GOVERNMENT BUDGET AND THE

ECONOMY

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".
 UNIT- 5
• GOVERNMENT BUDGET-
MEANING,OBJECTIVES,AND COMPONENTS.

• CLASSIFICATION OF RECEIPTS-REVENUE RECEIPTS

AND CAPITAL RECEIPTS;CLASSIFICATION OF
EXPENDITURE-REVENUE EXPENDITURE AND
CAPITAL EXPENDITURE.

• MEASURES OF GOVERNMENT DEFICIT- REVENUE

DEFICIT,PRIMARY DEFICIT THEIR MEANING.
A government budget is an annual statement of
estimated receipts and estimated expenditure of the
government during a fiscal year which runs from April 1
to March 31 of next year .
Government budget is a financial statement of Budgetary
receipts and budgetary expenditure of the government
during a fiscal year.
 Role of Government Budget in the

allocation of resources

(I) The Government can impose heavy tax on dangerous and harmful
goods (eg.Tobacco, alcohol). This will discourage their production.

(ii) Heavy tax can be imposed on luxury goods so that their production
can be discouraged.

(iii)The Government can provide subsidies to encourage the production

of essential commodities.

(III) Expenditure policy

A government budget can help to reduce inequalities in income through
redistribution of income and wealth in the economy. To achieve this
objective, government uses fiscal instruments of taxation and subsidies.

• 1. Budget of a government shows its comprehensive exercise on the

taxation and subsidies.
• 2. A government uses fiscal instruments of taxation and subsidies with a
view of improving the distribution of income and wealth in the economy.
• 3. A government reduces the inequality in the distribution of income and
wealth by imposing taxes on the rich and giving subsidies to the poor, or
spending more on welfare of the poor.
• 4. It will reduce income of the rich and raises the living standard of the
poor, thus, leads to equitable distribution of income.
• 5. Expenditure on special anti poverty and employment schemes will be
increased to bring more people above poverty line.
• 6. Public distribution system should be inferred so that only the poor could
get food grains and other essential items at subsidised prices.
• 7. Equitable distribution of income and wealth is a sign of social justice
which is as the principal objective of any welfare state in India.
 ECONOMIC EQUALITY
(Redistribution of Income)
• TAXATION POLICY AND EXPENDITURE POLICY
• The Government may impose heavy tax on rich man’s income
and luxury goods. Progressive rate of taxation can be
followed.
• Poor man’s income and necessary goods may be exempted
from taxation.
• The money collected from the rich can be used for various
welfare programmes for the poor people.
• Food can be supplied at low rates. Educational and health
services can be developed.
 ECONOMIC STABILITY/PRICE STABILITY
• Economic stability can be achieved by controlling
inflation and deflation.
• During inflation, the Government can prepare a
surplus budget. Taxes can be increased and
expenditure can be reduced. This will reduce
money supply and help in controlling inflation.
• During deflation, the Government can prepare
deficit budget. Taxes can be reduced and
expenditure can be increased. This will increase
money supply in the economy.
 Economic growth
• TAXATION POLICY AND SUBSIDIES
• EXPENDITURE POLICY
• Government allocates resources for various
development and welfare programmes in its budget.
• Funds are allocated for the defence of the country.
• Resources are allocated for educational and health
sectors.
• Resources are allocated for the development of various
sectors of the economy.
• Balanced allocation of resources help in balanced
economic growth.
• Backward areas are given more resources.
Management of Public Enterprises:
Allocation of funds for the public sector enterprises is
done through the budget. For eg. Railways.
 COMPONENTS OF BUDGET

• 1. Revenue Budget. This financial statement includes

the revenue receipts of the government i.e. revenue
collected by way of taxes & other receipts.
• 2. Capital Budget.
• It deals with the capital aspect of the government
budget and it consists of (i)Capital Receipts
(ii) Capital Expenditure.
 BUDGET RECEIPTS

Budget receipts refers to the estimated money receipts

of the government from all sources during a given fiscal
year.
 REVENUE RECEIPTS

RECEIPTS THAT DO RECEIPTS THAT DOES NOT

LEAD TO REDUCTION IN THE
NOT CAUSE LIABILITY ASSETS OF THE
TO GOVERNMENT GOVERNMENT
(TAX) (NON TAX REVENUE)
• Two sources of Revenue Receipts
• Tax revenue and Non tax revenue.
• Tax revenue is the income that is gained by
governments through taxation. Taxation is the
primary source of government revenue
• NON TAX REVENUES

• Interests
• Profits and interests
• Fees
• License fee
• Fines and penalties
• Escheats
• Gifts and Grants
• Forfeitures
• Special Assessment.
 CAPITAL RECEIPTS

RECEIPTS THAT CAUSE

LIABILITY TO RECEIPTS THAT LEAD TO
GOVERNMENT REDUCTION IN THE ASSETS
(Borrowings) OF THE GOVERNMENT
• Capital receipts are the income received by the
company which is non-recurring in nature. They are
part of the financing and investing activities rather
than operating activities. The capital receipts either
reduces an asset or increases a liability.
• Debt creating capital receipts
• Non debt creating capital receipts
• 1. Borrowings:
• Borrowings are the funds raised by government to
meet excess expenditure.
• Governments borrow funds from:
• (i) Open Market (Public);
• (ii) Reserve Bank of India (RBI);
• (iii) Foreign governments (like loans from USA, England
etc.);
• (iv) International institutions (like World Bank,
International Monetary Fund)
• Borrowings are capital receipts as they create a liability
for the government.
• 2. Recovery of Loans:
• Government grants various loans to state governments
or union territories. Recovery of such loans is a capital
receipt as it reduces the assets of the government.
• 3. Other Receipts:
• (a) Disinvestment:
• Disinvestment refers to the act of selling a part or the
whole of shares of selected public sector undertakings
(PSU) held by the government.
• (b) Small Savings:
• Small savings refer to funds raised from the public in
the form of Post Office deposits, National Saving
Certificates, Kissan Vikas Patras etc. They are treated as
capital receipts as they lead to an increase in liability.
 a. Receipts from sale of shares of public sector
undertaking.
• It is a capital receipt because it results in the
reduction of assets.
b. Borrowing from public
• This is a capital receipt because it increases the
liability of the government.
c. Profits of public sector undertakings:
• It is a revenue receipt because profit doesn’t create
a liability or reduce assets of the government.
e. Disinvestment .
• This is a capital receipt because it reduces the
assets of the government.
 f. Customs duty.
• It is a revenue to the government. It is a revenue
receipt. It does not create a liability. It does not reduce
the assets too.
g. Construction of buildings.
• This creates assets. So it’s a capital expenditure.
h. Interest Payment, subsidies and grants given to
states.
• These things do not create assets or reduce the liability.
So they come under revenue expenditure.
i. Income tax, Excise duty, Fees and fines.
• These are revenue receipts because these do not create
a liability or reduce the assets of the government.
 REVENUE EXPENDITURE

EXPENDITURE THAT
EXPENDITURE THAT DOES
DOES NOT REDUCE THE NOT LEAD TO THE CREATION
LIABILITY OF THE OF ASSETS
GOVERNMENT
 CAPITAL EXPENDITURE

EXPENDITURE THAT
EXPENDITURE THAT LEAD TO
REDUCE THE LIABILITY THE CREATION OF ASSETS
OF THE GOVERNMENT
ESTIMATED RECEIPTS = ESTIMATED EXPENDITURE
 SURPLUS BUDGET

ESTIMATED RECEIPTS > ESTIMATED EXPENDITURE

 DEFICIT BUDGET

ESTIMATED EXPENDITURE > ESTIMATED REVENUE

BUDGETARY DEFICIT
 BUDGETARY DEFICIT
Budgetary Deficit
It is defined as the excess of total estimated
expenditure over total estimated revenue.
(i) Revenue deficit: If revenue expenditure is more
than revenue receipts, it is called revenue deficit
(ii) Fiscal deficit: It refers to the excess of total
expenditure over total revenue receipts and capital
receipts excluding borrowings.

(iii) Primary deficit: It is defined as fiscal deficit less

interest payments.
 Revenue Deficit

Revenue Deficit = Revenue

Expenditure-Revenue Receipts

It refers to excess of revenue expenditure over

revenue receipts during the given fiscal year.

It signifies that Government’s own revenue is

insufficient to meet the expenditures on normal
functioning of government departments .
 Implications of Revenue Deficit
 It indicates the inability of the Government to meet its
regular and recurring expenditure in the proposed budget.
(i.e. revenue expenditure, Government knows about this
before even starting of fiscal year)
 It implies that Government is dissaving. (Govt has no
reserves to use if revenue falls short at times.)
 It also implies that Revenue deficit will now be fulfilled
from capital receipts(which either create liability or reduce
asset-borrowings or disinvestments).
 Increasing the capital receipts to cover revenue deficit will
lead to an inflationary situation in the economy. (refer to
the objective of Economic stability). More borrowings
increase the future burden.
 Measures to reduce Revenue Deficit
 A high revenue deficit is a WARNING for the
Government .

 Government should plan to reduce its expenditure for

unproductive and unnecessary uses.

 Government should try and plan to increase its

receipts from various sources of tax and non-tax
revenue.(But government should also be careful that
burden on the public should not be increased.)
 Fiscal Deficit
Fiscal Deficit = Total Expenditure- Total
Receipts (excluding borrowings)

 It refers to the excess of total expenditure over total

receipts (excluding borrowing) during the given fiscal year.

 It presents the most comprehensive view of the budgetary

imbalances.

 It indicates how far the Government is spending beyond its

capacity.
 Implications of Fiscal Deficit
 Debt Trap: It indicates the borrowing requirement of the Government. It
shows the total of Principal amount and interest accrued on it. Increased
interest payments lead to Revenue deficit. Thus it creates a vicious circle of
revenue deficit and fiscal deficit. The economy gets caught in a debt trap.

 Inflation: Government primarily borrows from the RBI to meet its fiscal
deficit. RBI prints new currency(Deficit Financing) to meet the
requirements of Government. This increases the money supply in the
economy and leads to situation of inflation
 Foreign Dependence: if government borrows from the rest of the world
(ROW) it creates dependence on other countries.

 Hampers future growth: Higher borrowings lead to higher financial burden

on future generations and adversely impacts the development prospects of
the economy.
 Sources of financing Fiscal Deficit

Borrowings
Fiscal deficit can be covered by borrowing from
internal sources i.e. public and commercial banks
and from external sources i.e. foreign governments
and international organisations.
Deficit Financing
when RBI issues new currency to help the
Government meet its fiscal deficit, this process is
known as Deficit Financing.
 Primary Deficit
Primary deficit = Fiscal deficit – Interest payments

 It refers to the difference between fiscal deficit of the current year

and interest payments on the previous borrowings.
 It indicates the main amount borrowed during the current year
ignoring the interest payments of previous years.
 It mainly shows the amount of government borrowings, that will
fulfil government expenses, excluding interest payments.
 So, a low or zero primary deficit shows that interest payments on
previous loans have forced the government to borrow.
 DEFICIT FINACING
Deficit Financing refers to the financing of the
budgetary deficits.
 THE SOURCES OF DEFICIT FINANCING ARE :
(i) Expansion in money supply: The Central Bank
may print money equal to the deficit against of
treasury bills of the Government.

• (ii) Public Borrowings: The Government borrows

from the public through market loans. It can also
borrow from international agencies.