Government Budget

A government budget is a consolidated financial statement prepared by the government on expected public expenditure and public revenue during a financial year.

Or

A government budget is an annual statement of estimated receipts & expenditures of the government, prepared by the government during a financial year.

Or

A government budget is an annual statement, showing items-wise estimates receipts & expenditures during a fiscal year.

Features of Government Budget

• The budget is prepared by the government.
• A budget is a consolidated financial statement.
• The budget shows expected public expenditure and public revenue during a financial year.
• The Union Budget of India is also referred to as the Annual Financial Statement in Article 112 of the Constitution of India.
• The budget is prepared, keeping in view the general policy of the government toward the welfare of the people.
• The receipts and expenditures, shown in the budget are not the actual figures but the estimated value for the coming fiscal year.
• The Central Government budget is also known as Union budget.

Objectives of Government Budget

1. Proper Allocation/Reallocation of resources is one of the important objectives of the government budget.
2. Economic Stability is another objective of the budgetary policy of the government.
3. Economic Growth is one of the important objectives of the government budget.
4. Economic Equality is another important objective of the government budget as economic disparity is inherent in any economic system which is politically & socially undesirable for a healthy nation.
5. Management of Public Enterprises has been also one of the objectives of government budget.
6. Reducing regional disparities.

Components of Government Budget

Components of budget refer to the structure of the government budget. There are two primary components of a government budget, namely –

1. Revenue budget
2. Capital budget

1. Revenue budget: It deals with revenue aspects of the government budget. It shows revenue receipts and revenue expenditure. The revenue budget has two parts: (i) Revenue receipts (ii) Revenue expenditures.

(i) Revenue receipts: Revenue receipts are current income receipts from all sources such as taxes, profits of public enterprises, grants, etc. Revenue receipts neither create any liability nor cause any reduction in the assets of the government. Revenue receipts are classified into:

(i)Tax Revenue
(ii)Non-tax Revenue.

(ii) Revenue expenditures: Revenue expenditure includes the expenditure on those heads which do not create any assets or not reduces any liabilities. These expenditures are incurred on the normal functioning of the government and the maintenance of the law & order. For example, compensation of employees, pensions, interest payments, subsidies, grants expenditure on central plans, payment of salaries to government employees, maintenance of public property, providing free education and health services to people, etc constitute revenue expenditure. These do not create any public asset.

2. Capital budget: It deals with capital aspects of the government budget. It shows capital receipts and capital expenditure. The capital budget has two parts: (i) Capital receipts (ii) Capital expenditures.

(i) Capital receipts:Capital receipts are the receipts of the government which either create liability or cause any reduciton in the assets of the government. e.g. borrowings, recovery of loan and disinvestment etc. The major sources of capital receipts of the central government are:

(i)Borrowings

a.Domestic Borrowings 

b.External Borrowings

(ii)Recovery of Loans 

(iii) Disinvestment – Resale of shares of public sector undertakings.

(ii) Capital expenditures: Capital expenditure refers to the amount to be spent on those heads which leads to the creation of the assets or reduction in liabilities. For example, expenditure on defence capital; purchase of assets viz. land, buildings & shares; loans to state govt. & union territories etc.

Or

When government incurs expenditure to create assets such as school and hospital buildings, roads bridges, canals, railway lines, etc., or reduce its liability such as repayment of loan etc., such expenditure is known as capital expenditure

Types of Government Budget

A budget can be of three types:

1. Balanced budget
2. Deficit budget
3. Surplus budget
1. Balanced budget: when government receipts are equal to the government expenditures, we call it a balanced budget.

Balance budget

Total Budgeted Receipts = Total Budgeted Expenditures

2. Deficit budget: When the government expenditure exceeds its receipts, it is a deficit budget.

Deficit budget

Total Budgeted Receipts < Total Budgeted Expenditures

3. Surplus budget: When the government receipts are greater than its expenditures, we call it a surplus budget. 

Surplus budget

Total Budgeted Receipts > Total Budgeted Expenditures

Important Facts regarding Government Budget: 

• The term budget has been derived from the French word ‘Bougett’ which refers to ‘a small bag’.
• The first Indian Budget was presented by Sir James Wilson year, 1860.
• The Union Budget of India is also referred to as the Annual Financial Statement in Article 112 of the Constitution of India.
• P C Mahalanobis is known as the father of the Indian budget.
• The first Union budget of Independent India was presented by the first Indian finance minister, Sir R.K Shanmugham Chetty, on 26th November 1947. 
• The budget is prepared by the Budget Division Department of Economic Affairs of the Ministry of Finance annually.
• The Finance Minister is the head of the budget-making committee.
• The Union budget is mostly prepared in between the period of 1 April to 31st March and it is classified into revenue budget and capital budget.
• Mr.Morarji Desai, the former prime minister and finance minister of the country, had presented 10 budgets in Parliament, which is the highest number by a single finance minister till date.
• The Union finance minister reads out a ‘Budget Speech’ on that day in the Lok Sabha.

 

Diagrams for Circular flow of Income