Government

Budget
Chapter 10
 Budget
“Budget is statement of the
estimates of the government
receipt and government
expenditure during the
period of the financial
(fiscal) year which runs from
April 1 to March 31st”.
Silent feature (characteristics) of
budget
The salient features of government budget are as under
 It is an annual financial action plan for the next financial
year.
 It is presented in monetary value.
 It is produced before the Parliament by the finance minister.
 It is approved by the Parliament before implementation.
 It is a guideline of government policy of the government.
 Objectives of a budget
 Reducing inequalities in income and wealth: The government uses
physical instruments of tax station (government. Revenue) and
subsidies (govt. expenditure) to improve the distribution of income
and wealth in the economy.
 Reallocation of resources. It refers to change in direction of
resources from one used to the other. The government seeks to
reallocate resources with a view to balance the goals of profit
maximization and social welfare. Unlike private Enterprises,
government targets social welfare also along with profit motive.
Production of goods which are injurious to health is discouraged
through heavy taxation. On the other hand, production of ‘socially
useful goods’ (like, ‘khadi’), is encouraged through subsidies.
 Economics stability: using its revenue and
expenditure policy, the government ensures
economic stability in the economy. Free interaction
of market forces I.e., the forces of Supply and
demand are bound to generate trade cycles, also
called business cycles.
 Growth of economy. Govt. through its fiscal policy
targets to inject sufficient recourse by encouraging
savings and investment. This will further enhance
capital formation and level of production causing
Rise and national income and economic growth.
Structure and components of
budget
Budget receipt

1. Revenue receipt
2. Capital Reserve
Budget expenditure

1. Revenue expenditure
2. Capital expenditure
Meaning of budget
Receipts
Budget receipt: refers to estimated
money receipt of the government from
all sources during the fiscal year.
Revenue receipt
Capital receipt
Revenue receipts: are those estimated receives of the government
during the fiscal year which do not affect assets or liabilities status
of the government. These receipts:
Do not create a corresponding liability for the government example
tax receipts.
Do not lead to reduction in Assets of the government example
fees, fines, grants etc.
 Tax revenue receipts. Receipts from all types of direct and
indirect taxes, example, Income Tax, Corporation tax GST etc.
 Non tax revenue receipts. These are received from sources other
than taxes, example fees, fines, grands etc.
Tax receipts
 A tax is a compulsory payment made by an individual common
household or a Farm to the government without anything
corresponding in return.
 It is a compulsory payment I.e., if tax is imposed by government
on a person it has to pay it. It is compulsory payment.
 The revenue received through taxes is spent on public welfare.
 There is no proportionate relation between the tax and social
benefits offered correspondingly.
 Payment of taxes is the personal responsibility of the person.
 Taxes are imposed legally i.e according to the law of land.
 Types of Taxes
 Directtax: Direct taxes are those taxes whose final
word on falls on that person who makes the payment
to the government. Hair combing the incidence and
impact of the text life on the same person. Example:
Income tax.
 Indirect
taxes: Indirect taxes are the taxes which are
paid to the government by one person but their
burden is gone by and the person. Here are the
incidence and impact to the text fly on different
persons, Example: GST.
Difference between direct and indirect
tax
Non tax receipts
Non tax receipts are those receipts which are received from
sources other than Taxes like fees, fine, escheat etc.
 Fees: One of the main sources of non tax revenues of the
government is fees charged by government. It is improved by
the government to cover the cost of services provided by it.
 Licence and permit fee: It is payment made to government to
seek permission for something, licence fee paid to get licence
to drive vehicles all for permission of keeping a gun etc.
 Special assessment: It is that payment which is made by the
owners of those properties whose value has appreciated due
to development activities of the government.
 Escheat: Escheat refers to that income of the
government which accrues out of the property which
does not have a legal heir.
 Fines and penalties: Fines and penalties are those
payments which are made by those who break laws.
 Gifts and Grants: Government receives gifts and Grants
from within the country and abroad.
 Interest on loans: Receipts of interest by government on
loans given by it to state governments, union territories
etc. Is an important source of non tax revenue.
Capital receipts
Capital receipts are those estimated ships
of the government during the fiscal year
which effects asset celebrity status of the
government.
 Createa corresponding liability for the
government e.g., borrowing,
 Lead to reduction in assets of government
e.g., disinvestment, recovery of loans.
Sources of capital receipts
Borrowings and other
liability
Recovery of loans
Other receipts
(disinvestment)
 Borrowing and other liabilities: Borrowing creates
liability for the government. Accordingly e
borrowings are to be treated as capital receipts. It is
a debt creating capital receipts.
The government borrows money from:
 The general public (market borrowings).
 The Reserve Bank of India.
 The rest of the world (Foreign governments and
international Institutions like World Bank and IMF).
 Recovery of loan: The debtors are assets for the government.
Recovery of loans causes A reduction in assets (debtor’s) of
the government. Hence, recovery of loan is a capital receipts.
It is a non debt creating capital receipts.
 Other receipts: It includes all other capital receipts.
Disinvestment (Disinvestment is the opposite of investment)
in the equity holding is one such receipts. Disinvestment
occurs when the government sells off its shares of public
sector enterprises to private sector. It is called privatisation.
It is treated as capital receipt because it causes reduction in
Assets of the government. It is a non dept creating capital
receipt
 Meaning of budgetary
Expenditure
It refers to the estimated
expenditure of the government
on its ‘development and non
development programmes’ on
its plans and non plan
programs during the fiscal year.
Revenue expenditure and capital
expenditure
Revenue expenditure
 Revenue expenditure refers to the estimated
expenditure of the government in a fiscal year which
does not affect Assets and liabilities status of the
government.
 Does not create assets of the government.
 Does not cause a reduction in Liabilities of the
government.
For example, old age pension, salaries and scholarships,
expenditure on administrator, defence etc.
Capital Expenditure
 Capital expenditure refers to the estimated
expenditure of the government in a fiscal year which
affects assets and liabilities status of the government.
 Creates assets of the government,
 Causes a reduction in Liabilities of the government.
For example, purchase of share of MNC‘s construction
of dams and steel plants, repayment of loans etc.
Development expenditure and
non development expenditure
Development expenditure
 Development expenditure is incurred on economic
and social development of the country.
 Itrelates 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
 Non development expenditure is the expenditure
of general services of the government which do
not usually promotes economic development.
 Itrelates to non developmental activities of the
government.
For example, expenditure and administration,
defence, justice, grants to state government etc.
Plan expenditure and non plan
expenditure
Plan expenditure
 Plan expenditure is expenditure to be incurred
during the year in accordance with the central
plan of the country.
 Itis incurred only financing the objectives of
Central Plains 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
government expenditures which are non planned.
 Itis incurred on financing those projects which
are not plant in the central plan.
For example, expenditure as a relief to the
earthquake victims, expenditures on construction
of houses demolished due to floods etc.
 Meaning and types of budgetary
deficit
Budgetary deficit refers to the situation where in the
total estimated expenditure of the government
exceeds its total estimated revenue. Budgetary deficit
can be of three types:
 Revenue deficit
 Fiscal deficit
 Primary deficit
Revenue deficit

 Revenuedeficit signifies the state when the

estimated government expenditure exceeds
the estimate government received one
revenue account during the year. It can be
expressed as under:
 Revenue deficit = Total revenue expenditure
- total revenue receipts
Interpretations of revenue
deficit:
 It shows that the government is unable to meet its
regular and recurring expenditure
 It shows that the government is using up savings
 It shows that capital receipts are used for meeting
extra consumption expenditure
 Higher revenue deficit alarms the government either to
Curtail expenditure or increase revenue.
How to minimise revenue
deficit?
 Reduction of Expenditure. The government
should take appropriate and effective steps to
bring down the expenditure along with avoiding
unproductive or unnecessary expenditure.
 Increase in revenue. The government should
leave no stone unturned to increase the
receipts from different sources of tax revenue
as well as non tax revenue.
 Fiscal deficit
 Fiscaldeficit refers to the situation where in the
total estimated expenditure exceeds the total
estimated Assets of the government during the year.
Here total expenditure include revenue expenditure
as well as capital expenditure similarly, total receipts
includes revenue receipt as well as capital receipts
excluding borrowings. It can be expressed as under:
 Fiscaldeficit = Total expenditure- revenue receipt –
capital receipts (excluding borrowings )
Interpretations of fiscal
deficit
1. It shows the total borrowing requirement of the government– It
involves the burden of principal amount as well as the interest is
there on. Interest payment increase the revenue expenditure leading
toe revenue deficit. Thus the various cycle of physical deficit and
revenue deficit takes place and government has to take further loan
to repay the previous loan. Consequently, the nation trapped in the
debt- net.
2. It shows that the economy is suffering from inflationary pressure–
The government borrows from the Reserve Bank of India to meet the
fiscal deficit. The RBI prints new currency to make good the deficit
requirements. Thus the supply of money in the economy creates
inflation any situation.
 It
also shows increasing foreign Dependence-
The government borrows funds from abroad. It
means the dependence on foreign countries
goes on increasing.
 Adverse effect on future growth– Fiscal deficit
increase the burden for future generations in
the form of increased borrowings. As a result
the future growth and development prospects
of the nation are retarded.
 How to minimise and meet the fiscal
deficit
 Internaland external borrowing– The fiscal deficit can be
minimised and met by borrowings from internal sources
(public, commercial banks etc.)or from external sources (
foreign government , International organisations).
 Deficitfinancing– The government may borrow from the
central bank (RBi) against its securities to meet the
fiscal deficit. The Reserve Bank of India issues new
currency for this purpose. It is known as deficit financial.
Primary deficit
Primary deficit is that situation
of deficit when the amount of
interest payment has been
deducted from the fiscal deficit.
Primary deficit = fiscal deficit -
interest payment
Interpretations of primary deficit
1. It shows as to what extend the government borrowings
can meet the expenses other than interest payment.
2. A Low or zero primary deficit signifies that interest
commitments (on earlier loans) have compelled the
government to borrow.
3. Primary deficit is the basic reason of fiscal deficit. It is
experience of past so many years that high interest
payments on the past borrowings are mainly
responsible for existing fiscal deficit.