Revision: Public Finance >> Government Budget Economics ISC (Commerce) Class 12 CISCE

1. "It is a document containing a preliminary approved plan of public revenue and expenditure." – Prof. Rene Stourn
2. "The budget has come to mean the financial arrangements of a given period, with the usual implication that they have been submitted to the legislature for approval." – Prof. Bastable
3. "A Govt. budget is a financial plan concluding outlay and receipt of the Govt." – Richard Good

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.” 

"A Government Budget is a statement of estimated receipts and expenditures of the government for a financial year."

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.

• According to Prof. Findlay Shirras, "National Debt is a debt which a state owes to its subjects or to the nationals of other countries."
• Prof. P.E. Taylor defines, "The debt is the form of promises by the Treasury to pay to the holders of these promises a principal sum and in most instances interest on that principal. Borrowings is resorted to in order to provide funds for financing a current deficit."
• According to Prof. Carl S. Shoup, public debt or government borrowings are, "The receipts from the sale of financial instruments by the government to individuals or firms in the private sector to induce the private sector to release manpower and real resources and to finance the purchases of those resources or to make welfare payments or subsidies."

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 + Capital Receipts excluding borrowings)

Primary Deficit = Fiscal Deficit − Interest Payments

• 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.

• 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.

• Planning: Estimates income & expenditure for smooth governance
• Fiscal Integration: Coordinates tax, spending & borrowing decisions
• Economic Impact: Influences production, investment & income distribution
• Policy Tool: Promotes growth, stability, equity & BOP balance
• Performance Indicator: Reflects efficiency and priorities of government
• Public Accountability: Ensures control & transparency via Parliament
• Resource Allocation: Directs resources as per social & economic goals

Economic & Functional Budget

• Economic Budget: Classifies expenditure by nature (wages, salaries, borrowing, investment).
• Functional Budget: Classifies expenditure by functions (defence, education, health, transport).

Planning & Programme Budgeting System (PPBS)

• Links long-term planning with budgeting.
• Uses cost–benefit and systems analysis to relate inputs with outputs.

Performance Budget

• Focuses on functions, activities, and projects.
• Shows results and achievements, not just spending.

• 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.

Adoption in India

• Introduced in 1987 by the Central Government
• Applied to development & non-development expenditure
• Aim: Control wasteful public spending

Requirements for Success

• Review of all programmes
• Expert support & staff training
• Better MIS and awareness

Problems in India

• Bureaucratic resistance
• Complex decision-making
• Poor communication systems
• Corruption & lack of professional approach

Result

• Effective if properly planned; helps cut unproductive expenditure

• Budget Deficit: Total Expenditure > Total Receipts
• Revenue Deficit: Revenue Expenditure > Revenue Receipts
• Fiscal Deficit: Total Expenditure − (Receipts excluding borrowings)
• Primary Deficit: Fiscal Deficit − Interest Payment

• Public Revenue: Income of the government from taxes, fees, borrowing, grants, etc.
  Includes Revenue Receipts (tax & non-tax) and Capital Receipts (loans, foreign grants, provident funds).
• Public Expenditure: Spending by the government for administration, protection, and economic & social welfare of people.

• Public expenditure is government spending by central, state and local bodies for public welfare and development.​
• It includes spending on defence, administration, health, education, roads and social welfare schemes.​
• Revenue expenditure covers day‑to‑day running costs like salaries, pensions and routine services.​
• Capital expenditure creates assets and development, e.g. infrastructure projects and loans.​
• Developmental expenditure is productive and raises employment, output and welfare (health, education, industry, R&D).​
• Non‑developmental expenditure is mainly compulsory and less productive, such as defence and general administration.​
• Public expenditure is rising due to more government welfare functions, population growth, urbanisation and higher defence and administration costs.​

• Developmental Expenditure: Spending that promotes economic and social development.
  Examples: agriculture, industry, education, health, and development grants/loans to states.
• Non-Developmental Expenditure: Spending on general administrative and essential services.
  Examples: defence, administration, interest payments, pensions, and non-development loans/grants.

• Tax: Compulsory payment to government without direct return.
• Direct Tax: Paid by same person (income tax).
• Indirect Tax: Burden shifted (GST).
• Proportional Tax: Same rate for all incomes.
• Progressive Tax: Higher income → higher tax rate.
• Regressive Tax: Higher income → lower tax rate.
• Degressive Tax: Rate rises up to a limit, then constant.
• Single Tax: One main tax.
• Multiple Tax: Many taxes (most suitable).
• Specific Tax: Based on quantity.
• Ad-valorem Tax: Based on value (fairer).

• Non-tax revenue is government income from sources other than taxes, such as fees, prices, fines, gifts and borrowings.
• Fees: Paid for specific government services, e.g. education fee, registration fee.
• Prices of public goods/services: Paid for services sold by government, e.g. railway fares, postal charges.
• Special assessment: Extra charge on people in an area that gets special facilities like better roads or streetlights.
• Fines and penalties: Amounts paid for breaking laws, e.g. traffic fines.
• Gifts, grants and donations: Voluntary payments or foreign aid given to the government.
• Special levies: High duties on harmful goods like alcohol or other intoxicants to reduce their use.
• Borrowings: Money raised through loans, bonds and deposits from people and institutions at home and abroad.