Government Budgeting

Economics

The term ‘budget’ has nowhere been used in the Constitution. It is the popular name for the ‘Annual Financial Statement’ that has been dealt with in Article 112 of the Constitution. An Annual Financial Statement of income and expenditure is generally used for a government, but it could be of a firm, company, corporation etc. In Parliament, the Budget goes through six stages:

  1. Presentation of Budget
  2. General discussion
  3. Scrutiny by Departmental Committees
  4. Voting on Demands for Grants
  5. Passing of Appropriation Bill
  6. Passing of Finance Bill.

The Budget Division of the Department of Economic Affairs in the Finance Ministry is the nodal body responsible for preparing the Budget.

Developmental and Non-developmental Expenditure

All expenditure of a productive nature is developmental, like all investments on the heads of new factories, dams, bridges, highways, railways, etc. The expenditures which are of consumptive kind and do not involve any production are non-developmental, i.e., paying salaries, pensions, interest payments, subsidies, defence expenses, etc.

Plan and Non-Plan Expenditure

Every expenditure incurred on the public exchequer is classified into two categories the plan and the non-plan. All those expenditures which are made in the name of planning are the plan expenditure and rest of all are non-plan expenditures. Basically, all asset creating and productive expenditures are planned. All consumptive, non-productive, non-asset building are non-plan and non-developmental expenditures.

Changes Introduced (2017)

Advancement of Budget presentation to February 1 (earlier presented on the last working day of February). Merger of Railway Budget with the General Budget. Doing away with plan and non-plan expenditure. The government has shifted from the ‘plan’ and ‘non-plan’ classification of spending to ‘revenue’ and ‘capital’ classification.

COMPONENTS OF GOVERNMENT BUDGET

Revenue Budget:

Every form of money generation in the nature of income, earnings acts as revenue for a government or a firm. Such forms of money generation do not increase the financial liabilities of the government— i.e., the tax incomes, non-tax incomes along with foreign grants. Revenue Receipts and Revenue Expenditure together constitute the Revenue Budget.

1. Revenue Receipts

Revenue receipts of a government are of two kinds Tax Revenue Receipts and Non-tax Revenue Receipts consisting of the following income receipts in India:

Tax Revenue Receipts: This includes all money earned by the government through the collection of different taxes, i.e., all direct and indirect tax collections.

Non-tax Revenue Receipts: This includes all money earned by the government from sources other than taxes. In India, they are Profits and dividends, Fees, Penalties and Fines received by the government, etc.

2. Revenue Expenditure

It includes all the expenditures incurred by the government that are either of the current kind or revenue kind or compulsive kind. The basic nature of such expenditures are that they do not involve the creation of productive assets & they are of a consumptive kind. They are:

  1. Interest payment made by the govt on the internal and external loans.
  2. Salaries, Pension and Provident Fund paid by the government to the government employees.
  3. Subsidies forwarded to all sectors by the government.
  4. Defence expenditures by the government.
  5. Postal Deficits of the government.
  6. Law and order expenditures.

Revenue deficit (RD):

It is the difference between the revenue receipts (RR) and the revenue expenditure (RE).

RD = RR - RE

Effective Revenue deficit (ERD):

It is defined as the difference between the revenue deficit and creation of capital assets.

Fiscal deficit (FD):

It is the difference between what the government earns and its total expenditure (excluding non-debt creating capital expenditure).

Fiscal Deficit = Total expenditure - (Revenue receipts + Non-debt creating capital receipts)

Budget deficit (BD):

The difference between the total budgeted receipts and expenditure. BD = Budgetary receipt - Budgetary expenditure

Primary deficit (PD):

It is the difference between fiscal deficit and interest payments

PD = FD-interest payment

Capital Budget

The part of the Budget which deals with the receipts and expenditures of the capital by the government. This shows the means by which the capital is managed and the areas where capital is spent.

Capital Receipts

All non-revenue receipts of a government are known as the capital receipts. Such receipts are for investment purposes and supposed to be spent on plan-development by a government. The capital receipts in India include Loan Recovery. Borrowings by the Government Other Receipts by the Governments.

Capital Expenditure

All the areas which get capital from the government are part of the capital expenditure.

It includes:

  1. Loan Disbursals by the Government.
  2. Loan Repayments by the Government of the Borrowings made in the Past.
  3. Plan Expenditure of the Government.
  4. Capital Expenditures on Defence by the Government.
  5. General Services—the railways, postal department, water supply, education, rural extension, etc.

Deficit financing

Financing of the gap between government receipts and expenditure. It can be done through: Monetised deficit: Borrowings made from RBI through printing fresh currency. The printed money is called high power money. FRBM act disallows RBI to do this under normal conditions. Ways and Means Advances (WMA): The Reserve Bank of India gives temporary loan facilities to the centre as a banker to the government against the ad-hoc treasury bill. There is no collateral but the penal interest rate is charged.

TYPES OF BUDGETS

Golden Rule

The proposition that a government should borrow only to invest (capital expenditure in India) and not to finance current spending (revenue expenditure in India) is known as the golden rule of public finance.

Zero Based Budgeting:

It is a method of budgeting in which all expenses are evaluated each time a Budget is made and expenses must be justified for each new period. Zero budgeting starts from the zero base and every function of the government is analysed for its needs and cost. Budget is then made based on the needs

Outcome Budget:

  1. It analyses the progress of each ministry and department and what the respected ministry has done with its Budget outlay.
  2. It measures the development outcomes of all government programs.
  3. It was first introduced in the year 2005

Gender Budgeting:

It is defined as a “gender-based assessment of Budgets, incorporating a gender perspective at all levels of the budgetary process and restructuring revenues and expenditures to promote gender equality”. It is budgeting for gender equity. Through Gender Budget, the Government declares an amount to be spent over the development, Welfare, Empowerment schemes for females.

Balanced Budget

A government Budget is assumed to be balanced if the expected expenditure is equal to the anticipated receipts for a fiscal year.

Surplus Budget

A Budget is said to be surplus when the expected revenues surpass the estimated expenditure for a particular business year. Here, the Budget becomes surplus, when taxes imposed, are higher than the expenses.

Deficit Budget

A Budget is in deficit if the expenditure surpasses the revenue for a designated year.

Objectives of Government Budget

Reallocating the resources across the nation through its budgetary policy maximizing profits and public welfare. It does so through subsidies or tax concessions and by producing goods and services directly. Bringing down inequalities in terms of earning and wealth accumulation. It aims to distribute the wealth by levying more taxes on the rich and allotting more funds towards welfare projects targeting poor people. Paving way for economic stability by presenting a surplus budget at times of inflation and deficit budget at times of deflation to maintain the prices of goods and services in a stable condition in the country’s economy. Managing public enterprises to bring in different provisions to increase the overall rate of savings and investments in the nation’s economy. Contributing to economic growth by increase the overall rate of savings and investments in the economy. Addressing the regional disproportion through an efficient system of taxation and expenditure policy.

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Subject: Economics

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