Introduction

In this chapter, we will study three aspects

of a budget.
First, what is the structure of a government
budget?
Second, what does a government budget reveal
about an economy?
Third, what are the objectives of government
budget?

Meaning Of Government
Budget

A governments budget is a statement

showing item wise estimated receipts
and expenditures of the government
under various heads during a year.

In India, the Budget year, called the

fiscal year, begins on April 1 and

ends on the following March 31.

A Budget statement has two parts:

Budget receipts and
Budget expenditure.

 If the receipts are equal to the

estimated expenditure, the budget is
said to be in balance.
If the estimated receipts exceed
estimated expenditure, the budget is
said to be in Surplus.
And, if the estimated receipts fall
short of the estimated expenditure,
the budget is said to be in Deficit.

Components of Government
Budget
The government operates at three levels:
central government,
state government, and
the local government.

The basic format of a budget is virtually

the same at all levels. Given below is the
format of the Govt. of Indias Budget for
the year 2005-2006:

RECEIPTS
1.
2.
3.
4.
5.
6.
7.
8.
9.

Revenue receipts (= 2 + 3)
Tax revenue (Net to the Centre)
Non-tax revenue
Capital receipts (= 5 + 6 7 + 8)
Recoveries of loan
Other receipts
(Of which disinvestment proceeds)
Borrowings and other liabilities
Total receipts (= 1 + 4)

2005

2006
3512
2735
777
1631
120
0
(0)
1511
5143

EXPENDITURE
10. Non-plan expenditure (= 11 + 13)
11. On revenue a/c

3708
3305

12. (Of which interest payments)

13. On capital a/c

(1339)
403

14. Plan expenditure (= 15 + 16)

15. On revenue a/c

1435
1160

16. On capital a/c

275

17. Total expenditure (= 10 + 14)

18. Revenue expenditure (=11 + 15)
19. Capital expenditure (= 13 + 16)

5143
4465
678

DEFICITS
20. Revenue deficit (= 18 1)
21. Fiscal deficit (17 1 5 6 = 8 7)
22. Primary deficit (= 21 12)

953
1511
172

 Budget receipts means the funds

planned to be raised form
various sources. These are
classified into two groups:
Revenue receipts and
Capital receipts.

 REVENUE RECEIPTS

These receipts which neither create

any liability nor lead to any reduction
in assets are called revenue receipts.
It includes two types of receipts
namely:
Tax Revenue receipts
Non-tax revenue receipts.

(i).Tax revenue
What is a tax?receipts
A tax is a legally compulsory payment made
to the government by the people.

Direct and Indirect taxes:

Taxes are classified into two main groups:
(i). Direct tax and
(ii). Indirect tax.
Whether a tax is direct or indirect is based on
two considerations. Whose liability it is to pay
the tax to the government? This is one
consideration. On whom lies the actual
burden, or incidence, of the tax? This is
second consideration.

When the liability to pay and incidence of a tax

lies on the same person, it is treated as a direct tax.
In brief, a tax whose incidence cannot be shifted is
called a direct tax. Some of the direct taxes in India
are: income tax, corporation tax, wealth tax, etc.

When the liability to pay and incidence of a tax

lies on different person, it is treated as an indirect
tax. In brief, a tax whose incidence can be shifted is
called as Indirect tax. Some of the indirect taxes in
India are: Value Added Tax (VAT), sales tax, excise
duty, custom duty, service tax, etc.

(ii). Non-tax revenue

receipts
Income receipt from source
other than the tax is
classed
as
non-tax
revenue.
The main sources are interest,
dividends, profits & external
grants.

 Capital Receipts
Raising of funds by govt. either by
incurring liability or by disposing of
assets held by it is treated as
capital receipts.
In the budget of the Central Govt.
of India capital receipts are
classified into three groups:
(a)recoveries of loan;
(b) borrowings & other liabilities; and
(c) other capital receipts.

loans
When govternment recovers
loans from its debtors it is treated as
capital receipt. It leads to decline in
financial assets of the govt.

(ii). Borrowings and other

liabilities
Raising of funds through
borrowings leads to increase in the
liabilities of the government. It is a
capital receipt.

(iii). Other Capital

receipts
In all other capital receipts
disinvestment in equity holding is one
such receipt. Govt. can raise funds by
selling its holding of shares in the
market. When govt. raises funds

by selling its equity holding, it is

called disinvestment. It leads to
reduction in assets held by govt. It is a
capital receipt.

 Budget expenditure refers to the estimated

expenditure under various heads. In Indian
governments budget, it is classified into two
categories:
Revenue expenditure and
Capital expenditure.

Revenue expenditure is the expenditure

which does not lead to any creation of
assets or reduction in liabilities. E.g.
expenditure on salaries, pensions, interest,
subsidies, grants, etc.
Capital expenditure is the expenditure
which leads to creation of assets or leads
to creation of assets or leads to reduction
in liabilities. E.g. expenditure on land,
building, machinery, etc.

 Deficit in budget means that the

estimated expenditure is higher than
the estimated receipts.
In the Indian governments budget,
there are three different types of deficit
namely:
Revenue deficit,
fiscal deficit, and
primary deficit.

(i). Revenue
Deficit
Revenue deficit refers to the excess of
total revenue expenditure over total
revenue receipts.
Revenue deficit = Revenue expenditure Revenue
receipts

The revenue deficit includes only such

transactions that affect the current
income
and
expenditure
of
the
government.

(ii). Fiscal Deficit

Fiscal deficit is the difference
between the governments total expenditure
and its total receipts excluding borrowing.
Gross fiscal deficit = Total expenditure
(Revenue receipts + Non-debt creating capital
receipts)

(iii). Primary Deficit

Primary deficit is fiscal deficit minus the
interest payments.
Primary Deficit = Fiscal deficit Interest
payments
Net interest liabilities consist of interest
payments minus interest receipts by the
govt. on net domestic lending.

The deficit in the govt. budget can be

contained by adopting a combination
by adopting a combination of the
following measures:

1.Reduce
spending.

government

2.Raising taxes.

1. Reduce government
spending
Government spending is of two
types: on revenue account and on capital
account. The spending which has more
flexibility should be reduced. Generally, it
may be difficult to reduce routine expenditure
in the short run. But it can be reduced in
phases over longer periods.

2. Raising taxes
Deficit can also be reduced by
raising the rate of taxes or by imposing new
taxes. If taxes are too high people start
evading taxes. While resorting to this
measure government has to keep in mind all
the limitations attached with it.

Govt. budget is a reflection of certain

goals the govt. wants to achieve. These goals are
direct outcome of governments economic, social
and political policies. Some of the objectives of
the govt. budget are as following:
(i). Reallocation of resources in the economy
(ii). Reducing inequalities in income and wealth
(iii).Bringing economic stability.

Reallocation of resources in
the economy
There are many economic activities not
undertaken by the private sector either due
to lack of profit or due to huge investment
expenditure involved. There are many
other
activities
like,
water
supply,
sanitation, etc., which are necessarily
undertaken by govt. in public interest.
Govt. can start these activities on its own.
In addition, government can encourage the
private sector through tax concession,
subsidies, etc., to undertake certain
production in public interest. By doing so,
govt. helps in reallocation of resources.

Reducing inequalities in
income & wealth
Government can achieve this step by taking
two fiscal policy steps. First, govt. can
impose higher rate of tax on the income of
the rich and the goods consumed by the
rich. It will reduce the disposable income of
the rich. Second, govt. can spend more
amount on providing free services to the
poor like education, medical treatment,
etc. this will rise the disposable income of
the poor. In this way, gap between the rich
and the poor can be reduced. Govt. budget
is helpful in reducing income inequalities in
the country.

Bringing economic stability

Economic stability means
absence
of
large-scale
fluctuation
in
prices.
Such
fluctuations create uncertainties
in the economy. Government can
exercise
control
over
these
fluctuations through taxes and
expenditure.