Introduction to Economics Fizza Aftab

FEDERAL BUDGET

What is Federal Budget?

Every government plans various activities and for undertaking these activities, it has to first raise
revenue and then incur expenditures.
“Federal budget is the annual statement of the expenditures and revenues of
the federal government with the laws and regulations that approve and support
those expenditures and taxes.”
The main objectives of the federal governments of the developing and developed countries of the
world are:
 To finance the activities of federal government
 To encourage economic growth in an atmosphere of stability

Types of Budget: The federal budget can be of three types

1. Balanced Budget: A budget in which the tax revenues of the government is exactly
equal to the total expenditures of the government
2. Budget Surplus: If the tax revenues of the government are greater than its development
and non-development expenditures, the budget is named as surplus budget or fiscal
surplus.
3. Budget Deficit: In case the development and non development expenditures of the
government exceed its revenue, the government has a budget deficit or fiscal deficit.
Components of Federal Budget:
Budget is very often divided into revenue and capital budget. The Revenue Budget covers items
of recurring nature. It consists of revenue receipts of the government and its expenditures.
Revenue receipts are divided into tax and non-tax revenue. The Capital Budget includes those
items which are meant for acquiring and disposal of capital assets. The development
expenditures include expenditures on construction of roads, railways, industrial projects,
irrigation projects etc.
REVENUE BUDGET
Main Sources: (a) Tax Revenue and (b) Non Tax Revenue
Introduction to Economics Fizza Aftab

(a) Tax Revenue: (1) Direct Taxes (2) Indirect Taxes

(1) Direct Taxes: It is levied on the income, profit and property of the individuals and
businesses. For example, income tax, corporate tax, property tax and wealth tax.
(2) Indirect Taxes: These taxes levied on goods and services. For example, Excise Duty
(it is levied on the production of selected industries of Pakistan and also on the
services provided by hotels, restaurants and advertisements), Sales Tax (it is levied
on the sale price of goods produced in Pakistan), Custom Duty (tax on the import
and export of commodities, is known as custom duty. It is a major source of revenue).
(b) Non-Tax Revenue:
Besides taxes, the federal government also obtains revenue from passport fees, copy right
fees, post office, interest and dividends from investment from various corporations etc.

Main heads of Uses: (a) Current Expenditures

(a) Current Expenditures: It includes:

 Civil Administration: current expenditures on various civil departments of the
federal government.
 Defense: expenditure on the maintenance and operation of defense services.
 Law and Order: expenditures on maintenance and operation of police and courts for
the administration of justice.
 Community social and Economic services: current expenditures for the welfare of
the people in the country. Like water supply, broadcasting, transport, communication
etc.
 Subsidies: In order to increase production and to keep prices of essential
commodities at reasonable level, government gives financial help to the producers
and distributors.
 Debt Serving: It includes payment of interest and repayment of the principal in
respect of external and internal debt. This is now the most important item of current
expenditures of the federal government.

CAPITAL BUDGET

Like the revenue budget, the capital or development budget also has the receipt and expenditure
dimensions which are given below:

Development Expenditures: Contrary to the revenue/current expenditure, the development

expenditures aim at investment and capital formation for budgeting up the productive capacity in
Introduction to Economics Fizza Aftab

various sectors of the economy such as agriculture, industry, education, health, water and power,
roads, railways etc.

Capital Receipts: It consists of the following two categories:

(a) Internal Borrowing: In this case the federal government borrows from the central bank
which can either advance credit from the additional reserves or by printing money.
(b) External Borrowing: Developing countries need to borrow externally in order to finance
their development projects but this need to be balanced by ability to make repayments as
well as ensuring that the borrowed funds are used for productive expenditures. Pakistan
has been successful on both these fronts
Introduction to Economics Fizza Aftab
Introduction to Economics Fizza Aftab
Introduction to Economics Fizza Aftab
Introduction to Economics Fizza Aftab
Introduction to Economics Fizza Aftab