Government budget and the economy

GOVERNMENT
BUDGET AND THE
ECONOMY
Madan Kumar M.A.,M.A.,B.Ed.,M.Phil.,M.B.A.,

CONTENTS OF THE CHAPTER:-
• Government Budget – Meaning, Objective
• Components of Government Budget
• Classification of receipts – Capital and revenue
• Classification of expenditure
- Capital and revenue
• Balanced budget surplus budget, deficit budget
- meaning and implication
• Revenue deficit, Fiscal deficit, primary deficit
- Meaning and implication.

MEANING OF GOVERNMENT BUDGET:-
A government budget is an annual
statement of the estimated receipts and
estimated expenditure of the
government during a fiscal year.

OBJECTIVE OF THE GOVERNMENT BUDGET

REALLOCATION OF RESOURCES
. Reallocation of resources -:It means
managed and proper distribution of
resources. As private sector can not
provide all the goods and services the
government has to provide these
goods.

TO REDUCE INEQUALITIES IN INCOME
AND WEALTH-
II. To reduce inequalities in income and wealth-:
Through budget government tries to reduce the
gap between Rich and poor. This is achieved
through taxing the rich and subsidizing the needs
of poor people. Taxing the income of rich people
reduces their purchasing power and subsidies to
poor people increases real income of poor people.

TO ACHIEVE ECONOMIC STABILITY
III. To achieve economic stability -: There may be inflation or
depression in the economy. Inflation is the situation of rise in
price level whereas depression is lack of demand. Both the
situations are undesirable. During depression government
reduces rate of tax and borrowing and increases public
expenditure. During inflation government increases the rate
of tax and borrowing and decreases public expenditure.

IV. Management of Public Enterprises
V. To achieve economic growth

COMPONENTS OF GOVERNMENT
BUDGET:-
1. Budget Receipts
2. Budget Expenditure

CLASSIFICATION OF BUDGET
RECEIPTS/EXPENDITURE :-
 Capital Receipts:
 Revenue Receipts:-
 Revenue Expenditure:-
 Capital Expenditure:-

1. Capital Receipts: - Capital Receipts refer to those receipts of the
government which i) tend to create a liability or ii) Causes reduction in
its assets. All the Capital receipts are broadly classified into three
categories.
2.
1) Recovery of loans :- These are Capital receipts because they reduce
financial assets of the government
2) Borrowings: - Funds raised by the government form the borrowing
are treated as capital receipts such receipts creates liability.
3) Other Receipts: - Funds raised through disinvestment are included in
this category. By this government assets are reduced.

2. Revenue Receipts:-
Any receipts which do not either create a liability or lead to reduction in
assets is called revenue receipts. Revenue receipts consist of 1) Tax
Revenue and 2) Non-Tax Revenue.

1) Tax Revenue: - A tax is a legal compulsory payment imposed by the
government on the people. All taxes are broadly classified into i) Direct
Tax
When the liability to pay a tax and the burden of that tax falls on the
same person, the tax is called direct tax. e.g. Income tax, corporation tax,
Gift tax etc.
ii) Indirect Tax.
When the liability to pay a tax falls on one person and burden of that tax
falls on some other person, the tax is called an Indirect tax. e.g. Sales tax,
Custom duties, Service tax etc.

2) Non-Tax Revenue: - Non tax revenue consists of all revenue receipts
other than taxes. For eg.:-
i) Interest
ii) Profit and dividend
iii) Fees and fines
iv) External grant-in-aid

MEANING OF BUDGET EXPENDITURE:-
Budget expenditure refers to the
estimated expenditure to be
incurred by the government
under different heads in a year.

 Revenue Expenditure:-
An expenditure which do not creates assets or reduces liability is
called Revenue Expenditure.
Examples are – Salaries of government employees, interest payment
on loan taken by the government, pension, subsidies, grants etc.
 Capital Expenditure:-
It refers to the expenditure which leads to creation of assets and
reduction in liabilities eg. Expenditure incurred on construction of
building, roads, bridges etc.

Balanced Budget:-
A Government budget is said to be a balanced in which government
receipts are shown equal to government expenditure
Surplus Budget:-
When government receipts are more than government expenditure in
the budget, the budget is called a surplus budget.

DEFICIT BUDGET:-
When government expenditure
exceeds government receipts in the
budget is said to be a deficit budget.

 Revenue Deficit:-
Revenue deficit refers to the excess of revenue expenditure of the
government over its revenue receipts.
Revenue deficit = Total revenue expenditure – Total revenue receipts.
Importance: - Since it is largely related with the recurring expenditure.
Therefore, high revenue deficit gives a warning to the government either to
cut expenditure or to increase revenue receipts. It also implies requirement
burden in future.

Fiscal Deficit:-
Fiscal deficit is defined as excess of total expenditure over total receipts excluding
borrowings.
Fiscal Deficit = Total budget expenditure - Total budget receipts net of borrowings.
Importance: - Fiscal deficit is a measure of total borrowings required by the government.
Greater fiscal deficit implies, greater borrowings by the government. This creates a large
burden of interst payments in the future that leads to increase in revenue expenditure,
causing an increase in revenue deficit. Thus a vicious circle sets in. In the present, a large
fiscal deficit may also lead to inflationary pressures.

Primary Deficit:-
Primary deficit is defined as fiscal deficit minus interest payment. It is
equal to fiscal deficit reduced by interest payment.
Primary deficit = Fiscal deficit – interest payment.
Importance: - Primary deficit signifies borrowing requirements of the
government. A low or zero primary deficit means that while
government’s interest requirement on earlier loans have compelled the
government to borrow but it is aware of the need to tighter its belt.

BALANCED BUDGET
= Estimated Government receipts = Estimated Government expenditure

SURPLUS BUDGET
Estimated government receipts ˃ estimated
government expenditure

DEFICIT BUDGET
Estimated government expenditure ˃ estimated
government receipts

REVENUE DEFICIT
Total Revenue expenditure – Total
Revenue receipts

FISCAL DEFICIT
 Total expenditure – total receipts excluding borrowing
 Borrowing

FISCAL DEFICIT
 Total Expenditure (revenue exp+capital exp) - total receipts other
than borrowing (revenue receipts +capital receipts excluding
borrowing )

PRIMARY DEFICIT
Fiscal deficit – interest payments

Any questions

THANK YOU

Government budget and the economy

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