Revision: Introductory Macroeconomics >> Government Budget and the Economy Economics Commerce (English Medium) Class 12 CBSE

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

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.

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.” 

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.

• "Fiscal Policy is the policy concerning the revenue, expenditure and debt of the government for achieving definite objectives." -Prof. Dalton 
• "Fiscal policy involves alterations in government expenditures for goods and services or the level of tax rates. Unlike monetary policy, these measures involve direct government entrance into the market for goods and services (in case of expenditure) and a direct impact on private demand (in the case of taxes)." – Prof. Gardner Ackley
• "We define fiscal policy to include any design to change the price level, composition or timing of government expenditure or to vary the burden, structure or frequency of tax payment." – G.K. Shaw
• Fiscal policy includes those "Changes in government expenditure and taxation designed to influence the pattern and level of activity." – Harvey and Johnson
• Fiscal Policy includes those "Changes in taxes and expenditure which aim at short run goals of full employment, price level and stability." – Otto Eckstein
• Fiscal Policy is defined as the policy under which the government uses the instruments of taxation, public spending and public borrowing to achieve various objectives of economic policy.

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

\[Y^*=\frac{1}{1-c}\left(\overline{C}- cT+c\overline{TR}+I+G\right)\]

\[C=\overline{C}+cYD=\overline{C}+c(Y-T+\overline{TR})\]

where,

\[Y_D=Y-T+\overline{TR}\]

\[AD=\overline{C}+c(Y-T+\overline{TR})+I+G\]

\[Y=AD\]

or

\[Y=\overline{C}+c(Y-T+\overline{TR})+I+G\]

\[\Delta Y=\frac{1}{1-c}\Delta G\]

or

\[\frac{\Delta Y}{\Delta G}=\frac{1}{1-c}\]

\[\frac{\Delta Y}{\Delta T} = \frac{-c}{1-c}\]

\[\frac{\Delta Y}{\Delta G} = \frac{1}{1-c}\]

\[\frac{\Delta Y}{\Delta G} = 1 \quad \text{when } \Delta G = \Delta T\]

\[\frac{\Delta Y}{\Delta TR} = \frac{c}{1-c}\]

• 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 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.

• Fiscal policy involves government expenditure, public revenue, and public debt (public borrowing).
• Its primary goal is to influence income, production, employment, and stabilise economic activity using the Keynesian approach.
• A budget can be surplus, deficit, or balanced depending on government revenue and government expenditure.
• Key instruments include government expenditure, taxation, public debt (public borrowing), and deficit financing.
• Fiscal policy corrects deficient demand (by increasing government expenditure or reducing taxes) and excess demand (by reducing government expenditure or increasing taxes).
• Government spending creates a multiplier effect on equilibrium income.

• A tax cut raises disposable income and shifts aggregate expenditure up by \(c \times \Delta T\), increasing output.
• The tax multiplier is negative and smaller in absolute value than the govt. expenditure multiplier.
• The balanced budget multiplier = 1 - equal increases in G and T still raise income.
• Proportional taxes flatten the AD curve and lower the multiplier value.
• Proportional taxes and transfers act as automatic stabilisers - they cushion GDP swings without new policy action.
• The transfer multiplier is positive but smaller than the expenditure multiplier, as only a fraction of transfers is spent.

• Budget deficits lead to borrowing, which adds to government debt and increases interest payments.
• Internal debt is less of a burden than foreign debt.
• Ricardian Equivalence states that borrowing and taxation are equivalent if consumers are forward-looking.
• Public investment financed through borrowing can benefit future generations if returns exceed interest costs.
• Crowding out occurs when government borrowing reduces funds available for private investment.
• Deficit reduction strategies include higher direct taxes, PSU disinvestment, and expenditure cuts.
• Deficits vary with the business cycle and do not always indicate an expansionary fiscal policy.