Economics Project: GOVERNMENT BUDGET AND ITS COMPONENTS

Index
•Introduction

•Meaning of Government Budget

•Objective of Government Budget

•Components of Budget

•Revenue Receipts

•Capital Receipts

•Budget Expenditure

•Measures of government Deficit

Introduction
In the modern world every government aims at maximization of the welfare of its country. It
requires a number of infrastructural economic and welfare activities. All these activities requires
huge expenditure to be incurred. This requires appropriate planning and policy. Budget helps in
Planning and framing policies.

Meaning of budget
The term budget is derived from the French word "Budgette" which means a "leather bag" or a
"wallet". It is a statement of the financial plan of the government. "A budget is a document
containing a preliminary approved plan of public revenues and expenditure".

In general Government Budget is an annual statement’ showing items wise estimates of receipts and
expenditures during a fiscal year. The receipts and expenditure shown in the budget are not the
actual figures but only the estimated values for the coming year. The fiscal year is considered from

1st April to 31st March.

Important Points of Government Budget

• Budget is prepared by government at all level i.e., central government state government and local
government prepare its respective annual budget. However, we restrict our studies to budget of
central government known as Union Budget.

• Estimated expenditures and receipts are planned as per the objective of the government.

• In India, Budget is presented in parliament on such a day as the president may direct by
convention, it is presented on last working day of February, each year.

• It is required to be approved by the parliament before it can be implemented.

OBJECTIVES
• Government prepares the Budget for fulfilling certain objectives. These objectives are the direct
outcome of government economic, social and political policies. The various objectives of
Government Budget etc.
 1) Reallocation of Resources:-Through the Budgetary policies, government aims to reallocate
resources in accordance with the economic and social priorities of the country.

•Tax concessions or subsidies: - to encourage investment government can give tax to producers for
ex: government discourage the production of harmful by providing subsidies.

• Directly producing goods and services:-If private sector does not take interest, government can
directly undertake the production.

2) Reducing inequalities in income and wealth: - Economic inequalities is an inherent part of every
economic system. Government aims to reduce inequalities of income and wealth through its
budgetary policy. Government aims to influence distribution of income by imposing taxes on the rich
and spending more on the welfare of the poor. It will reduce income of rich and raise standard of
living of the poor, thus reducing inequalities in the distribution of income.

3) Economic Stability:-Government budget is used to prevent business fluctuations of inflation or

deflation to achieve the objective of economic stability.

●Inflationary tendencies emerge when aggregate demand is higher than expenditure.

●During deflation, government can increase its expenditure and give tax concessions and subsidies.
4) Financing and management of public sector enterprises: There are large number of public sector
industries and managed for social welfare of the public budgets prepared with the objective of
making various provision for managing such enterprises and providing them financial help.

5) Economic Growth: - the growth rate of a country depends on rate of saving and investment for
this purpose budgetary policy aims to mobilise sufficient resources for investment I the public sector.
Through the government makes various provisions in the Public Sector. Therefore the government
makes various rate of saving and investments in savings.

6) Reducing regional disparities:- The government budget aims to reduce regional disparities through
its taxation and expenditure policy for encouraging setting up of production units in economically
backward regions.

Components of Budget
•Two major components of Budget are:-

●Revenue Budget: - It deals with the revenue aspect to the government budget. It explains how
revenue is generated or collected. Capital Budget: - Capital Budget consists of capital receipts and
payments. It also incorporates transactions in the Public Accounts. Components

•The components of Budget can also be categorised according to receipts and expenditure .On this
basis two broad components are:-

1) Budget Receipts

2) Budget Expenditure

Budget Receipts:-Budget receipts refers to the estimated money receipt of this government from all
sources during a given fiscal year Budget receipts may be further classified as: •Revenue Receipts: -
Revenue Receipts refers to those receipts which Create any liability nor cause any reduction in the
assets of the government. They are regular and recurring in nature and government receives them in
its normal course of activities. A receipt is a revenue receipt is satisfies the following two essential
conditions:-

1) The receipt must not create a liability for government for ex: - taxes levied by the government are
revenue receipts as they do not create any liability. However any amount borrowed by the
government is not a revenue receipt as it cause an increase in the liability in terms of repayment of
borrowings.

2) The receipt must not cause decrease in the asset for ex: - receipts from sale of shares of a public.

Sources of Revenue
• Revenue Receipts of the government are generally classified under two heads:-

1) Tax Revenue

2) Non Tax Revenue

• Tax Revenue refers to sum total of receipts from taxes and duties imposed by the government. Tax
is compulsory payment made by people and companies of the government without reference to any
direct benefit in return .It means there are two aspects of taxes

i) Tax is a compulsory payment no one can refuse to pay it.

ii) Tax receipts are spent by the government for common benefit of people in the country.

Types of taxes
1) Direct Taxes: - They are imposed on property and income of individual and companies and are
paid directly by the government. • They are imposed on individuals and companies. • The liability to
pay the tax actual burden of tax lie on the same person i.e. burden cannot be shifted to others. E.g.
income tax, wealth tax

2) Indirect Taxes: - Refers to those taxes which affect the income and property of individuals and
companies through their consumption expenditure. E.g. Vat, GST, entertainment tax

Non Tax Revenue

Non tax revenue refers to receipts of the government from all services other than those tax receipts.
The main sources of non-tax revenue are:-

1. Interest: - Government receives interest on loans given by it to state government union territories
private enterprises and general public

2. Fees: - It refers to charges imposed by government cover the cost of recurring provided by it court
fees, registration fees etc. are some example of fees.

3. License Fees: - It is a payment charged by the government to grant permission of something

license fees paid for permission of keeping a gun or to obtain. National permit for commercial
vehicles.

4. Fines and Penalties:-They refers to those payment which are imposed on Law Breakers E.G: fine
for jumping light, for non-payment of tax the latter is imposed to generate revenue.

5. Escheats:-It refers to claim of the government on the property of a person who dies without
leaving behind a heir or a will.
6. Gifts and Grants: - Government receives gifts and grants from foreign government and
international organisations. Sometimes, individuals and companies money to the government
received during national crisis such as war food etc.

7. Forfeitures: - These are in the form of penalties which are imposed by the court of non-
compliance of others contract etc.

8. Special Assessment:-It refers to the payment made by the owners of those properties whose value
has appreciated due to development activities of the government expenditure is recovered.

Components of capital budget

• Capital Receipts

•Capital receipts refers to those receipts which either create a liability or cause a reduction in the
assets of the government. They are non-recurring and non-routine in nature • 1) the receipts must
create a liability for the government borrowings are capital receipts as they lead to an increase in the
liability of the government. However tax received is not a capital receipt as it does not result in
creation of any liability. •2)The receipts must cause a decrease in the assets receipts from scale of
share of public enterprises is a capital receipt as it leads to reduction in assets of the government.

•Capital Receipts are broadly classified into three groups:

•Borrowings: - borrowings are the funds raised by government to meet excess expenditure •i)
Government Open Market •ii) Reserve Bank of India •iii) Foreign Government •iv) International
Institutions •v) Borrowings are capital receipts as they create a liability for the government.

•Recovery of Loans: - Government grants various loans to state government or union territories
assets of the government. •Other Receipts: - These include the following: include •Disinvestment: -
Refers to the act of selling a part or the whole of shares of selection public sector undertakings held
by the government. They are termed as capital receipts as they reduce the assets of the
government. A part of or whole of its shares it leads to transfer of ownership PSU to the private
enterprises

•Small saving: - Refers to funds raised from the public in the form of post office deposits, National
saving certificates, Kisan Vikas Patras etc. They are treated as capital receipts as they lead to an
increase liability.

Classification: - A receipt is a capital, if it either create a liability or reduces an asset.

Items Categorized as Revenue and Capital Receipts

• 1) Loan from the World Bank:-It is a capital receipt as it creates liability for the government.

•2) Corporation Tax:-It is revenue receipt as it neither creates any liability nor reduces any asset.

•3) Grants received from World Bank:-It is a revenue receipt as it creates any liability nor reduces
any asset of the government.

•4) Profits of Public Sector Undertaking:-It is a revenue receipt as it neither creates liability nor
reduces asset of the government.

•5) Sale of a Public Sector Undertaking: - It is a capital receipt as it reduces assets of the government.
•6) Foreign Aid against earthquake victims: - It is a revenue receipt as it neither creates any liability
nor reduce any asset of the government.
 •7) Dividends on Investment made Government:-It is revenue receipt as it neither any liability nor
reduces any asset of the government.

•8) Borrowings from Public:-It is a capital receipt as it creates liability.

•9) Recovery of Loans:-It is a capital receipt as it reduces assets of the government.

•10) Interest received:-It is a revenue receipt as it neither creates any liability nor reduce liability
any asset of the government

Budget Expenditure
•Budget Expenditure refers to the estimated expenditure of the government during a given fiscal
year. The budget expenditure can be broadly classified as:

•1) Revenue Expenditure •2) capital Expenditure

Revenue Expenditure
•Revenue expenditure refers to the expenditure which neither creates any asset nor causes
reduction in any liability of government

•It is recurring in nature.

•It is incurred on normal functioning of the government.

•The expenditure must not create an asset of the government. Payment of salaries or pension is
revenue expenditure as it does not create any asset Development of Delhi metro is not a revenue
expenditure as it leads to creation of an asset

Capital Expenditure
• Capital Expenditure refers to the expenditure which either creates an asset or cause a reduction in
the liabilities of the government. It is non-recurring in nature.

• It adds to capital stock of the economy and increase its productivity through expenditure on long
period like Metro or Flyover.

• The expenditure must create an asset for the government for ex: - School building construction is
capital expenditure as it leads to creation of asset However, any amount paid as salaries to teachers
is not a capital expenditure. • Examples: loan to states and union territories expenditure on building,
roads, flyovers etc.

•Construction of school buildings:-It is a capital Expenditure as it increase asset of the government.

•Expenditure incurred on Administrative:-It is a revenue expenditure as it neither creates nor

reduces any liability of the government.

•Repayment of Loans:-It is a capital expenditure as it reduces the assets of the government.

•Expenditure on building a bridge:-It is a capital expenditure as it increase asset of the government.
•Payment of Salaries to staff of government:-It is a revenue expenditure as it neither creates any
asset nor reduces any liability of the government.

•Purchase of 20 cranes for the flyover:-It is a capital expenditure as it increase asset of the
government.
Plan and Non Plan Expenditure
•1) Plan Expenditure:-Plan Expenditure refers to the expenditure that is incurred on the
programmes detailed in the current five year plan for ex:- expenditure on agriculture and allied
activities, irrigation, energy, transport etc. i)Projects covered under the central plans ii)Central
assistance for state and Union Territory.

•2) Non-Plan Expenditure:- Non-Plan expenditure is a generic term, which is used to cover all
expenditure of Government not included in the Plan. It includes both developmental and
non-developmental expenditure. Part of the expenditure is obligatory in nature e.g. interest
payments, pensionary charges and statutory transfers to States.

Development and Non Development Expenditure

• 1) Development Expenditure refers to the expenditure which is directly related to economic and
social development of the country. Expenditure on such services is not a part of the essential
functioning of the government. Developmental expenditure adds to the flow of goods services in the
economy.

•2) Non Developmental Expenditure. It refers to those expenditure of the government

which does not directly help in economic development of the country. Cost of tax
collection, cost of audit, printing of notes, internal law and order, expenditure on defence etc.
are treated as non-developmental expenditure.

Measures of Govt.
BUDGET Deficit
•Budgetary deficit is defined as the excess of total estimated expenditure over total estimated
revenue. When the govt. spends more than it collects then it incurs a budgetary deficit with
reference to budget of Indian Govt. Can be of 3 type:-

•1) Revenue Deficit •2) Fiscal Deficit •3) Primary Deficit

Revenue Deficit
•Revenue Deficit is concerned with the revenue expenditure and revenue receipts of the
government. It refers to excess of revenue expenditure over revenue receipts during the given Fiscal,
year.

•Revenue Deficit signifies that government own revenue is insufficient to meet the expenditures of
government departments.

•Revenue deficit= Revenue expenditure – Revenue Receipts

Fiscal Deficit
A fiscal deficit occurs when a government's total expenditures exceed the revenue that it generates,
excluding money from borrowings. Fiscal Deficit presents a more comprehensive view of
budgetary tool for explaining and understanding the budgetary development in India.

•The extent of Fiscal deficit is an indication of how for the government is spending beyond its
means.

•Fiscal Deficit= Total Expenditure- Total Receipts (excluding borrowings)

Implications
•Fiscal deficit indicates the total borrowings requirements of the govt. borrowing not only
repayment of principal amount, but also require payment of interest.

•Government mainly borrow from Reserve Bank of India to meet its Fiscal Deficit.

•Government also borrow from rest of the world which raises its dependence on their country.
•Borrowings increase the financial burden.

Sources of Financing Fiscal Deficit

•Borrowings:-Fiscal deficit can be meet by borrowings from the internal sources on the external
sources.

•Deficit Financing:-Government may borrow from Reserve Bank of India against its securities to
meet the fiscal deficit .RBI issues new currency for this purpose.

Primary Deficit & Implications

•It indicates how much of the government borrowings are going to meet expenditure other than. It
indicates interest payments.

•The difference between Fiscal Deficit and Primary Deficit shows the amount of interest payment on
the borrowings, made in past.

• Primary deficit = Fiscal Deficit – Interest Payments

•In India interest payment have considerably increased in the recent years. High interest payment
on past borrowings have greatly increased the fiscal deficit. To reduce the fiscal deficit interest
payment should be reduce4d through repayments of loans as early as possible.

How to classify expenditure as Revenue or Capital Expenditure?

•An Expenditure is a capital expenditure if it either creates an asset or reduces a liability.

•An expenditure is revenue expenditure if it neither creates any asset nor reduces any liability.

• 1) Subsidies:-It is a revenue expenditure as it neither create any asset nor reduce any of the
government.

•2) Defence capital equipments purchased from Germany:-It is a capital expenditure as it increase
asset of the government.

•3) Grants given to State Governments:-It is a revenue expenditure as it neither creates any asset
nor reduces any of the government.

Bibliography
•www.google.co.in=images+of+government+budget&chips= q:images+of+government+budget
•Macroeconomics: T.R.Jain & V.K.Ohri •Macroeconomics: Sandeep Garg
•All in one: Akansha Sharma • By K.K.Dewett
•www.wikipedia.com •www.slideshare.com