Government Budget Introduction and Components

Government Budget Introduction

• A government budget is an annual financial statement detailing estimated government income (receipts) and spending (expenditures) for a specific period.
• Key objectives include allocating resources for public services, achieving economic stability through fiscal policies, ensuring equitable income distribution, reducing regional disparities, and fostering economic development.

Components of a Government Budget

• Revenue Budget: Consists of government revenue receipts and revenue expenditures.
  • Revenue Receipts: Primarily from taxes (e.g., income tax, GST, customs) and non-tax sources (e.g., dividends, interest).
  • Revenue Expenditure: Includes salaries, pensions, subsidies, and interest payments on debts.
• Capital Budget: Focuses on capital receipts and capital expenditures.
  • Capital Receipts: Include loans obtained, asset sales (disinvestment), and recovery of previous loans.
  • Capital Expenditures: Investments in infrastructure, repayment of loans.

Types of Budgets

• Balanced Budget: Government receipts equal expenditures.
• Surplus Budget: Government receipts exceed expenditures.
• Deficit Budget: Government expenditures exceed receipts.

Types of Deficits

• Revenue Deficit: Calculated as Revenue Expenditure minus Revenue Receipts. Indicates insufficient funds to cover operating expenses.
• Fiscal Deficit: Calculated as Total Expenditure minus Total Receipts (excluding borrowings). Measures the government's borrowing needs.
• Primary Deficit: Calculated as Fiscal Deficit minus Interest Payments. Reflects the borrowing required to fund the government's operations after interest payments are considered.

Implications of Deficits

• Excessive borrowing creates a substantial national debt.
• This can necessitate increased taxation or reduced public expenditure.
• Deficits can also contribute to inflationary pressures.

Budgetary Policy Instruments

• Taxation: Adjusting tax rates to influence economic activity.
• Public Expenditure: Allocating funds for public services and infrastructure.
• Borrowing: Obtaining funds through internal or external loans.

Types of Government Expenditures

• Developmental Expenditure: Spending on areas like health, education, and infrastructure improving long-term economic growth.
• Non-Developmental Expenditure: Spending on areas like defense, pensions, and interest payments, less directly contributing to long-term growth.

Fiscal Policy

• Fiscal policy involves the government using taxation, spending, and borrowing to influence the overall economy.
  • Expansionary Fiscal Policy: Increasing government spending and/or decreasing taxes to stimulate economic growth.
  • Contractionary Fiscal Policy: Decreasing government spending and/or increasing taxes to curb economic activity, often to manage inflation.

Budget as a Tool for Economic Development

• Government budgets can be used to redistribute income more equitably.
• They can significantly reduce regional disparities.
• They can promote economic stability and promote employment opportunities.

Important Terminologies

• Direct Taxes: Taxes individuals directly pay, such as Income Tax.
• Indirect Taxes: Taxes levied on goods and services, such as GST.
• Plan vs. Non-Plan Expenditure: A distinction made to differentiate between government expenditures allocated to specific development plans or those for ongoing operational needs.