Government Budget

Definition: A government budget is an annual financial statement showing item wise estimates of expected revenue and anticipated expenditure during a fiscal year.

  • Budget prepared by central government, is known as ‘Union Budget’.
  • Budget is required to be approved by the parliament, before it can be implemented.

Objectives of Government Budget

  1. Reallocation of resources:
  • Private enterprises always desire to allocate resources to those areas of production where profits are high.
  • However, it is possible that such areas of production (like production of alcohol) may not promote social welfare.
  • Through its budgetary policy, the government of a country directs the allocation of resources in a manner such that there is a balance between the goals of profit maximisation and social welfare.
  • Production of goods which are injurious to health (like cigarettes) are discouraged through heavy taxation.
  • On the other hand, production of “socially useful goods” (like khaadi) is encouraged through subsidies.
  • Therefore, the government has to reallocate resources in accordance to social and economic considerations in case the free market fails to do or does so inefficiently.

2. Redistributive activities:

  • Budget of a government shows its comprehensive exercise on the taxation and subsidies.
  • A government uses fiscal instruments of taxation and subsidies with a view of improving the distribution of income and wealth in the economy.
  • A government reduces the inequality in the distribution of income and wealth by imposing taxes on the rich and giving subsidies to the poor, or spending more on welfare of the poor.
  • It reduces income of the rich and raises the living standard of the poor, thus, leads to equitable distribution of income.
  • Expenditure on special anti-poverty and employment schemes will be increased to bring more people above poverty line.
  • Public distribution system should be inferred so that the poor could get foodgrains and other essential items at subsidised prices.
  • Therefore, equitable distribution of income and wealth is a sign of social justice, which is the principal objective of any welfare state in India.

3. Stabilising activities:

  • Free play of market forces (or the forces of supply and demand) are bound to generate trade cycles, also called business cycles.
  • These refer to the phases of recession, depression, recovery and boom in the economy. The government of a country is always committed to save the economy from business cycles. Budget is used as an important policy instrument to combat the situations of deflation and inflation.
  • By doing it the government tries to achieve the state of economic stability.
  • Economic stability leads to more investment and increases the rate of growth and development.

4. Management of Public Enterprises:

  • A government undertakes commercial activities that are of natural monopolies; and which are established and managed for social welfare of the public.
  • A natural monopoly is a situation where there are economies of scale over a large range of output.
  • Industries, which are potentially natural monopolies, are railways etc.

5. Economic Growth

  • The growth rate of a country depends on rate of saving and investment.
  • For this purpose, budgetary policy aims to mobilise sufficient resources for investment in the public sector.
  • Therefore, the government makes various provisions in the budget to raise overall rate of savings and investments in the economy.

 6. Reducing Regional Disparities

  • The government budget aims to reduce regional disparities through its taxation and expenditure policy for encouraging setting up of production units in economically backward regions.

 Importance of a budget:

  • Today every country aims at Economic Growth to improve the living standard of its people. There are many issues such as poverty, unemployment, inequalities in incomes, wealth etc. Government strives hard to solve these problems through budgetary measures.
  • The budget shows the fiscal policy, item wise estimates of expenditure discloses how much and on what items the government is going to spend. Similarly, item wise details of government receipts indicate the sources from where the government intends to get money to finance the expenditure.
  • In this way, budget is the most important instrument in hands of government. To achieve their objectives is the most important goal of the government budget.
  • Note: Fiscal year is the year in which country’s budget is prepared. Its duration is from 1 April to 31 March.

Types of Budget:

  • Balanced Budget
  • Unbalanced Budget

Balanced Budget: If in a fiscal year, the government revenue is equal to the government expenditure, it is known as balanced budget.

Balanced Budget = Estimated Govt. Receipts = Estimated Govt. Expenditure
Unbalanced Budget: If in a fiscal year, the government expenditure is either more or less than the government receipts, the budget is known as Unbalanced budget.

It may be of two types:

  • Surplus budget
  • Deficit budget

Surplus Budget: If the revenue received by the general government is more in comparison to expenditure, it is known as surplus budget.
In other words, surplus budget implies a situation where government income is in excess of government expenditure.

Deficit Budget: If the expenditure made by the general government is more than the revenue received, then it is known as deficit budget.
In other words, in deficit budget, government expenditure is in excess of government income.

Components of Budget

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Revenue Budget: It deals with the revenue aspect of the government budget. It explains how revenue is generated, collected ad allocated among various expenditure heads. It consists of Revenue receipts and Revenue expenditure.

Capital Budget: It deals with the capital aspect of the government budget. It consists of Capital receipts and Capital expenditure.