GOVERNMENT BUDGET

MEANING It is defined as a financial statement showing expected receipts andexpenditure of the government during the period of a financial year. A budget contains the following features. It is a statement of expected revenue and proposed expenditure of the government. It possess periodicity which is generally one financial year. It has a sanction of public authority Expenditures and sources of finance are planned in accordance with the objective of the government. NEED & IMPORTANCE OF GOVERNMENT BUDGET (1) Redistribution of income &Wealth:- Budget of the government shows its comprehensive exercise on the taxation and subsidies. The government uses fiscal instruments like taxation and subsidies to improve the distribution of income & wealth in the economy equitable distribution of income & wealth is a sign of social justice which is the principle objective of a welfare state like India. (2) Planned approach to government activities: - Government activities have increased tremendously which needs mobilization of large resources to meet the increased requirement of governmentexpenditure. There has to be a definite planning for estimatedrevenue and proposed expenditure for the proper conduct of government activities. (3) Economic stability :- Free market forces are bound to general trade cycles also called as business cycle. these refer to the phases of recession depression and boom in the economy. The government of the country is always committed to save the economy from business cycles. Budget is used as an important policy instrument to tackle the situations of deflation & inflation and to achieve the state of economic stability. (4) Allocation of resources :- Through the budgetary policy the government of a country allocates the resources in a manner so that there is a balance between the goals of profit maximization and social welfare. Production of goods which are injurious to health is discouraged through heavy taxation on the other hand production of socially useful goods is encouraged through subsidies. (5) Public accountability:- Government budget has the purpose of public accountability of funds. Budgets proposal are discussed in the parliament and the parliament exercises control over the government budget through different committees like Public account, the estimate committee and a committee on public undertakings. (6) Instrument of economic policy :- Government budget is not only a statement of estimated revenue and expenditure of the government but it is a powerful instrument to be used as economic policy of the government. It is helpful in removal of inequality, economic instability etc. (7) Index of government functioning :- Through government budget we can easily make out the methods of government functioning. A proper planning regarding taxes and subsidies shows the

efficiency of the government and durance of corruption and other types of malpractices. It is considered to be a mirror of the performance of the government budget. TYPES OF BUDGET 1. Union Budget :- It is the budget prepared by central government for the country as a whole. This budget is presented in two parts. (1) Railway budget and (2) Main Budget. 2. State Budget :- It is repaired by state govt. such as one budget of Punjab govt. UP govt. etc. 3. Plan Budget :- It is a document which shows the budgetary provisions for important Projects, programmes and schemes included in the central plan of the country. Non plan Budgets relates to the budgetary provisions other than the plan expenditure. 4. Performance budget :- It presents the main projects programmes and activities in the light of specific objective and an assessment of the previous year budgets and achievement. 5. Supplementary budget:- Budget estimates of the coming year are based on the forecast with regard to revenue and expenditure. It is not always possible to foresee and provide for all emergencies such as riots, curfew, natural calamities or political instabilities which requires extra expenditure. In these circumstances government presents in the parliament a supplementary budget to deal with theexpenditure related to emergencies 6. Vote on account budget :- Under article 116 of the Indian constitution the budget can be split up during the year. The reason may be political in nature. The existing government may or may not continue for the whole year on the account of the fact that elections are due then government prepares a lame duck budget this is called vote on account budget. 7. Zero base budget:- The government of India commenced Zero based budgeting 1987-88. It is a particular technique for the preparation of budget. It involves fresh evaluation of every item ofexpenditure on the government budget assuming it as a new budget. STRUCTURE OF GOVERNMENT BUDGET The budget is divided into two parts the revenue budget and capital budget. 1. Revenue budget: - Revenue budget comprises of revenue receiptsand expenditure met from such revenue. Revenue receipts include all types of tax and non tax revenue. Revenue expenditure includes all types of plan and non plan expenditures of the government. Revenue account covers those items which are recurring in nature and are non- redeemable. They create no liabilities or involve no sale of assets. 2. Capital Budget:- It comprises of capital receipts & capitalexpenditures of the government. Capital receipts are the receipts of the government which creates liabilities or reduces financial assets for example foreign loan or repayment of loan. Capital expendituresrefers to those expenditure of the government which lead to the creation of physical or financial asset or reduction in the financialliabilities for e.g.- expenditure on building and other constructions Purchasing machinery investment in shares etc. DIFFERENCE BETWEEN REVENUE RECIEPTS AND CAPITAL RECEIPTS

The main difference between revenue receipts and capital receipts is that in case of revenue receipts govt. is under no obligations to return the amount. But in case of capital receipts which are borrowings govt. is under obligations to return the amount along with the interest. DIFFERENCE BETWEEN REVENUE EXPENDITURE AND CAPITALEXPENDITURE A basic difference between capital and revenue expenditure is that the former is incurred on creation or acquisition of assets whereas the latter is incurred on rendering services. For instance expenditure on construction of a hospital building is capital expenditure but expenditure on medicines, salaries of the doctors etc.for rendering services by the hospital is revenue expenditure. Balanced Budget, Surplus Budget and Deficit budget BALNACED BUDGET: Agovt.budget is said to be a balanced budget in which govt. receipts (revenue and capital)are shown equal to the govt. expenditure Thus Balanced Budget = Estimated Govt. Receipts =Estimated Govt. Expenditure Two main merits of balanced budget are 1. It insures financial stability 2. It avoids wasteful expenditure Two main demerits are. 1. Process of economic growth is hindered. 2. Scope of undertaking welfare activities is restricted. Surplus Budget: When govt. budget receipts are more than government expenditure in the budget, the budget is called a surplus budget ,in other words a surplus budget implies a situation wherein government revenue is in excess of government expenditure. Thus Surplus Budget =Estimated Govt. Receipts > Estimated Govt.Expenditure A surplus budget shows that the govt. is taking away more money than what it is pumping in the economic system as a result aggregate demand tends to fall which helps in reducing price level. Therefore in times of severe inflation a surplus budget is the appropriate budget. But in the case of deflation and recession surplus budget should be avoided Deficit Budget When govt.expenditure exceeds government receiptsin the budget the budget is said to be a deficit budget. DEFICIT BUDGET= Estimated Govt. Expenditure > Estimated Govt. Revenue Deficit Budget has its 2 merits specially for developing economy. 1. It activates economic growth 2. It enables to undertake welfare programmes of the people. It has 2 demerits also

1. It encourages unnecessary and wasteful expenditure by the govt. 2. It may lead to financial & political instability. Types of Deficit in the Budget. There are three types of deficit in the budget 1. Revenue deficit:- the excess of revenue expenditure over revenue receipts is called revenue deficit. Thus, Revenue deficit =revenue expenditure Revenue receipts. It implies that resources have to be borrowed from other sectors of economy to cover this deficit. It may lead either to borrowing or sale of government asset thus high revenue deficit give a warning signal to the government either to curtail its expenditure or increase its revenue. 2. Fiscal deficit:- fiscal deficit is the excess of total expenditure over revenue receipts(revenue and capital receipts) excluding borrowing. Fiscal deficit = Total expenditure Revenue receipt Capital receipts (excluding borrowing) Fiscal deficit therefore is a compressive measure of the implications for in economy. It has serious implication for economy. The govt. has to borrow to meet this deficit a major part of fiscal deficit is financed by the deficit financing(printing extra currency notes). It leads to rise in the prices. 3. Primary deficit: - The excess of fiscal deficit over payments of interest is called primary deficit. Thus, Primary deficit = Revenue deficit Interest payments Primary deficit shows how much of the govt. borrowing is going to meet expenses other than interest payment. A lower primary deficit indicates that the interest payment has forced the govt. to borrow. Thus it indicates the real position of govt.

here are four factors of production which are land,labour,capital and entrepreneur. These factors of production get reward for their services in the form of rent,wages,interest and profit. A basic problem which a producer faces with it is how the share of different factors of production in the total product be determined? This is called the problem of distribution. There are two types of income distributions:

1. PERSONAL DISTRIBUTION : It refers to the distribution of national income among various individuals .It implies the distribution of income according to the size of income received by different individuals irrespective of sources of income. 2. FUNCTIONAL DISTRIBUTION : It deals with the distribution of income among four factors of production for services or functionsperformed by them. The most important theory for functionaldistribution is the marginal productivity theory of distribution. It helps in the distribution of all factor payments like rent,wages,interest and profit.

RENT : In simple words rent is a regular payment for the use of land, furniture and machine. In economics, rent is used in a very narrow or restricted sense and is referred to the price paid for the services of land and other free gifts of nature. There are two view points regarding rent 1 CLASSICAL VIEW: According to David Ricardo Rent is that part of the produce of the earth which ism paid to the land lord for the use of the original and indestructible power of the soil. Main points of rent according to Ricardos definition are; (a )Rent arises on land only because of its inelastic supply (b ). A tenant makes the payment to the land lord for the original and indestructible powers of the soil. (c.) The fertility of land will determine the amount of rent. 2. MODERN VIEW: Economic rent is defined as any payment made to the factor of production in excess of the minimum amount necessary to keep the factor of production in its present employment. Thus RENT= Actual earning Transfer earning. Transfer earning is the amount which a factor of production must earn in its present occupation to prevent it from transferring to another occupation. It is also known as opportunity cost. Actual earning on the other hand is what the factor of production earns in its present employment. Some different concepts of rent are: 1. ECONOMIC RENT: According to prof. Boulding Economic rent may be defined as payment made to a factor of production in excess of the minimum amount necessary to keep the factor in its presentoccupation 2. GROSS RENT: It is the rent which is paid for the services of land and capital invested on it .It

includes the following: (a) Payment for the use of land (b) Interest on capital invested on it (c) Wages for the services of land lord for supervising the investment in land. 3. CONTRACTUAL RENT: It is the payment made to the land lord by tenants under a contract through agreement between the two. Or is the total rent which is agreed upon between land owner and user of land on the basis of some contract which may be verbal or written .It may be more or less than the economic rent. 4. SCARCITY RENT: It applies to all the factors of production whose supply is less elastic .Scarcity rent arises due to the scarcity of factors of production. 5. DIFFERENTIAL OR SITUATION RENT: It refers to the rent arises due to the difference in the fertility of land .This type of rent arises under extensive cultivation. The surplus enjoyed by more fertile land over and above the less fertile land is known as differential rent. More fertile land is known results in more production thus they pay more rent. It is enjoyed by intra marginal land and not by marginal land. 6. QUASI RENT : The concept of quasi rent was developed by prof. Marshall .According to him quasi rent is the surplus earned by man made factors of production whose supply is inelastic or fixed in the short run but elastic in the long run. Factors like machines, buildings. Whose supply is inelastic in the short run earn rent which is termed as Quasi rent i.e. something like rent on land but not the same. The supply of land always remains fixed both in the short run and long run. But the supply of man made factors is inelastic in the short run. Their supply can fully be changed in the long run. Thus man made factors of production earn rent only in the short run which disappears in the long run. If demand for these factors increases in the short run ,supply being constant the price will rise consequently they will start getting additional payment called Quasi rent. As we know price must cover the variable cost in the short run,but in the long run it has to cover both fixed cost as well as variable cost. In short run variable cost must be recovered otherwise producers would stop producing .Whatever a firm earns over and above the variable cost is earned received by the fixed factors of production.Therefore Quasi rent is measured by the excess of total revenue earned in short run over and above the total variable cost. Symbolically Quasi rent= TRTVC . It can be explained with the help of following graph also SIMILARITIES BETWEEN RENT AND QUASI RENT 1. Both rent and quasi rent have an element of surplus income. 2. Rent and quasi rent arise due to inelastic supply of factors of production. 3. Both rent and quasi rent arise due to increase in demand.

WAGES :

The payments which are made for the productive services of labour.Labour in economics is all kind of mental and physical exertion taken for the sake of earning money. KIND OF WAGES : MONEY WAGES: Wages paid and received in term of money are called money wages or nominal wages It includes monetary payments only. REAL WAGES : It refers to the basket of goods and services which the labour is able to purchase with the given income. Thus the amount of goods and services a given money wage can buy in the market at any particular time is called real wage. Infect real wage is the amount of purchasing power received by workers through his money wages. PIECE WAGES : These are wages paid according to the number of units produced of a commodity by the worker. TIME WAGES : These are the wages paid for the services of labourers according to the time spent. WAGES IN KIND: When the labourer is paid in terms of goods rather than cash is called wages inkind. Factors determining real wages: (i) purchasing power (ii) working hours (iii) no. of leaves (iv) vacations (v) working conditions(vi) chances of promotion(vii) housing facility (viii) medical facility (ix) conveyance free education for children (x) THEORIES OF WAGES : There are two theories of wages 1.MARGINAL PRODUCTIVITY THEORY OF WAGES: According to thistheory each worker is paid wages equal to its marginal productivity. 2. MODERN THEORY OF WAGES: Under the conditions of perfect competition both in labour and product markets wages are determined by the forces of demand and supply. COLLECTIVE BARGAINING Collective bargaining is defined as a situation in which conditions of employment are determined by the agreement between the representatives of trade union on one hand and the representatives of employees association on the other .In other words when trade union bargains with the employers association for wage determination .It is called collective bargaining. NEEDS FOR COLLECTIVE BARGAINING : Collective bargaining is needed for the following reasons: 1.To enable the employer to secure cooperation expected from workers and for keeping cordial relations between employers and employees. 2. To save the workers from exploitations in the hands of employees. 3. Mutual negotiations become essential for the solutions of the problem 4. Collective bargaining puts a check on the one sided decisions of the employers

5 It is needed for maintaining a peaceful industrial atmosphere.

INTEREST : Interest is the payment for the use of money or for the use of loan able funds .It means interest is the reward for the use of capital but it is not the income of the whole capital .It is the income of only that part of capital which is used for lendimg purpose. TYPES OF INTEREST : NET INTEREST: It is the price paid for the use of capital only. It is the payment which is made by the borrower to the lender purely for the use of money capital.Net interest is also known as pure interest. GROSS INTEREST : It signifies the total payment made by the borrower to the lender of the capital .It includes rewards like rewards for risk, for management, for inconvenience, other than net interest. Thus; GROSS INTEREST= NET INTEREST+REWARD FOR MANAGEMENT+REWARD FOR RISK+REWARD FOR INCONVINIENCE COMPONENTS OF GROSS INTEREST : Gross interest includes the following components: (i) Net interest: It is the price paid for the use of money capital for a particular period of time (ii) Rewards for risk taking : When a lender lends some amount of money to the borrower he has to bear risk to some extent .According to prof. Marshall these risks can be divided into two: (a) PERSONAL RISK :These are those risks which arise due to credibility and economic positions of the borrowers. (b) BUSINESS RISK /TRADE RISK: These are those risks which arise due to business fluctuations in which money is invested. In small scale business and small trading activity risk is greater than the big corporate companies. Higher the risk higher will be the rate of interest and vice versa (iii) REWARD FOR MANAGEMENT: The lender is required to spend some amount of money for maintaining accounts of loans and recovery of loans etc.They have to spend some money to buy stationery ,stamps etc. They have to pay wages to the staff working for them for this lender charges extra amount from the borrower in the form of management rewards. (iv) REWARD FOR INCONVINIENCE: The lender while giving loans has to suffer many inconveniences like physical and mental exertion for undertaking money lending business .Thus the lender charges some extra money to get himself compensated for inconvenience. Greater the inconvenience higher will be the reward for it.

PROFIT : Profit is the reward given to the entrepreneur for his services .Every entrepreneur incurs various expense for producing goods and services and by selling them he gets revenue. The difference between TR and TC is called profit. In a technical form profit implies the positive residual of an entrepreneur after deducting TC from TR Thus Profit= TR-TC

TYPES OF PROFIT (a) GROSS PROFIT: It is the difference between TR and explicit cost. It is that part of the income of a businessman which is available to him after all payments made the contractually hired factors of production. Thus Gross Profit = TR Explicit cost Components of gross profit 1. Reward for factors of production contributed by entrepreneur himself 2. Rent on entrepreneurs own land : Generally when an entrepreneur starts a business he uses his own land and building .Thus the imputed rent on his own land and building will be included in the gross profit. 3. WAGE INCOME: These are the wages for the services of the family members of the entrepreneur. 4. INTEREST ON OWN CAPITAL : When the entrepreneur uses his own capital the interest on such capital in an imputed form will be a part of gross profit. 5. DEPRECIATION CHARGES: Depreciation is known as consumption of fixed capital .It refers to the fall in the value of fixed assets due to the normal wear and tear .Thus depreciation charges should be deducted from gross profit to arrive at net profit. (b) NET PROFIT: Net profit is that part of profit which is calculated by deducting the implicit cost and the depreciation charges from the gross profit. Thus , Net profit = Gross profit depreciation implicit cost of production Net profit is also known as pure profit. NORMAL PROFIT: It is the minimum profit which is required by entrepreneur to remain in the business. This reward for the entrepreneur forms the part of the cost of production as the price is calculated on the basis of these costs. Thus Net Profit = TR=TC OR AR =AC (D) SUPER NORMAL PROFIT / ABNORMAL PROFIT: The profit which is earned over and above the normal profit is known as supernormal profit. These profits are usually available to the entrepreneur only in the short run. Super normal profit = TR...> TC OR AR> AC.