the

government from

all sources during

a given fiscal year.

Budget Receipts

Revenue receipts

Capital receipts

Tax revenue

Non-tax revenue

Recovery of loansBorrowing Other

receipts

Capital Receipts: - Capital Receipts refer to those receipts of the government which i) tend to create a liability or ii) Causes reduction in its assets. All the Capital receipts are broadly classified into three categories.

1) Recovery of loans :- These are Capital receipts because they reduce financial assets of the government

2) Borrowings: - Funds raised by the government form the borrowing are treated as capital receipts such receipts creates liability.

3) Other Receipts: - Funds raised through disinvestment are included in this category. By this government assets are reduced

Revenue Receipts:-

Any receipts which do not either create a liability or lead to reduction in assets is called revenue receipts. Two sources of revenue receipts

Tax Revenue

Non-Tax Revenue.

Revenue receipts

Tax revenue

Non-tax revenue

Direct Tax

Indirect Tax.

InterestProfit and

dividend

Fees and fines

Gifts and

grants

How to classify a tax as Direct Tax or Indirect Tax

• A tax is a direct tax, if its burden cannot be shifted.

For example, income tax is a burden tax as its impact

and incidence is on the same person.

• A tax is a indirect tax, if its burden can be shifted.

For example, sales tax is an indirect tax as its impact

and incidence is on different persons.

• Corporation tax

• Value added tax

• Service tax

• Excise duty

• Wealth tax

• Sales tax

How to classify a receipt as Revenue Receipt or Capital Receipt?

• A receipt is a capital receipt, if it creates a liability or

reduces an asset.

• A receipt is a revenue receipt, if it neither creates a

liability nor reduces any asset.

Budget Expenditure

• Budget expenditure refers to the estimated expenditure of the government during a given fiscal year.

Budget Expenditure

Capital Expenditure:

-

Revenue Expenditure:

-

Revenue Expenditure

• An expenditure which do not creates assets or reduces

liability is called Revenue Expenditure.

• It is recurring nature

• It is incurred on normal functioning of the government

and the provisions for various services.

• Examples are – Salaries of government employees,

interest payment on loan taken by the government,

pension, subsidies, grants etc.

An expenditure is a revenue expenditure ,if it satisfies the following two essential condition.:The expenditure

must not create an

asset of the

government.

The expenditure

must not cause

decrease in any

liability.

Revenue expenditure

Neither creates an

Asset

Nor reduces any liability

Capital Expenditure:-

• It refers to the expenditure which leads to creation of assets and reduction in liabilities

• It is non-recurring in nature• It adds to capital stock of the economy and

increases its productivity through expenditure in long period development programmes like Metro or Flyover.

• eg. Expenditure incurred on construction of building, roads, bridges etc.

An expenditure is a capital expenditure, if it satisfies any one of the following two conditions:

The expenditure must create

an asset for the government.

Eg: construction of metro.

The expenditure must cause a

decrease in the liabilities. Eg:

repayment of borrowings.

Capital expenditure

Either creates an Asset

Or reduces a liability

How to classify Expenditure as Revenue of Capital Expenditure?

• An expenditure is a capital expenditure, if it creates

an asset or reduces a liability.

• An expenditure is revenue expenditure, if it neither

creates any asset nor reduces an liability.

Plan and Non-plan ExpenditurePlan expenditure refers to the expenditure that is incurred on the programmes detailed in the current five year.Non-plan expenditure refers to the expenditure other than the expenditure related to the current five-year plan.

Budget expenditure

Plan expenditure

Non-expenditure

Plan expenditure vs. non-plan expenditure

Plan expenditure

• Plan expenditure is spent on

current development and

investment outlays.

• It arises only when the plans

provide for such

expenditure.

non-plan expenditure

• It is spent on the routine

functioning of the

government.

• It is a must for every

economy and the

government cannot escape

from it.

How to classify an expenditure as plan or non- plan expenditure?

• An expenditure is a plan expenditure, if it arises due

to planned proposals.

• An expenditure is a non-plan expenditure, if it is out

of the scope off government plans.

Developmental and Non- developmental Expenditure

Developmental Expenditure

• It refers to the expenditure which

is directly related to economic

and social development of the

country.

• It directly contributes to

development of the economy.

• It is productive in nature as it

adds to the flow of goods and

services.

Non- developmental Expenditure

• It refers to the expenditure which is

incurred on the essential general

services of the government .

• It does not contribute directly to

the development , but it lubricates

the wheels of economic

development.

• It is not concerned with the

productivity of working class.

How to classify an expenditure as developmental expenditure and non

developmental expenditure• An expenditure is a developmental expenditure, if it

directly adds to the flow of goods and services.

• An expenditure is a non-developmental

expenditure, if it indirectly contributes to economic

development.

Measures of government deficit

• Types:-

Deficit Budget:-

When government

expenditure exceeds

government receipts

in the budget is said

to be a deficit

budget.

Government deficit

Revenue Deficit:-

Fiscal deficit

Primary deficit:-

• Types:- Revenue Deficit:- Revenue deficit refers to the excess of revenue expenditure of the

government over its revenue receipts. Revenue deficit = Total revenue expenditure – Total revenue receipts.

Fiscal deficit :-Fiscal deficit is defined as excess of total expenditure over total

receipts .

• Fiscal Deficit = Total budget expenditure - Total budget receipts net of borrowings.

Primary deficit:-It refers to the difference between fiscal deficit of the current year

and interest payments on the previous borrowings.Primary deficit= fiscal deficit - interest payments