It is defined as a financial statement showing expected receipts and expenditure 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 government expenditure. There has to be a definite planning for estimated revenue 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 the expenditure 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 of expenditure 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 receipts and 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 & capital expenditures 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 expenditures refers to those expenditure of the government which lead to the creation of physical or financial asset or reduction in the financial liabilities 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 CAPITAL EXPENDITURE
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 receipts in 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.