Government Budget and the economy

 Meaning of Budget

 A government budget is an annual financial statement that estimates the government's receipts and expenditures for the fiscal year There are two components of govt budget – Revenue budget and Capital Budget. 

Key Components of the Budget:

• Revenue Budget:

  This deals with the government's regular income and expenses.

  • Revenue Receipts: These are receipts that do not increase government liabilities or decrease assets (e.g., taxes, interest receipts, dividends). 
  • Revenue Expenditure: These are expenses that do not create assets or reduce liabilities (e.g., salaries, subsidies, interest payments). 
• Capital Budget:

  This focuses on transactions that affect the government's assets and liabilities.

  • Capital Receipts: These receipts either create liabilities (borrowings) or reduce assets (disinvestment). 
  • Capital Expenditure: These expenses either create assets (infrastructure) or reduce liabilities.
• Objectives of a Government Budget:
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(i) Reduction of Inequalities – To reduce inequalities of income and wealth, government can influence distribution of income through levying taxes on the rich and spending more on poor along with granting subsidies to poor. This will reduce income of the rich and raise standard of living of the poor. Government uses progressive taxation policy to reduce inequalities among the people.

(ii)Reallocation of Resources – To reallocate resources in line with social and economic objectives, government provides more resources into socially productive sectors where private sector is not coming, e.g., sanitation, water supply, rural development, education, health etc. 

(i(iiii) To achieve economic stability – Government can bring economic stability i.e., can control fluctuations in general price level through taxes, subsidies and expenditure. For instance, when there is inflation, government can reduce its own expenditure and when there is depression characterized by falling output and prices, government can reduce taxes and grant subsidies to encourage spending by people.

(iv)Management of public enterprise – to finance and manage public enterprises which are of the nature of monopolies like railways, power generation and water lines etc.

(i

Components of Budget 

Budget Receipts – (a) Revenue Receipts and (b) Capital receipts 

(ii)Budget Expenditure – (a) Revenue Expenditure and (b) Capital Expenditure(b) Capital receipts 

Revenue Receipts – Revenue receipts refer to those receipts of the government which

(i) do not create any liability for the government for example – tax receipts  or 

(ii) do not cause any reduction in the assets of the government for example – non-tax receipts .

Revenue receipts consist of tax revenue and non-tax revenue.

Taxation – A tax is a compulsory payment made by an individual, household or a firm to the government without reference to anything in return

Classification of Taxation 

1.Progressive and Regressive Taxes

2.Direct and Indirect Taxes

Value Added Tax (TAX) is an indirect tax which is imposed on value added at the various stages of production. Value added refers to the difference between value of output and value of intermediate consumption. It is imposed at each stage of production and is a proportional tax. 

Specific Tax is a tax which levied on a commodity on the basis of its units, size or weight.

Direct Taxes – Taxes which are not shifted i.e., the incidence of taxes  which falls on persons who pay them to the government are direct taxes. For example – income tax, wealth tax etc. 

Indirect Taxes – The burden of tax is shifted to other i.e., tax is levied on a commodity is termed as indirect tax. For example – sale tax, custom duty, GST etc. 

Non-Tax Receipts

These are those receipts which are received from sources other than taxes like fees, fine, escheat etc. Some of the non-tax receipts are as follows

(i) Fees – A fee is a payment to the govt for the services rendered to public e.g., land registration fees, court fees etc.                                             

(ii) Licence and permit fee – It is payment made to govt to seek permission for something e.g., licence fee paid to get licence to drive vehicles or for permission of keeping a gun etc.

(iii) Special Assessment – Refers to the payments made by the owners of those properties whose value has appreciated due to development activities of the government.

(iv) Escheat –  refers to claim of the government on the property of a person who dies without leaving behind any legal will.

 

(v) Fines and Penalties – Fines and penalties are those payments which are made by those who breaks laws. Its actual aim is to force the people to be law-abiding. It is determined by the govt in an arbitrary manner, depending on the degree of offence.

vi) Gifts and Grants – Govt receives gifts and grants from within the country and abroad. This is not a permanent source of revenue. This is generally received during natural calamities like flood, earthquake and may be during pandemic situations.

(vii) Income from Public Enterprises – Profits from public enterprises, e.g., Indian Railways, Indian Oil, SAIL etc., owned by the govt, constitutes the income of the govt. here, the objective is to earn revenue.

(viii) Forfeiture of share – The penalties imposed by courts for non-fulfilment with orders or non-fulfilment of conditions of agreement or contract etc.

 

Capital Receipts 

These are those estimated receipts  by the govt during the fiscal year which affect asset or liability status of the govt. These receipts 

(i)Create a corresponding liability for the govt e.g., borrowings 

(ii)Lead to reduction in assets of govt e.g., disinvestment, recovery of loan\. 

Capital Receipts

(i) Recovery of loan

(ii) Borrowings and other liabilities

(iii) Other receipts

Recovery Loans – The central govt offers loans to the state govt to cope with financial crises. When the loans are recovered, assets of the govt are reduced. Hence recovery of loans is a capital receipts. It is non-debt creating capital receipts. 

(ii)Borrowings and other liabilities – Borrowing creates liability for the govt . Accordingly, borrowings are treated as capital receipts. The govt borrow money from – The General Public, The Reserve Bank of India and The Rest of the World

(iii)Other receipts – It includes proceeds from disinvestment.

Meaning of Budgetary Expenditure 

It refers to the estimated expenditure of the govt, on its development and non-development programmes or its plan and non-plan programmes  during the fiscal year.

Revenue expenditure and Capital Expenditure 

Development expenditure and Non-development expenditure

Capital Expenditure

It refers to the estimated expenditure of the govt in a fiscal year which affects assets and liabilities status of the govt. this expenditure 

(i) create assets of the govt

(i(ii)cause reduction in liabilities of the govt 

For example –

(a)  purchase of shares of MNCs

(b) Expenditure of land and building  

Development Expenditure 

It is incurred on economic and social development of the country. It relates to growth and development projects of the country.

For example – expenditure on development of agriculture, industries, transport and communication, health , education etc.

Non-Development Expenditure 

It is the expenditure on general services of the govt which do not usually promote economic development. It relates to non-developmental activities of the govt.

For example – expenditure on administration, defence, justice, grants to state govt etc.

Plan Expenditure 

Plan expenditure is the expenditure to be incurred during the year in accordance with the central plan of the country. It is incurred on financing the objectives of the central plans of different sectors of the economy.

For example – planned expenditure on health, education, law and order etc.

Non-Plan Expenditure 

Non-Plan expenditure refers to all such govt expenditures which are non-planned of the govt.

For example – expenditure as a relief in Pandemic situation COVID-19, earthquake etc.

Budget Deficit

Budget deficit is defined as the excess of total estimated expenditure over total estimated revenue. When the govt expenditure exceeds its revenue it occurs a budgetary deficit.

Three Types of Deficit Budget

(a)Revenue Deficit 

(b)Fiscal Deficit 

(c)Primary Deficit

Revenue Deficit 

Revenue deficit is the excess of revenue expenditure over revenue receipt.

RD = RE - RR

Where RD = revenue deficit

RE = revenue expenditure 

RR = revenue receipt 

Implications of Revenue Deficit  

There are implications of revenue deficit. 

Firstly, a part of RD is financed through borrowed funds from the capital account. This implies that government’s investment or capital expenditure is reduced to the extent of deficit on the revenue account. This affects economic growth of the economy. 

Secondly, because of high revenue deficit, government has to borrow from the market which reduces the resources available for private investment. This again lowers the rate of economic growth.

Thirdly, it increases burden of taxes.

Fourthly, since borrowed funds from capital account are used to meet generally consumption expenditure of the government, it leads to inflationary situation in the economy with all its ills.

Fiscal Deficit (FD)

Fiscal Deficit is the excess of total expenditure over total receipts (revenue + capital other than borrowing)    

FD = BE – BR  excluding borrowings

FD =Borrowings 

                  Implications of Fiscal Deficit – Greater fiscal deficit implies greater borrowings by the government   (i)  causes inflation  (ii) increases foreign dependence  (iii) accumulates financial burden for future generation and (iv) multiple borrowings (v) Debt trap

Sources of Financing Fiscal Deficit

(i) Borrowings 

(ii) Deficit Financing

Measures to reduce Fiscal Deficit

Measure to reduce Public expenditure 

(a)A drastic reduction in wasteful expenditure – Subsidies

(b)By curtailing non-plan expenditure

Measures to increase revenue 

(c)Increase in existing tax rate and impose new taxes

(d)Efforts should be made to increase income from public sector enterprise

(e)Tax evasion should be controlled

Primary Deficit (PD)

Primary deficit is the difference between fiscal deficit and interest payments.

How to reduce Primary Deficit

(i)Effort should be made to reduce fiscal deficit

(ii)Early repayment of loans 

 

 Budget Deficits and Surpluses:

Budget Deficit: Occurs when the government's expenditures exceed its receipts. 

Budget Surplus: Occurs when the government's receipts exceed its expenditures. 

Balanced Budget: Occurs when the government's expenditures equal its receipts. 

Important Concepts:

Disinvestment: The sale of government-owned assets, like shares in public sector companies. 

Fiscal Policy: The government's use of spending and taxation to influence the economy. 

Revenue Deficit: A situation where revenue expenditure exceeds revenue receipts.