Government Budget

1. Government Budget: A government budget is an annual financial statement

showing item wise estimates of expected revenue and anticipated expenditure
during a fiscal year.

2. Balanced Budget: If the government revenue is just equal to the government

expenditure made by the general government, then it is known as balanced
budget.

3. Unbalanced budget: If the government expenditure is either more or less than

a government receipts, the budget is known as Unbalanced budget.

4. Surplus Budget: If the revenue received by the general government is more in

comparison to expenditure, it is known as surplus budget.

5. Deficit Budget: If the expenditure made by the general government is more

than the revenue received, then it is known as deficit budget.

6. Budget receipt: It refers to the estimated receipts of the government from

various sources during a fiscal year.

7. Budget expenditure: It refers to the estimated expenditure of the government

on its “development and non-development programmes or “plan and non-plan
programmes during the fiscal year.

8. Revenue Budget: Revenue Budget contains both types of the revenue receipts
of the government, i.e., Tax revenue and Non tax revenue ; and the Revenue
expenditure.

9. Revenue Receipts: Government receipts, which

(a) Neither create any liabilities for the government; and

(b) Nor cause any reduction in assets of the government, are called revenue
receipts.

10. Tax Revenue: Tax revenue refers to receipts from all kinds of taxes such as
income tax, corporate tax, excise duty etc.

11. Tax: A tax is a legally compulsory payment imposed by the government on

income and

profit of persons and companies without reference to any benefit.

12. Non-tax revenue: It refers to government revenue from all sources other than
taxes called non-tax revenue.

13. Revenue Expenditure: An expenditure that (a) Neither creates any assets (b)
nor causes any reduction of liability.

14. Capital Budget: Capital budget contains capital receipts and capital
expenditure of the government.

15. Capital Receipts: Government receipts that either creates liabilities (of
payment of loan) or reduce assets (on disinvestment) are called capital receipts.

16. Capital Expenditure: Government expenditure of the government which either

creates physical or financial assets or reduction of its liability.

17. Direct Tax: When (a) liability to pay a tax (Impact of Tax), and (b) the burden
of that tax (Incidence of tax), falls on the same person, it is termed as direct tax.

18. Indirect Tax: When (a) liability to pay a tax (Impact of tax) is on one person;
and (b) the burden of that tax (Incidence of tax), falls on the other person, it is
termed as indirect tax.

19. Progressive Tax: A tax the rate of which increases with the increase in income
and decreases with the fall in income is called a progressive tax.

20. Proportional Taxation: A tax is called proportional when the rate of taxation
remains constant as the income of the taxpayer increases.
21. Regressive Tax: In a regressive tax system, the rate of tax falls as the tax base
increases.

22. Plan expenditure: It refers to that expenditure which is incurred by the

government to fulfill its planned development programmes.

23. Non-Plan Expenditure: This refers to all such government expenditures which
are beyond the scope of its planned development programmes.

24. Developmental Expenditure: Developmental expenditure is the expenditure

on activities which are directly related to economic and social development of the
country.

25. Non-developmental expenditure: Non-developmental expenditure of the

government is the expenditure on the essential general services of the
government.

26. Budgetary deficit: It refers to the excess of total budgeted expenditure (both
revenue

Expenditure and capital expenditure) over total budgetary receipts (both revenue
receipt and capital receipt).

27. Revenue Deficit: Revenue deficit refers to the excess of revenue expenditure
of the government over its revenue receipts.

28. Fiscal deficit: It is defined as excess of total expenditure over total receipts
(revenue and capital receipts) excluding borrowing. 29. Debt Trap: A vicious circle
set wherein the government takes more loans to repay earlier loans, which is
called Debt Trap.

30. Primary deficit: It is defined as fiscal deficit minus interest payments.

How does Govt budget help to achieve following objectives?

 I. Allocation functions: It means reallocation of resources by government in
consideration with social & economic welfare therefore the allocation
functions deals with the problem of adjustment in resource allocation .

To attain allocation function govt budgets helps to divert resources from private
to public sectors .if private firms do not find profitable to produce public goods
like parks,dams,bridges etct then govt must produce & provide such goods to
publicthrough its expenditure policy.

If private sector provides undesirable goods like cigarettes and alcohol and govt
imposes tax like excise duty to discourage its consumption and thereby increasing
the welfare of people .

II. Distribution Function – It refers to the distribution and redistribution of

income and wealth among individuals in the society. It is the responsibility
of the govt to redistribute the income in order to alter the degree of
inequality prevailing in the society .In order to bring equality budgetary
instruments of taxation & public expenditure are used govt increases taxes
like income tax & thereby reduces the income of rich people at the same
time the collected income is in the form of taxes .Government uses to
provide subsidies ,unemployment allowances, old age pensions etc &
thereby increases the level of income of poor people thus bringing equality
in the society .
III. Stabilization Function: It refers to stability in the price level and full
stabilization of resources. Any fluctuations in the price & business activity
prevent the economic growth with stability. Therefore government uses its
budgetary instruments of taxation and expenditure policy to bring stability in
the economy .During the inflation government raises the direct taxes like
income tax & corporate tax & thereby reduce level of aggregate demand in
the economy .During deflation govt reduces the rate of direct taxes &
increase level of aggregate demand .thus brings price stability in the
 economy . In order to achieve fuller utilization of resources govt uses its
expenditure policy to create employment opportunities in the economy

(a) Revenue Budget: Revenue Budget contains both types of the revenue receipts
of the government, i.e., Tax revenue and Non tax revenue ; and the Revenue
expenditure.

(i) Revenue Receipts: These are the receipts that neither create any liability nor
reduction in assets of the government. It includes tax revenues like income tax,
corporation tax and non-tax revenue like fines and penalties, special assessment,
escheat etc.

(ii) Revenue Expenditure: An expenditure that neither creates any assets nor
cause reduction of liability is called revenue expenditure.

(b) Capital Budget: Capital budget contains capital receipts and capital
expenditure of the government.

(i) Capital Receipts: Government receipts that either creates liabilities (of
payment of loan) or reduce assets (on disinvestment) are called capital receipts.
Capital receipts include items, which are non-repetitive and non -Recurring in
nature.

(ii) Capital Expenditure: This expenditure of the government either creates

physical or financial assets or reduction of its liability. Acquisition of assets like
land, machinery, equipment, its loans and advances to state governments etc. are
its examples

Measures of Govt Deficit

Deficit indicates excess of total expenditure of govt over its total receipts .

There are three measures of govt deficit

Revenue Deficit = Revenue expenditure – Revenue receipts

Revenue expenditure includes on those transactions that effect current income &
expenditure of govt .

Revenue Deficit implies the following

a) Government is dissaving & using up of the savings of the other sector to

finance a part of its consumption expenditure.
b) Government has to borrow even for consumption expenditure
c) It indicates accumulation of debt and interest payment.
d) Government has to reduce development & welfare expenditure which
affects economic growth .

Fiscal Deficit – It is the difference between governments total expenditure and its
total receipts excluding borrowings

Gross Fiscal Deficit=Total Expenditure –(Revenue Reciepts + Non debt creating

capital receipts)

Fiscal deficit will be equal to net borrowing at home + borrowing from

RBI+Borrowing from abroad

Implications

a) It indicates total borrowing requirements of the government

b) It indicates how far government is living beyond its means .
c) It creates a large burden of interest payment in the future which may
further increase revenue deficits.
d) Fiscal deficit is inflationary in nature because it increases money supply.
Primary Deficit-Borrowing requirements of the government includes interest
obligations on accumulated debt in order to obtain how far government borrows
in order to meet interest obligations.

We need to calculate primary deficit.

Gross Primary Deficit = Gross fiscal deficit –net interest liability.

Implications

a) It is often referred to as measure of fiscal irresponsibility of government .

How to reduce deficit in government budget

i) Government can reduce deficit by increasing taxes .

ii) By reducing government expenditure through better planning programs
& efficient administration.

iii) Government can also raise revenue by selling assets of public sector
undertakings & other government assets .
iv) It can encourage private sector to undertake capital & infrastructure
project to reduce its expenditure .

CLASSIFICATION OF GOVERNMENT EXPENDITURE.

Revenue expenditure is the expenditure incurred for normal running of the

government, government departments& provisions for various services .These
expenditure will create any asset or reduce liability of govt Ex- interest , subsidies
etc.Planned & Non Planned Expenditure

Planned Expenditure is that public expenditure which represents current

development & investment outlays that arises due to planned proposal
All other expenditure other than planned expenditure is non planned
expenditure.
Developmental & Non Developmental Expenditure .

Developmental expenditure includes planned expenditure of railways, ports &

telegraphs & non developmental commercial undertakings which are financed
through internal and extra budgetary resources including market borrowing & term
loans from financial institutions to state government enterprises.

Non developmental expenditure are those expenditure on defense, justice policy,

expenditure on tax collection, general administration etc.

Distinguish between Capital & Revenue Expenditure

Revenue Expenditure Capital Expenditure

I. The government expenditure I. The expenditure of government
that does not result in creation of that results in creation of asset or
assets or reduction of liability. reduction of liability.
II. It is for short period and is II. It is for long period & non
recurring in nature recurring in nature.
III. Expenditure on salaries of III. Expenditure on acquisition of
employees . assets ie.land & building.

Explain the basis of classifying govt receipts into revenue receipts & capital
receipts

Revenue receipts –A government revenue receipts are those receipts which

neither create liability nor reduces assets of government Ex-Tax & Non Tax
Revenue.

Tax is a compulsory payment or financial levy made by citizen to the government.

There are two types of taxes Direct and Indirect taxes.

Non Tax revenue: Any revenue other than tax which doesn’t create any liability of
the government is known as Non tax revenue. It includes administrative revenue
like FEE, FINE , ESCHEAT , PENALTY and commercial revenue like Sale of electricity
sale of stamps sale of tickets by government .
Capital Receipts – It refers to those government receipts that tend to create
liability or cause reduction in its assets of government.

Ex- Borrowing, Income from disinvestment and recoveries of Loan

What are direct and indirect taxes? Explain with the examples.

Answer: Direct Taxes are the taxes that are undeviatingly paid to the government
by the taxpayer (citizens). It is a tax applied to individuals and establishments
straight by the government. Examples: Income tax, corporation tax, wealth tax
etc.,

Indirect Taxes are applied to the production or sale of goods and services. These
are originally paid to the government by an agent, who then adds the amount of
the tax-funded to the value of the goods/services and passes on the total amount
to the end-user Examples: Sales tax, service tax, excise duty etc.,