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Basic Budget Concepts for Beginners

The finance minister, Shri Arun Jaitley, presented the budget on 29th February 2016. It would be
interesting to understand various concepts associated with budget so that you are able to grasp the budget
better now that you know the particulars. Understand why decisions are made in the Budget. This Basic
Budget Concepts for Beginners is the best place to start.

The word ‘Budget’ is derived from the French word ‘bougette’ meaning a little bag to carry money or a
small purse. This probably may be due to the fact that the entire wealth of one person could be carried in
the little bag – a briefcase, these days!

So what is the Budget?

A budget is an annual statement of estimated revenue and expenditure in upcoming fiscal year. (Psst…
Fiscal year lasts from April 1st to March 31st.)

TRIVIA: It is Article 112 of the Indian Constitution that lays down the meaning of the Union
Budget of India.

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The budget has several objectives such as:

1. Reducing inequalities of income and wealth

In Simple Terms: Making sure that there isn’t extreme poverty in the country and that the rich
don’t get extra benefits because they are rich. The gap between the rich and the poor is reduced
through taxation of the rich and subsidies to the poor.

2. Reallocation of resources between government and private sector

In Simple Terms: The government is responsible for proper and managed distribution of
resources. The private sector cannot cater to all the needs of the people of the country. So the
government must decide where and how much to divide its collected funds. How much goes to the
public sector, how much to the development of private sector?

3. Attaining economic stability

In Simple Terms: Making sure India is economically independent and is protected from the
shocks of international and domestic economic problems. The government must protect the
economy from the risks of inflation and depression. During depression, the government reduces
rates of taxation and borrowing, while increasing public expenditure. During inflation, the
government increases the rate of tax and borrowing while reducing public expenditure.

4. Managing public enterprises

In Simple Terms: Allocating funds to public arms of the government and public sectors
companies to make sure they function properly and provide the goods/services that they were
created for.

5. Achieving economic growth

In Simple Terms: Making the country’s economy grows, both overall and in each state and
region. Also to make India stand out in the global economy to achieve better standard of living for
the citizens of the country.

Basic Budget Concepts for Beginners

There are three important concepts in relation to Budget

1. Receipts
2. Expenditures
3. Deficits

Receipts

Receipts refer to revenues collected by the government through various means. There are two kinds of
Receipts:

1. Revenue Receipts
2. Capital Receipts

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Capital Receipts are those receipts which create a liability or cause reduction in government assets.

Let us now explore various sources of Capital Receipts:

1. Recovery of Loans
This reduces assets of government and hence must be classified as Capital Receipt. It should be
remembered that a loan given is an asset in the book of accounts. And recovery of loans
reduces this asset class.

2. Borrowings
Funds raised by government from borrowing are treated as capital receipts as these create liability
for government. Amount borrowed is a liability since one has to repay the borrowing.

3. Disinvestment Receipts
Funds raised by disinvestment are also capital receipts as these reduce assets of government.
Disinvestment of public sector enterprise clearly reduces government ownership of these
enterprises and thus reduces assets of government.

Revenue Receipts are those receipts (revenues) of government which do not create a liability or cause
reduction in government assets. Examples of Revenue receipts are:

1. Tax Revenues
Taxes are compulsory payments imposed by government on people. There are two kinds of taxes
– direct tax and indirect tax.

Direct Tax is when the burden of tax and liability of tax falls on the same person.
Examples of direct taxes are Income Tax, Corporation Tax, Wealth Tax and Gift Tax. You
pay these personally.
In case the tax burden can be passed on to another person that kind of tax is called Indirect
Tax – for instance – excise duty, custom duty, service tax, sales tax. These kinds of taxes
are passed on by a person/organisation to another person/organisation i.e. you pay these
taxes but recover them from the actual consumer.

2. Non-Tax Revenue
These refer to those kinds of revenues other than taxes. Examples include: Profits and Dividends
of Public Enterprises, Interest over loans granted, External Aid Received, Fees and Fines, etc.

Expenditures

Budget expenditure refers to estimated expenditures incurred by the government under different heads in
a year. Just as there is classification in Receipts as revenue receipts and capital receipts, similarly budget
expenditures are also classified as:

1. Capital Expenditures
2. Revenue Expenditures

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Let us look at both of these types of expenditures one by one.

1. Capital Expenditure refers to those expenditures which result in creation of asset or reduction in
liability. Examples of Capital Expenditure include expenses on creation of roads, bridges,
buildings etc. Clearly a road, a bridge or a building is an asset.

2. Revenue Expenditures do not create assets and do not reduce liability. Examples include salaries,
interest payments, pensions, subsidies etc. Capital expenditures can also be understood as
developmental and revenue expenditures as non developmental.

NOTE: A capital expenditure can be distinguished from a revenue expenditure in that capital
expenditures are a one-time expenditure, whereas revenue expenditures are recurring expenditures.

Deficits

Finally let us try to understand various kinds of deficits. A budget is said to be balanced when receipts
equal expenditures.

Balanced Budget: Receipts = Expenditures

A budget is said to be in surplus when receipts are in excess of expenditures.

Surplus Budget: Receipts > Expenditures

A budget is said to be in deficit when receipts are short of expenditures.

Deficit Budget: Receipts < Expenditures

There are various kinds of deficits.

Revenue Deficit refers to excess of revenue expenditures over revenue receipts.

Revenue Deficit = Revenue Expenditures – Revenue Receipts

Capital Deficit on other hand refers to excess of capital expenditures over capital receipts

Capital Deficit = Capital Expenditures – Capital Receipts

Fiscal Deficit refers to excess of total expenditures over total receipt, excluding borrowings.

Fiscal Deficit = (Total Expenditures) – (Total Receipt – Borrowings)

Finally Primary Deficit means Fiscal deficit reduced by interest payments.

Primary Deficit = Fiscal Deficit – Interest Payments

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We hope these basic budget concepts for beginners was helpful. Good luck with exams!!

Courtesy: Arun Sharma @blogspot & J. Singh @economicsdiscussion

Read Highlights from Union Budget of India 2016-17

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