Government Budget refers to the financial statement which contains the performance of the government of the past one year along with the policies and programs that government will make or implement in the next coming year or to keep the data of expected revenues and expenditures of upcoming one year. The programs and policies can also be called as Budgetary Policy or Fiscal Policy.
Significance of Budget
Brief about Fiscal Policies: The government budget gives a detailed description of all the expected revenue and expenditure of the upcoming year which creates a goal for government to achieve the targets and work properly.
Budget Measurements: Government makes every possible step to solve the problems of the country such as; poverty, unemployment, inflation etc. Therefore, it helps to make policies for the solution of major problems prevailing in the country.
Secure Allocation of Resources: Through its budgetary policies, government allocates the resources so that the private producer can also focus on welfare. For e.g. The producer of cigarettes or alcohol for human consumption has to pay heavy tax in order to lessen the flow of these types of goods in the country or to obstruct the sales of these goods and promote goods which are made in India through subsidies.
Growth of GDP: It is the primary objective of government to increase the rate of GDP through its own public investing policies or by convincing private investors.
Activities of Redistribution: Government balances the difference between the richer section of the country and the poorer section of the country through its fiscal and subsidiary policy. Government soaks money from the richer section through its fiscal policy by levying taxes on them and by distributing the money received from them among poorer sections through its subsidized policies.
Activities to Stable the Economy: The government uses its budgetary policies to control the business cycle through rinsing or inducing the investment in the country so that a country can work properly in the international market also.
Managing Public Enterprises: Government owns some natural monopolies of a country for the social welfare of people. To fund them, some amount from the budget is also transferred to them for working as well as expansion.
Opportunities for Employment: Government makes policies like MNREGA and many others to promote employment opportunity in the country.
Regional Development: Government declares some areas as SEZ(Special Economic Zones) in which private investors are invited by giving them tax reduction and subsidies to set up their business so that the general public can get the opportunity of employment and to develop that area.
Components of Government Budget
Government budget is divided into two parts namely Revenue Budget and Capital Budget. A detailed classification of components is as follows:
Revenue Budget: Revenue budget contains all the short term receipts and expenditure of government of a year. It is of two parts i.e. Revenue receipts and Revenue expenditure.
Revenue Receipt: Revenue receipts are those receipts which do not create any liability for government as well as not cause any reduction in the assets of the government.
These are further classified into two parts:
Taxable Receipts: These are those revenue receipts which are in the form of any tax such as direct tax, indirect tax etc. A tax is the compulsory extraction of money or mandatory financial charges taken from the people.
Types of Taxes
Value-Added Tax: It is a type of indirect tax which is imposed on the added value of the goods or services. For e.g. Tax on the intermediate goods.
Specific Tax: It is a type of tax which is imposed on the basis of the size, weight, length of the product. For e.g. Tax on cars on the basis of their length.
Proportional Tax: It is a type of tax which does not increase or decrease in the terms of rate with the increase in the level of income. For e.g. Tax on purchase and sale of immovable property.
Direct Tax: It is a tax which is paid by the person on which it is levied. For e.g. Income Tax.
Indirect Tax: It is a type of tax which is levied on someone else but paid by someone else. For e.g. Goods and Service Tax.
Progressive Tax: It is a type of tax which increases its rate with the increase in the level of income. For e.g. Income tax levied in slabs.
Regressive Tax: It is a type of tax which decreases its rate with the increase in the level of income. For e.g. Consumption taxes.
Non-Taxable Receipts: Non-taxable revenue receipts refer to those receipts which government receives from the sale of goods and services through its departments or those receipts which are other than taxes.
Types of Non-Taxable Receipts
Fees: It is a type of receipt which government receives by rendering the services to the general public.
Fines: It is the penalty amount which is received when someone violates or break the rules or law.
Interest on Sort term Loans: Central Government provides short term loans to states, UTs and the interest income on those loans is called revenue receipt.
Special Assessment: The increase in the prices of property due to some special development activity by the government.
Revenue Expenditure: It is a type of expenditure which neither creates assets nor decreases the amount of liability.
Expenditure done in the form of Grants
Payment of salaries and wages.
Payment of Interest.
Expenditure on defence of a country.
2. Capital Budget: Capital budget contains all the long term receipts and expenditure of government of a year. It is of two parts i.e. Capital receipts and Capital Expenditure.
Capital Receipts: These are those receipts which either creates liability for the government or causes reduction in the value of assets. It includes those items which are non-repetitive and are of non-routine nature.
Borrowing: Money borrowed by the government from citizens, central bank (RBI) or from the rest of the world are treated as capital receipts as they leads to formation of liability for the government.
Disinvestment: When government sells its majority stake hold to private investor is known as Disinvestment as it leads to reduction in the assets of the government.
Divestment: When Government sells its stake hold to private investor is known as Divestment as it leads to decrease in the value of assets.
Recovery of Loan: When some loan is recovered of the government which is offered to the state government or Union Territory government.
Capital Expenditure: It is a type of expenditure by the government which leads to the creation of assets or reduction in the liability.
Purchase of land and Building.
Purchase of Plant and Machinery.
Long term loan to state government.
Budget expenditure refers to the expenditure which is done by the government either for the development or non-development purpose or those are planned or non-planned in a fiscal year.
Types of Budget Expenditure
Plan and Non-plan Expenditure:Planned expenditures are those expenditures which are taken into consideration beforehand to be made during a fiscal year whereas non-planned expenditures are those expenditures which are not preplanned and are made at the time of some problem
Revenue and Capital Expenditure: Revenue expenditures do not lead to any reduction in liability or formation of asset whereas capital expenditure are those which lead to the formation of assets or reduction in the liability of the government.
Development and Non-development Expenditure: Expenditures which are directly related to the social development or economic development of a country whereas non-development expenditures are those expenditures which are on general essential services of the government of a country.
Deficit and Its Implications
Budget deficit refers to a situation in which total budgeted expenditure exceeds the total budgeted receipts of the government or when the sum of receipts falls short than the sum of expenditure of a country.
Types of Deficit:
Revenue Deficit: It refers to a situation when total of revenue expenditure exceeds the total of revenue receipts in a country. It shows that the government is lacking in savings and is going to take borrowing. To control such thing, government should reduce its expenditures and increase receipts.
Fiscal Deficit: It refers to a situation in which total expenditure exceeds the total receipts but excluding borrowing made by the government. It is the total borrowings which is taken by the government and shows that the liability of government is increasing and causing inflation in the economy.
Fiscal Deficit = Total Expenditure – (Revenue Receipts + Recovery of Loans + other Receipts)
Fiscal Deficit = Borrowings and Other Liabilities
Primary Deficit: It refers to the total amount required other than borrowing other than payment of interest. It shows the total borrowing by the government other than payment of interest.