Topic 10

Budget

Budget , budgetary and fiscal deficit , fiscal

policy aims , objectives and efficacy
 Budget

• Every year Government of India, prepares budget which shows the

expected receipts and expenditures of the government in a financial year.

• Receipts of the government come from

✔ Direct and Indirect taxes
✔ Profits from various financial institutions
✔ Government commercial undertakings and local bodies etc.

• Expenditure of the government are on

✔ Developmental projects such as construction
of roads, railways, production of energy etc
✔ Non-developmental expenditure on a large
number of activities such as defence,
subsidies, police, law and order, etc.
 Types of Budget

Receipts Expenditure
200 crs Balanced budget 200 crs

When receipts = Expenditure, it is balanced budget

Receipts Expenditure
500 crs Surplus budget 300 crs

When receipts > expenditure, it is surplus budget

Receipts Expenditure
Expenditure budget
500 crs 300 crs

When receipts < expenditure, it is deficit budget

 Two main types of Deficits

Budget Deficit Total Receipts – Total expenditure

100 crores = 300 crores - 200 crores

It does not give a true picture of the financial health of the economy

Fiscal Deficit Budget Deficit + Borrowings & Other Liabilities

• 150 crores = the100

To restore +
croresdiscipline,
financial the50 crores
fiscal responsibility and budget management
(FRBM Bill) was introduced in
2000 and passed in 2003
• The act aims at reducing gross financial
deficit by 0.5% of the GDP
 Fiscal policy
• Related to taxation policy of government
• It is a part of Budgetary policy of government

Government Budget
• A budget is a financial statement that sets out the income and expenditure of a government in a given year. It
shows the relationship between government revenue and government spending

There are three possible outcomes of a budget:

🕐 a budget surplus: this is where public revenue

is greater than public expenditure - there is
more money coming in than going out
🕐 a budget deficit: this is where public
expenditure is greater than public revenue -
there is more money going out than coming in
🕐 a balanced budget: this where public revenue
and public expenditure are equal - the amount
of money coming in is exactly the same as the
amount going out.
 Reasons for government spending's
• Essential services = education , housing health care etc
• Welfare benefits and state pension
• Correct market failures , provide subsidies

Reasons for taxation

• To raise revenue to finance government expenditure

• To influence economic activity – to increase / decrease
demand
• To redistribute income
• To discourage imports
• To reduce pollution
 Main categories of taxes – Direct & Indirect

Direct taxes
• are taxes levied on a person’s or a firm’s income or wealth.
• people or firms responsible for paying the tax have to bear the burden of the tax.

Indirect taxes
• which can also be called expenditure or outlay taxes
• they are levied on spending.
• firms that actually make the tax payment to the government may pass on at least some of the burden of
the tax, to other people.
• For example, most of the tax that governments impose on petrol is passed on by petrol companies to
the customers in the form of higher prices
 Main categories of taxes
Progressive tax:
this kind of tax takes a greater proportion of income
from a wealthy person than from a poor person

Regressive tax:
this kind of tax takes a greater proportion of income
from a poor person than from a wealthy person.
This situation occurs when a government imposes a tax
at a set rate. For example, if a goods and services tax
(GST) or a value added tax (VAT) is set at 20%,
everybody will pay this percentage, however rich or
poor they are
Proportional tax:
this kind of tax takes an equal proportion of income
from everybody, that is, the tax rises in proportion to
the income of the taxpayer. For example, if a tax rates is
established at 20% of income everybody will pay an
equal proportion of their income in tax.
Main categories of taxes
 Main types of taxes

• Income tax = on personal income

• Sales tax = VAT , GST
• Corporation tax = on profits of business
• Excise = on goods such as alcohol , tobacco , petrol etc
• Capital gain tax = on earnings from investment
• Custom duties = on foreign goods
• Inheritance tax = on transfer of income and wealth
• Stamp duty = on sale of commercial or residential
property
• Carbon tax = on carbon emission
• Windfall tax = lottery gambling
 Principles of taxation

Efficient = amount collected should be

used in efficient manner

Equity = based on ability of tax payer Convenience = easy to understand and

pay

Economical = easy and cheap to collect Certainty = tax amount should be certain

Flexibility = must change as per

requirement
Impact of taxation & Elasticity
Fiscal policy = It is use of taxation and expenditure by government to achieve Macro
economic objective

Expansionary Fiscal policy Measures

Fiscal policy Measures
Contractionary Fiscal policy Measures
Expansionary Fiscal policy Measures
• Used during Recession
• Government will increase spending
and reduce taxation
• This will increase money supply
• Demand will increase
• Economy will come out of recession
Contractionary Fiscal policy
Measures
• Used during Inflation
• Government will increase Taxation
and reduce spending
• This will decrease money supply
• Demand will decrease
• Economy will come out of inflation
 Impact of Fiscal policy
Economic growth

Low inflation / Stable prices

Employment

Healthy BOP

Redistribution of Income
 Efficacy of fiscal policy
• The effectiveness of fiscal policy is an interesting field in literature of macroeconomics.
• The results show positive growth effects of fiscal policy across emerging markets in the examined
periods
• Notably, the improvement in institutions promotes higher crowding-in effects of fiscal policy.
• Over all in complement with monetary and supply side policy fiscal policy has a positive impact in Indian
economy