Government Budget & the Economy

Meaning of a Government Budget

Budget is a statement showing the estimated income and expenditure of a government during a fiscal year Fiscal Year : 1 April 31 March Budget is NOT actual expenditures and receipts It is expected expenditures and receipts

Impact of a Budget on the Economy

Balanced Budget
Estimated Receipts = Estimated Expenditure

impact : AD increases Used to rectify a situation of Deficient Demand

Impact of a Budget on the Economy

Deficit Budget Estimated Receipts < Estimated Expenditure impact : AD increases Used to rectify a situation of Deficient Demand

Impact of a Budget on the Economy

Surplus Budget Estimated Receipts > Estimated Expenditure impact of a Large Surplus budget : AD decreases Used to rectify a situation of Excess Demand

Structure of The Indian Governments Budget

Budget

Receipts

Expenditure

Revenue

Capital Market Borrowing Recovery of loans

Plan

Non-Plan

Tax

Issuance of treasury bills Non-Tax Other liabilities Other receipts Revenue Capital Revenue Capital

Direct

Indirect Commercial revenue Interest received Dividends & profits Administrative revenue

NonDevt

Devt

NonDevt

Devt

NonDevt

Devt

NonDevt

Devt

Budgetary Receipts
Revenue Receipts
Do not create a liability Do not reduce the value of an asset
Revenue Receipts

Tax

Non Tax

Direct Income tax Corporate tax

Rs. 100 as tax

Indirect Sales tax Excise duty

Govt.
Rs. 100 paid by firm as tax

Govt. payer + bearer

Firm (payer)
Rs. 100 Collected by firm

Commercial revenues: toll, railway fares Interest and dividend Grants Foreign government/ aid agencies Administrative Revenue
Fee License fee Fines Forfeitures Escheat

customer (bearer)

Budgetary Receipts
Capital Receipts
Create a liability Reduce the value of an asset

Include:
Borrowing

Market Loans
Issuance of treasury bills Loans from foreign governments

Recovery of loans Other liabilities Other receipts - Disinvestment Funds

Budgetary Expenditures
Plan
Expenditure incurred on programmes under current five year plan

Non-Plan
Expenditure not as per current five year plan

Revenue
Does not create an asset Does not reduce liability

Capital
Create as asset Reduce liability

Developmental
Expenditures directly impact the social and economic development of the country

Non-Developmental
Expenditures on essential, general services of government

Measures of Deficit Revenue Deficit

Revenue Deficit = Total Revenue Expenditure Total Revenue Receipts Signifies:
Governments own revenue is insufficient to meet its normal running Government needs to make up short fall from capital receipts Revenue deficit increases the liabilities of government

Measures of Deficit Fiscal Deficit

Fiscal Deficit = Total Budget Expenditure Revenue receipts Capital receipts excluding borrowing Signifies
Borrowing of government Measures the extent to which government needs to borrow to finance its expenditure

borrowing Vicious circle of Debt interest burden

revenue deficit (receipts constant)

Measurement of Deficit Primary Deficit

Primary Deficit = Fiscal Deficit Interest payments Signifies:
Extent to which government is borrowing to meet interest burden of previous loans Low deficit government is largely borrowing to meet previous years debt obligations

Importance of Government Budget

Fiscal Policy

Tax

Expenditure

Used as a policy instrument for:

Enhancing productivity in the economy Reducing inequalities in income and wealth Channelising consumption Reallocating resources to areas where private investment is not forthcoming Controlling aggregate demand