GOVERNMENT BUDGET AND ECONOMY

Government budget is an annual statement, showing item wise estimates of receipts

and expenditure during a fiscal year.

Fiscal year 1st April to 31st March

Budget is prepared by government at all the levels.

Objectives of government budget

1. Reallocation of resources – Due to huge investment and low profitability, private sector does
not undertake many economic activities. So this work should be done by the government.
Thorough budgetary policy government aims to reallocate resources in accordance with the
economic and social welfare of the country.
2. Redistribution Activities – Fiscal instruments like taxation, subsidies and expenditure on social
security etc are used by the government to reduce inequalities of income and wealth through
budgetary policy.
3. Management of public enterprises – There are large numbers of public sectors industries which
are established by the government for social welfare of public.Budget is prepared with the
objective of making various provisions for managing such enterprises and for providing them
financial help.
4. Stabilizing economic activities – Government budget is used to prevent business fluctuations of
inflation and deflation and to maintain economic stability in the economy. In the budgetary
policy government introduces various policies to neutralize the business fluctuations.
5. Economic Growth – It is the main objective of every economy. The growth rate of an economy
depends upon the rate of saving and investments. Therefore, budgetary policies emphasis to
create the conditions for saving and investment in the economy.

COMPONENTS OF GOVERNMENT BUDGET

Government budget includes –

 BUDGET RECEIPTS – 1. REVENUE RECEIPTS LIKE TAX REVENUE AND NOT TAX REVENUE
2. CAPITAL RECEIPTS LIKE BORROWINGS, RECOVERY OF LOAN, OTHER
RECEIPTS.
 BUDGET EXPENDITURE – 1. REVENUE EXPENDITURE LIKE INCURRED NORMAL FUNCTIONING OF
THE GOVERNMENT LIKE PAYMENT OF SALARIES, PENSION,INTEREST , EXPENDITURE ETC
 2. CAPITAL EXPENDITURE – IT REFERS TO THE EXPENDITURE WHICH
EITHER CREATES AN ASSET OR CAUSES ANY REDUCTION IN LIABILITY OF GOVERNMENT.

EXAMPLE – CONSTRUCTION OF ROADS, FLYOVER, REPAYMENTS OF BORROWINGS ETC.

Other types of budget expenditure are

1 Planned expenditure and non-planned expenditure
2. Development and non- development expenditure

TYPES OF GOVERNMENT BUDGET

 Balanced budget – ( Estimated Recipts = Estimated Expenditure)

 Surplus budget – (Estimated Receipts > Estimated Expenditure)
 Deficit budget – (Estimated Receipts < Estimated Expenditure)

Measures of government deficit:

Budgetary deficit refers to the excess of total expenditure over total

estimated revenue. The budget can have 3 types of deficit

 Revenue deficit
 Fiscal deficit
 Primary deficit

Revenue deficit – It refers to the excess of revenue expenditure over revenue

receipts in the coming fiscal year.

REVENUE DEFICIT = REVENUE EXPENDITURE – REVENUE RECEIPTS

Implications of revenue deficit/what does revenue deficit means:

 It indicates the inability of the government to meet its regular and recurring
expenditure in the proposed budget.
  It implies that the government is Dissaving(spending more than what is
earned)
 As the presented budget must be a balance budget, so the government has
to make up this deficit from capital receipts (by taking loan)
 It means that revenue deficit either leads to increase in liability or reduces
any asset.
 Use of capital receipts for financing revenue deficit leads to an inflationary
condition in the economy.

2. FISCAL DEFICIT – It refers to the excess of total expenditure over total receipts
(excluding borrowings) in the coming fiscal year.

FISCAL DEFICIT = TOTAL EXPENDITURE – TOTAL REVENUE(EXCLUDING

BORROWINGS)

Implications of fiscal deficit/what does fiscal deficit means:

 Fiscal deficit indicates total borrowing requirements of the government.

 Inflation – Government mainly borrows from financial markets to meet its
fiscal deficit ( Example world bank).
 Foreign dependence – some government may also borrow from outside
world to finance it’s deficit. It raises the dependence of domestic country
on foreign country.
 Borrowings increases the financial burden for future. It adversely affects
the future growth and development rate of the country.

SOURCES OF FINANCING FISCAL DEFICIT:

Government may use discretionary fiscal policies to make changes to government

spending and taxation. These policies are discretionary in the sense that it is the
government’s decision as to whether the changes should be made. Government
can boost demand by cutting taxes or increasing its own expenditure.
 Government can use any of the available option to finance fiscal deficit.
1. Borrowings- Government can finance its fiscal deficit through borrowing. It
can borrow from internal sources ( public or commercial banks) or from
external sources ( foreign governments, international organizations etc).
2. Deficit financing ( printing of new currency)
Besides borrowing ,government has one more option to finance the fiscal
deficit which is known as deficit financing. Government may borrow from
central bank of the country against its securities to meet fiscal deficit.
Central bank may issue new currency for this purpose. This process is
known as deficit financing.

3. Primary deficit – It refers to the difference between fiscal deficit of the

current year and the interest payment of the previous year borrowings.
Primary deficit = Fiscal deficit – Interest Payment
 Implications of primary deficit
1. It indicates how much of the government borrowings are going to meet
expenses other than interest payment of pervious year.
2. The difference between fiscal deficit and primary deficit shows the amount
of interest payment on the borrowings made in past.