Definitions [6]
"A Government Budget is a statement of estimated receipts and expenditures of the government for a financial year."
Define of the following concept.
Balanced budget
A balanced budget occurs when the government’s total expenditure equals its total revenue during a financial year.
Balanced Budget = Total Expenditure = Total Revenue
Receipts which do not create a liability for the government or do not lead to reduction in assets, are known as revenue receipts.
- When the government raises funds either by incurring a liability or by disposing of/reducing assets, it is called a capital receipt.
- All those receipts of the government which create liabilities or reduce financial assets, are termed as capital receipts.
Define the following concept:
Budget
According to Prof. Johnson, “A state budget is a statement of the states estimated income and expenditure in a commencing period usually one year.”
According to Prof. Dimock, “Balanced estimate of expenditure and receipt for the given period of time.”
Define fiscal deficit.
The fiscal deficit is the excess of total expenditure, i.e. revenue and capital expenditure, over total receipts. This measure reflects total borrowings of the government during the financial year.
Fiscal deficit refers to the excess of total expenditure over total receipts, excluding borrowings, during the given fiscal year.
Formulae [6]
Revenue Deficit = Revenue Expenditure − Revenue Receipts
Fiscal Deficit = Total Expenditure − (Revenue Receipts + Non-Debt Capital Receipts)
Primary Deficit = Fiscal Deficit − Interest Payments
Revenue Deficit = Revenue Expenditure − Revenue Receipts
Fiscal Deficit = Total Expenditure − (Revenue Receipts + Non-Debt Creating Capital Receipts)
or
Fiscal Deficit = Revenue Deficit + Capital Expenditure − Non-Debt Creating Capital Receipts
Primary Deficit = Fiscal Deficit − Interest Payments
Key Points
- A government budget is a statement of estimated receipts and expenditures of the government for a financial year.
- The term "Budget" comes from the French word "Bougette" (leather bag).
- A financial year in India runs from 1st April to 31st March.
- It is constitutionally mandated - Article 112 (Union Budget) and Article 202 (State Budget).
- The budget has two parts: Revenue Budget and Capital Budget.
- It covers different types of budget deficits and government debt in a mixed economy.
- The Union Budget is presented and discussed in Parliament every financial year.
- The government budget has two main parts: Revenue Budget and Capital Budget.
- Revenue receipts do not create liabilities or reduce/sell assets.
- Revenue expenditure covers day-to-day operations and does not create assets or reduce liabilities.
- Capital receipts either create a liability or reduce government assets.
- Capital expenditure creates physical/financial assets or reduces liabilities.
- Disinvestment proceeds, public borrowing, and RBI/foreign loans are examples of capital receipts.
- Land, buildings, machinery, and loans to states/PSUs are examples of capital expenditures.
- The government budget has three core functions: Allocation, Distribution, and Stabilisation.
- Public goods are non-rivalrous and non-excludable — the private sector will not supply them due to the free rider problem.
- Redistribution is achieved through progressive taxes and transfer payments to alter personal disposable income.
- The stabilisation function manages aggregate demand to counter inflation and recession.
- Employment generation includes promoting labour-intensive technology and funding public works.
- The budget also controls PSU finances (revenues and expenditures) to manage public enterprises.
- Budget receipts = Revenue Receipts + Capital Receipts.
- Revenue receipts → neither create liabilities nor reduce assets.
- Capital receipts → create liabilities or reduce financial assets.
- Tax revenue = Direct (income tax, corporation tax) + Indirect (customs, excise, GST, service tax).
- Non-tax revenue includes PSU profits (BHEL, LIC) and commercial receipts (Doordarshan).
- Disinvestment is classified as capital receipt because it reduces government's financial assets.
- Borrowings = capital receipt because they create liabilities for the government.
- Revenue expenditure = no asset creation; no liability reduction.
- Capital expenditure = creates assets or reduces liabilities.
- Revenue expenditure is for day-to-day government functioning.
- Historically, Plan expenditure was linked to Five-Year Plans.
- Historically, Non-Plan expenditure covered general government services.
- Developmental expenditure promotes economic growth.
- Non-developmental expenditure supports essential government services.
- The Plan/Non-Plan classification was later discontinued due to its drawbacks.
- A Balanced Budget keeps government receipts and expenditure equal.
- A Surplus Budget means receipts exceed expenditure; used to control inflation.
- A Deficit Budget means expenditure exceeds receipts; used to tackle recession/depression.
- Deficit budgeting is the most commonly used approach in modern welfare states and developing economies.
- Budgets can also be classified as Revenue/Capital, Union/State, Ordinary/Emergency, Plan/Non-Plan (historical) and Development/Non-Development.
- Surplus and deficit budgets are used to influence aggregate demand in opposite directions.
- Budget deficit = Government spending > Government revenue.
- Revenue deficit signals the government is borrowing for consumption, not investment - leads to dissaving and reduced welfare spending.
- Fiscal deficit = total borrowing need of the government; it equals total expenditure minus non-borrowed receipts.
- Primary deficit = Fiscal deficit minus interest payments; it reveals the fresh borrowing requirement independent of past debt burden.
- Revenue deficit is always a sub-component of fiscal deficit; primary deficit is always smaller than fiscal deficit.
