Government Budget and the Economy PDF

**Unit 4** **Government Budget and the Economy** **Definition** 1. It is an annual statement, showing item wise estimates of receipts and expenditures during a financial year. 2. As per Article 112 of constitution government is supposed to present Annual Financial Statement in front of...

**Unit 4** **Government Budget and the Economy** **Definition** 1. It is an annual statement, showing item wise estimates of receipts and expenditures during a financial year. 2. As per Article 112 of constitution government is supposed to present Annual Financial Statement in front of the Parliament. 3. It unveils the fiscal policy of the government. **Objectives of Government Budget** 1. **High rate of growth of GDP-** Budget is a frame-work of policies meant to increase the production. Government spends on infrastructure, gives tax rebate and incentive for productive ventures. Special Economic Zones are set to increase production. 2. **Redistribution of income and wealth (Reducing inequalities in income and wealth)-** Government aims to influence distribution of income by imposing taxes on the rich and spending more on the welfare of the poor thus raising standard of living of poor. 3. **Re-allocation of resources-** Public goods like defence, administrative services, parks etc. cannot be supplied by private sector because they are not profitable. Even if they supply the price is very high which is unaffordable by poor. Government can reallocate resources by giving tax concessions to produce necessities and impose heavy taxes to discourage harmful goods. Government can start producing goods and services directly. 4. **Balance regional Growth-** Through liberal tax laws for the backward region and investment on infrastructure in such regions government tries to achieve this objective. 5. **Economic Stability-** Through taxation and expenditure policy government tries to correct the situation of inflation and deflation. 6. **Management of Public Sector Enterprises-** Through budget makes provision for such enterprises. **Components of Budget** **Budget can be classified as** 1. **First way** a. **Revenue Budget** i. **Revenue Receipt** ii. **Revenue Expenditure** b. **Capital Budget** iii. **Capital Receipt** iv. **Capital Expenditure** 2. **Second way** c. **Budgetary Receipts** v. **Revenue Receipt** vi. **Capital Receipt** d. **Budgetary Expenditure** vii. **Revenue Expenditure** viii. **Capital Expenditure** **Budgetary Receipts** *Budgetary receipts refer to the estimated money receipts of the government from all sources during* a *given fiscal year*. 1. **Revenue Receipts-** They neither reduce assets nor create liability. 2. **Capital Receipts-** They either reduce assets or create liability. RECEIPT TYPE ASSET REDUCTION LIABILITY CREATION -------------- ----------------- -------------------- REVENUE NO NO CAPITAL YES YES +-----------------------------------+-----------------------------------+ | #### REVENUE RECEIPTS | #### CAPTIAL RECEIPTS | +===================================+===================================+ | #### Revenue receipts refer to th | #### Capital receipts refer to th | | ose receipts which neither create | ose receipts which either create | | any liability nor cause any redu | any liability or cause a reductio | | ction in the assets of the govern | n in the assets of the government | | ment. |. | +-----------------------------------+-----------------------------------+ | #### They are regular and recurri | #### They are irregular and non-r | | ng in nature. | ecurring. | +-----------------------------------+-----------------------------------+ | #### Examples- Tax Revenue (like | #### Examples- Borrowings, Disinv | | income tax, sales tax, etc.) and | estment, Recovery of loan etc. | | non-tax revenue (such as fee, int | | | erest, etc.) | | +-----------------------------------+-----------------------------------+ **Revenue Receipts** They can be classified as- 1. Tax Receipt 2. Non-Tax Receipt **Tax Revenue (Receipts)** It refers to sum total of receipts from taxes and other duties imposed by the government. *Tax is a compulsory payment made by people and companies to the government without reference to direct benefit in return.* ***Classification of taxes*** 1. Direct & Indirect taxes 2. Progressive & Regressive taxes 3. Ad Valorem & Specific taxes **Direct & Indirect Taxes** 1. **Direct Taxes** **Those taxes, burden of which cannot be shifted to others. The person who pays the tax bears the burden also.** **Examples: Income tax, Corporation tax, Interest tax, Wealth tax, Gift tax, Estate duty** 2. **Indirect Taxes** **Those taxes, whose burden can be shifted to another person. The person who pays the tax doesn't bear the burden** **Examples: GST, Sales Tax, Entertainment Tax, Excise Tax, Custom Duties, Service Tax** +-----------------------------------+-----------------------------------+ | #### Direct Taxes | #### Indirect taxes | +===================================+===================================+ | #### Direct taxes are those taxes | #### Indirect taxes are those tax | | which are imposed on income and | es which are imposed on goods and | | properties of individuals and com | services. | | panies. | | +-----------------------------------+-----------------------------------+ | #### The burden of a direct tax c | #### The burden of an indirect ta | | annot be shifted. | x can be shifted. | +-----------------------------------+-----------------------------------+ | #### They are generally progressi | #### They are generally proportio | | ve in nature. | nal in nature. | +-----------------------------------+-----------------------------------+ | #### Examples- Income tax, intere | #### Examples-Sales tax, service | | st tax, capital gains tax etc. | tax, Excise duty etc. | +-----------------------------------+-----------------------------------+ **Progressive & Regressive Taxes** 1. **Progressive tax-** a. **Rate of tax increases with an increase in income** b. **Burden more on rich** 2. **Regressive tax** c. **Rate of tax decreases with increase in income.** d. **Burden more on poor** **Ad Valorem & Specific Taxes** 1. **Value Added Tax (VAT)** **Imposed on value added by producer** 2. **Specific Taxes** **Levied on the basis of units, size, weight etc.** **Non-tax Revenue (Receipts)** **It is the revenue earned by the government other than taxes.** **Examples: Interest Receipts, Profits & Dividends, Fees, License Fee, Fines & Penalties, Escheats, Gifts & Grants, Forfeitures, Special Assessment Tax** **Capital Receipt** **They either create liability or reduce an asset.** 1. **Debt Creating** 2. **Non-Debt Creating** - **Recovery of Loans (given to states).** - **Other Receipts- Disinvestment.** **Budgetary Expenditures** 1. **Revenue Expenditure** They neither create assets nor reduce liability. They are- 1. **Recurring in nature.** 2. **Incurred on normal functioning of government** 2. **Capital Expenditure** 1. **Non-recurring in nature.** 2. **Adds to capital stock and productivity of economy.** EXPENDITURE TYPE ASSET CREATION LIABILITY REDUCTION ------------------ ---------------- --------------------- REVENUE NO NO CAPITAL YES YES +-----------------------------------+-----------------------------------+ | #### Revenue Expenditure | #### Capital Expenditure | +===================================+===================================+ | #### Revenue expenditure refers t | #### Capital expenditure refers t | | o the expenditure which neither c | o the expenditure which either cr | | reates any asset nor causes reduc | eates any asset or causes a reduc | | tion in any liability of the gove | tion in any liability of the gove | | rnment. | rnment | +-----------------------------------+-----------------------------------+ | #### It is recurring in nature. | #### It is non-recurring in natur | | | e. | +-----------------------------------+-----------------------------------+ | #### Examples- Salary, pension, I | #### Examples- Repayment of borro | | nterest, etc. | wings; Construction of Metro, sch | | | ool, hospital etc. | +-----------------------------------+-----------------------------------+ **Types of Budget** 1. **Balanced Budget** When Total Expenditure of government is equal to Total Receipts of government 2. **Surplus Budget** When Total Expenditure of government is less to Total Receipts of government 3. **Deficit Budget** When Total Expenditure of government is more to Total Receipts of government **Budgetary Deficits** **There are three types of deficits** 1. **Revenue Deficit** 2. **Fiscal Deficit** 3. **Primary Deficit** **Revenue Deficit** It is the difference between Revenue Expenditure and Revenue Receipt **Implications of Revenue Deficit** 1. It indicates the inability of the government to meet its regular and recurring expenditure 2. It implies that government is dissaving 3. Government makes up this deficit by borrowing which increases future liabilities. 4. Government will have to curtail its expenditure on welfare. 5. Government is compelled to disinvest **Fiscal Deficit** It is the difference between Total Expenditure and Total Receipt (excluding borrowings) As Fiscal Deficit is financed through borrowings, it can be alternatively found in the following way: **Implications of Fiscal Deficit** 1. It leads to debt trap. 2. Government resorts to deficit financing which leads to inflation. 3. It increases foreign dependence. 4. It hampers future growth. 5. Crowding out effect **Primary Deficit** It is the difference between Fiscal Deficit and Interest Payments **Implications of Primary Deficit (same as Fiscal Deficit)** 1. It indicates the government borrowing requirements to meet expenses other than the interest payments. 2. Zero Primary Deficit indicates that government is forced to borrow to repay interest on past borrowings.