Public Finance: Budget Making Process

The Process of Budget Making

• Governments all over the world have to perform various functions, including protecting territories, maintaining law and order, providing public goods, and implementing plans for economic and social welfare.
• To execute these functions efficiently, governments require adequate financial resources, and budgeting is a powerful policy instrument to regulate and restructure a country's economic priorities.
• The need for budgeting arises from the need to efficiently allocate limited resources to ensure maximum social welfare.
• The objectives of budgeting include:
  • Redistribution of income and wealth
  • Reduction/elimination of economic fluctuations to bring in stability
  • Sustainable increase in real GDP
  • Reduction in regional disparities

Budget Concepts and Terminologies

• A budget is a statement that presents the details of 'where the money comes from' and 'where the money goes to'.
• A government budget is a document presented for approval and legislation by a government, containing estimates of the proposed expenditure for a given period and the proposed means of financing them.
• The budget includes projections for the economy and its various sectors, such as agriculture, industry, and services.
• The budget also contains estimates of the government's accounts for the next fiscal year, called budgeted estimates.

Sources of Revenue

• Government receipts are classified into two categories:
  • Revenue receipts (tax revenue and non-tax revenue)
  • Capital receipts (debt receipts and non-debt capital receipts)
• The broad sources of revenue are:
  • Corporation tax
  • Taxes on income
  • Wealth tax
  • Customs duties
  • Union excise duties
  • Goods and services tax (GST)
  • Taxes on union territories
• Non-tax revenues include:
  • Interest receipts
  • Dividends and profits from public sector enterprises
  • Surplus transfers from the Reserve Bank of India
  • Other non-tax revenues
• Capital receipts include:
  • Non-debt capital receipts (recoveries of loans and advances, miscellaneous capital receipts)
  • Debt capital receipts (market loans, short-term/Treasury bill borrowings, securities issued against small savings)

Public Expenditure Management

• Effective public expenditure management is essential for governments to ensure that the level of aggregate public expenditure is consistent with a sustainable macroeconomic framework.
• Public expenditure affects the allocation of resources among various uses and should be channeled to socially desirable areas.
• Public expenditure programmes or projects should be designed and implemented to provide given levels of outputs or achieve specific objectives at minimum cost.
• The Department of Expenditure of the Ministry of Finance is the nodal department for overseeing the public financial management system in the central government.

Public Debt Management

• In emerging market and developing economies, the government is generally the largest borrower.
• The government has to manage its debt carefully to ensure that it does not become a burden on the economy.### Public Debt
• Public debt refers to the debt incurred by the government to mobilize savings from the people in the form of loans, which are to be repaid with interest at a future date.
• Public debt management plays a crucial role in macroeconomic stability of a country and contributes to economic growth and welfare.

Debt Management Strategy

• The objective of debt management strategy is to efficiently raise debt at the lowest possible cost in the medium term while ensuring that financing requirements are met without disruption.
• The strategy is based on three pillars: low cost of borrowing, risk mitigation, and market development.

Institutions Responsible for Public Debt Management

• Reserve Bank of India (RBI) is responsible for domestic marketable debt, including dated securities, treasury bills, and cash management bills.
• Ministry of Finance (MOF) is responsible for external debt.
• Ministry of Finance (MOF) and RBI are responsible for other liabilities, such as small savings, deposits, and reserve funds.
• Internal Debt Management Department (IDMD) of RBI is responsible for managing the domestic debt of the central government and 28 state governments and two union territories.

Budget Concepts

• A balanced budget is a budget in which revenues are equal to expenditures.
• Unbalanced budget can be either surplus or deficit.
• Revenue receipts are receipts that neither create any liability nor cause any reduction in the assets of the government.
• Revenue expenditure is expenditure incurred for purposes other than creation of physical or financial assets.
• Capital expenditure is expenditure that results in creation of physical or financial assets or reduction in financial liabilities.

Deficits

• Budgetary Deficit or Overall Deficit is the excess of total estimated expenditure over total estimated revenue.
• Revenue Deficit is the excess of government's revenue expenditure over revenue receipts.
• Fiscal Deficit is the excess of total expenditure over total receipts excluding borrowings.
• Primary Deficit is the fiscal deficit of the current year minus interest payments on previous borrowings.

Consolidated Fund of India

• All revenues received, loans raised, and all moneys received by the government in repayment of loans are credited to the Consolidated Fund of India.
• Money can be spent from this fund only if appropriated by the parliament.
• The consolidated Fund has further been divided into 'revenue' and 'capital' divisions.

Contingency Fund of India

• A fund placed at the disposal of the President to enable him/her to make advances to the executive/Government to meet urgent unforeseen expenditure.
• Contingency fund enables the government to meet unforeseen expenditure and does not require prior legislative approval.

Public Account

• Under provisions of Article 266(1) of the Constitution of India, public account is used in relation to all fund flows where government is acting as a banker.
• Examples include Provident Funds and Small Savings.
• This money does not belong to the government but is to be returned to the depositors.### Corporate Tax
• Corporate tax is collected by the union government and falls under revenue receipts.

Government Borrowings

• Borrowings from foreign governments and institutions can be capital receipt or revenue receipt depending on the purpose of borrowing.

Revenue and Expenditure

• Revenue receipts include tax revenue, non-tax revenue, and other receipts.
• Capital receipts include recovery of loans, capital expenditure, and borrowings.
• Revenue expenditure includes salaries, interest payments, and subsidies.

Capital Receipts

• Capital receipts do not create any future repayment burden for the government.
• Examples of capital receipts include recovery of loans, sale proceeds from disinvestment, and non-debt capital receipts.

Budget and Deficits

• A budget is said to be unbalanced when government's expenditure exceeds government's revenue.
• Fiscal deficit refers to the excess of total expenditure over total receipts excluding borrowings.
• Revenue deficit is the excess of revenue expenditure over revenue receipts.

Government Securities

• 'Retail Direct' scheme facilitates investment in government securities by individual investors.

Grants and Credit

• Grants given by the central government to state governments are revenue expenditures.
• Short-term credit from the Reserve Bank to state governments is known as Ways and Means Advances (WMA).

Key Concepts

• Non-debt capital receipts are those that do not create any future repayment burden for the government.
• Primary deficit is the fiscal deficit minus interest payments.
• Fiscal policy refers to the use of government expenditure and taxation to influence the overall level of economic activity.

This quiz covers the process of budget making, sources of revenue, expenditure management, and management of public debt. Learn about government budget, its objectives, and key concepts.