Government budget = Government budget is a statement of the estimates of the government receipts and government expenditure during the period of the financial year.
Fiscal Year :- It is a financial year which runs from 1 April to 31 March.
Objectives of government budget
Redistribution of Income :-
- The government sector affects the personal disposable income of households by making transfers and collecting taxes. It is through this that the government can change the distribution of income and bring about a distribution that is considered ‘fair’ by society. This is the redistribution function.
The government can reduce income inequalities (or redistribute income) by:-
- Imposing higher rates of tax on the income of the rich and the goods consumed by rich. It will reduce their disposable income.
- Government can spend more amount on providing free services to poor like education, medical treatment etc. or subsidising them. This will raise disposable income of the poor. In this way gap between the rich and poor can be reduced.
- The redistribution objective is sought to be achieved through progressive income taxation, in which higher the income, higher is the tax rate. Firms are taxed on a proportional basis, where the tax rate is a particular proportion of profits.
- It aims at making sure that income is not concentrated among the few rich as income disparities make GDP a poor measure of economic welfare.
Allocation of Resources
- The government through its budgetary policy reallocates resources so that social (public welfare) and economic (profit maximization) objectives are met.
- The government can influence allocation of resources through:
- Tax concessions or Subsidies – Government can give tax concessions, subsidies etc. to private producers to encourage production of such goods and services which are beneficial for the society. For e.g.: Government can encourage the use of Khadi products by providing subsidies.
Similarly, the government can discourage the production of certain goods such as harmful consumption goods (like liquor, cigarettes etc.) by imposing heavy taxes. - Directly producing goods and services: Areas where private sector initiative is not forthcoming i.e. the areas where private sector is not interested due to lack of profits or due to huge investment involved, government can directly undertake the production of goods and services.
- There are many other activities like water supply, sanitation etc. which are necessarily undertaken by the government in public interest.
- Government provides certain goods and services which cannot be provided by the market mechanism i.e. by exchange between individual consumers and producers, known as public goods. For example :− national defence, roads, government administration, public park etc. These are those goods which are collectively consumed and one person’s consumption of a good does not reduce the amount available for consumption for others and so several people can enjoy the benefits.
Note :-Public Goods:-
- Public goods are those goods which are collectively consumed and have two important features – they are non-rivalrous i.e. One person’s consumption of a good does not reduce the amount available for consumption for others and so several people can enjoy the benefits and they are non-excludable, which implies that there is no feasible way of excluding anyone from enjoying the benefits of the good. These make it difficult to collect fees for their use and private enterprise will in general not provide these goods. Hence, they must be provided by the government. Examples of public goods include law enforcement, national defence, street lighting and public parks.
- Even if some users do not pay, it is difficult and sometimes impossible to collect fees for the public good. These non-paying users are known as ‘free-riders’.
Bringing Economic Stability:-
- Economic Stability means absence of large-scale fluctuations on the economic indicators like prices, employment levels, etc. as such fluctuations create uncertainty in the economy.
- Economic stability induces investments and increases rate and growth of development.
- The government can exercise control over these fluctuations in income and employment in the economy through taxes and expenditure. For e.g. In inflationary conditions (rising prices, when there is excess demand), the government can discourage spending by imposing higher taxes and reducing its own expenditure which is also called Surplus budget policy. In deflationary conditions (i.e. times of depressions, when there is deficient demand) government can encourage spending by reducing taxes, providing tax concessions, subsidies and increasing its expenditure also called Deficit budget policy.
Note :– Budgetary policy during inflation and deflation
- When demand exceeds available output, it may give rise to inflation. In such situations, restrictive conditions may be needed to reduce demand. The govt can reduce expenditure and impose higher taxes to reduce disposable incomes and purchasing power and hence reduce aggregate demand in the economy. i.e. it can use a surplus budget where total budgetary receipts exceed total budgetary expenditures of the government.
- Similarly, when demand fall short of available output, it may give rise to deflation. In such a situation government can encourage spending (aggregate demand) by reducing taxes and increasing its expenditure which will increase disposable income and purchasing power of the people in the economy. i.e. it can use a deficit budget where total budgetary expenditures exceed total budgetary receipts of the government.
Management of Public Enterprises :-
- The budget policy of the government shows how the government tries to increase the rate of growth through public enterprises.
- The budget helps the government to manage such public enterprises which are of the nature of natural or state monopolies. For example: Railways, Electricity and Water supply which are established and managed for social welfare of the public.
- The government manage such enterprises through budget by making various provisions and providing them with financial help.
Note:- Natural monopoly exist a single firm can produce goods and services at a cost which is lower than of many competing firms.
Reduction of poverty and unemployment :- to eradicate mass poverty and unemployment by creating employment opportunities & provide maximum social benefit to the poor.
Economic Growth
- The government aims to increase the production of goods and services across various sectors of the economy namely primary, secondary and tertiary and achieve a sustainable increase in the real GDP of an economy. It aims at improving the standard of living of the people and welfare of its people.
- The government makes various provisions in the budget to raise the overall rate of savings and investment in the economy to achieve a high economic growth rate. For this the government provides tax rebates and other incentives for production activities.
- Spending on infrastructure in the economy, promotes the economic activities across different sectors.
Structure of the budget
- Budget Receipts:- = Budget receipts refer to estimated money receipts of the government from all sources during the fiscal year. Budget receipts are classified as:
- Revenue Receipts := revenue receipts of the government are those money receipts which do not either create a liability or lead to reduction in assets. As tax receipts and non tax receipts
Note :- Income Tax, Corporation tax , gift tax custom duty excise duty, sales tax are tax receipts and non tax receipts fees, license and permits escheat, special assessment ,fines and penalties, income from public enterprises , gifts and grants.
- Capital Receipts :- capital receipts are those monetary receipts which either create liability for the government or cause reduction in the assets of the government.
Note : recovery of loans, borrowing and other liabilities, other receive
Examples of Capital Receipts :–
(a) Borrowings and other liabilities (Government borrows funds from the public/ market, RBI, foreign government and internal institutions like IMF, World Bank to meet its excess expenditure) − It increases liability of the government.
(b) Disinvestment (raising funds by selling shares or equity holdings of the PSUs by the government in the market) : − It leads to reduction in assets of the government.
(c) Recovery of loans (Government grants various loans to state government, UTs and other parties which leads an increase in the financial assets of the government) :− When the government recovers these loans from its debtors, its financial assets decline.
(d) Small saving deposits (It refers to the funds raised from public in the form of post office deposits, Kisan Vikas Patra, NSC – National Saving Certificate, PPF etc.) − They lead to an increase in the liability of the government.
Types of Capital Receipts :-
(e) Debt creating Capital Receipts :- These are the capital receipts which increase liability of the government and which government needs to repay along with interest. For example: Net borrowing by government at home, borrowings from RBI, loans received from foreign governments.
(f) Non-Debt creating Capital Receipts :- Non-debt creating capital receipts are those receipts which are not borrowings and therefore, do not give rise to debt. Examples are recovery of loans and the proceeds from the sale of shares of PSUs i.e. disinvestment, as it leads to the reduction in assets of the government.
Difference between revenue and capital receipt the main difference between revenue and capital receipts is that in the case of revenue receipt govt. is under no future obligation to return the amount. But in case of capital receipt which are borrowing govt is under obligation to return the amount along with interest.
Budget Expenditure :- All those expenditures (development and non-development) be done by the government in a financial year are included which are done with the view of public welfare and profit, they have been divided into two parts.
Revenue Expenditure :- Revenue Expenditure refer to estimated expenditure of the government in a fiscal year which does not either create assets or cause a reduction a reduction in liabilities as old age pensions, salaries and scholarships, Transfer payment and interest payment to be made by the government
Note:- Scholarships, unemployment allowance, Ladli scheme, old age pension etc. revenue of the government.
Capital Expenditure :- capital expenditure refers to the estimated expenditure of the government in a fiscal year which either creates assets or causes a reduction in liabilities. As repayment of loans (Paying off debts) or buying private assets for example, causes reduction in government liability.
Examples: (a) Repayment of loans/ borrowings – It reduces liability of the government.
(b) Loans and advances given to states and union territories – It increases asset of the government.
(c) Expenditure on building roads, flyovers, factories (construction of Metro) – It increases asset of the government.
(d) Expenditure of government on purchase of property or assets like buildings, machinery etc. – It increases asset of the government.
TAX RECEIPT : it is main source of government revenue. a tax is a compulsory made by an individual , household or a firm to the government without reference to anything in return. If a person fails to pay tax, he is liable to penal action.
Classifying taxes
- Progressive taxes :- This tax system is prevalent in most of the countries of the world, In this tax system, with the increase in income, the tax rate increases continuously, it is an fair tax system because its burden falls more on the rich and less on the poor
- Regressive tax:- Under this system of taxation, the tax rate diminishes as the taxable amount increases.
This system of taxation generally benefits the higher sections of the society having higher incomes as they need to pay tax at lesser rates. On the other hand, people with lesser incomes are burdened with higher rate of taxation. - Value added tax (VAT) :- Value added tax is an indirect tax which is imposes on ‘value added’ at the various stages of production. Value added refers to the difference between value of output and value of intermediate consumption. It is imposed at each stage of production, and is a proportionate tax.
- Specific taxation system:- When a tax is levied on a commodity on the basis of its units, size or weight, it is called the specific tax.
- Direct taxes:- Those taxes which are levied on the person who legally have to pay the same person, they cannot avoid it on any other person like income tax, corporation tax, gift tax, wealth tax etc.
- Indirect taxes:- an indirect is imposed on one person but paid partly or wholly by another. Thus, it is a tax whose burden can be shifted to others. In case of an indirect tax, some person first pays the tax but he is able to transfer the burden of the tax to others. Example : sale tax excise duty. Customs duty.
GST:- One Nation, One Tax, One Market
- Goods and Service Tax (GST) is the single comprehensive indirect tax, operational from 1 July 2017, on supply of goods and services, right from the manufacturer/ service provider to the consumer.
- It is a destination based consumption tax with facility of Input Tax Credit in the supply chain.
- It is applicable throughout the country with one rate for one type of goods/service.
- It has subsumed a large number of Central and State taxes and cesses.
- It has replaced large number of taxes on goods and services levied on production/ sale of goods or provision of service.
Cascading of tax
As there have been a number of intermediate goods/services, which were manufactured/provided in the economy, the pre-GST tax regime-imposed taxes not on the value added at each stage but on the total value of the commodity/service with minimal facility of utilisation of Input Tax Credit (ITC). The total value included taxes paid on intermediate goods/services. This amounted to cascading of tax. Under GST, the tax is discharged at every stage of supply and the credit of tax paid at the previous stage is available for set off at the next stage of supply of goods and/or services. It is thus effectively a tax on value addition at each stage of supply. In extend principles of ‘value- added taxation’ to all goods and services.
- Taxes Subsumed
It has replaced various types of taxes/cesses, levied by the Central and State/UT Governments. - Central Taxes
Some of the major taxes that were levied by Centre were Central Excise Duty, Service Tax, Central Sales Tax, Cesses like KKC and SBC.
- State Taxes
The major State taxes were VAT/Sales Tax, Entry Tax, Luxury Tax, Octroi, Taxes on Advertisements, Entertainment Tax, Taxes on Lottery /Betting/ Gambling, State Cesses on goods etc. These have been subsumed in GST. - Treatment of Petrol/liquor and Tobacco in GST
Five petroleum products have been kept out of GST for the time being but with passage of time, they will get subsumed in GST. State Governments will continue to levy VAT on alcoholic liquor for human consumption. Tobacco and tobacco products will attract both GST and Central Excise Duty. Under GST, there are 6 (six) standard rates applied i.e. 0%, 3%,5%, 12%,18% and 28% on supply of all goods and/or services across the country.
GST is the biggest tax reform in the country since independence and was rolled out on the mid-night of 30 June/1 July, 2017 during a special midnight session of the Parliament. The 101th Constitution Amendment Act received assent of the President of India on 8 September, 2016.
The amendment introduced Article 246A in the Constitution cross empowering Parliament and Legislatures of States to make laws with reference to Goods and Service Tax imposed by the Union and the States. Thereafter CGST Act, UTGST Act and SGST Acts were enacted for GST. GST has simplified the multiplicity of taxes on goods and services. - Expected Benefits
1. The laws, procedures and rates of taxes across the country are standardised.
2. It has facilitated the freedom of movement of goods and services and created a common market in the country. It is aimed at reducing the cost of business operations and cascading effect of various taxes on consumers.
3. It will reduce the overall cost of production, which will make Indian products/services more competitive in the domestic and international markets.
4. It is also expected to result into higher economic growth as GDP is expected to rise by about 2%.
5. Compliance will also be easier as all tax payment related services like registration, returns, payments are available online through a common portal www.gst.gov.in.
6. It has expanded the tax base, introduced higher transparency in the taxation system, reduced human interface between Taxpayer and Government and is furthering ease of doing business.
NON –TAX REVENUE RECEIPTS
Non- tax revenue receipts are those receipts which are received from sources other than taxes like interest, dividend etc.
- Fees : a fee is a payment to the government for the services that it renders to the people. Like land registration fees, birth and death registration fees
- license and permit : the amount that government charges for allowing the people to perform a given job, is called license or permit fees. License fees are charged to give permission for something by the government. Its example : driving license, import license
- Escheat : escheat refers to that income of the state which arises out of the property that comes to it for want of a legal heir. Such a property has no claimant. State alone has the legal right over it.
- Special assessment : it is that payment which is made by the owners of those properties whose value has appreciated due to developmental activities of the government . example: construction of road, provision of sewerage system
- Fines and penalties : fines and penalties are those payments which are made by the law breakers to the government by way of economics punishment. The aim is not to earn revenue. Its actual aim is to force the people to follow the rules and regulations
- Income form public enterprises : several public enterprises are owned by the government. Profit from sale proceeds of the products of these enterprises constitutes the income of the government . so government gets revenue in the form of profit. Example: Indian railways , nangal fertilizer factory, Indian oil, bhilai steel steel plant.
Note:- The process of selling shares of public enterprises is called disinvestment. It is a capital receipt as it reduces the asset.
- External grants-in-aid: government receives financial help from foreign government and international organizations in the form of grants, donations, gifts and contribution.
Plan expenditure : All those expenditure by the government which is done in a planned manner to complete the development work is called plan expenditure, it is done for both consumption and investment.
Example:- Expenditure on agriculture, energy, communication, education etc.
Non-Plan Expenditure:- Under this, those expenditures of the government are included which are not planned but such expenditure is always made by the government on general services.
Eg:- Grants, Security, Law, Payment of loans etc.
TYPE OF BUDGET
BALANCE BUDGET : a balanced budget is that budget in which government receipts are equal to government expenditure
GOVERNMENT RECEIPTS = GOVENRNMENT EXPENDITURE
It is avoid wasteful expenditure and ensures financial stability but it does not offer any solution to the problem of unemployment during depressions in developed countries and scope of undertaking welfare activities is restricted.
SURPLUS BUDGET : it is a budget in which government receipts are greater than government expenditures.
SURPLUS BUDGET = ESTIMATED GOVERNMENT RECEIPTS > ESTIMATED GOVERNMENT EXPENDITURES
In the time of inflation, which arises due to excess demand, a surplus budget is the appropriate budget because it helps in correction of inflationary gap by lowering the level of AD in the economy. AD is lowered on account of (i) heavy revenue collection by the government which reduces purchasing power with the people (II) low level of government expenditure. But in situation of deflation and recession, surplus budget should be avoided.
DEFICIT BUDGET : this is a budget in which government expenditures are greater than government receipts.
Deficit budget = Estimated government expenditures > Estimated government receipts.
Keynes recommend deficit budget as a key instrument to break the dead lock of depression. According to him, depression is that phase of economic activity when the level of investment is low owing to the low level of AD. Consequently, planned output is much lower than the full employment level of output
Deficit budget is not desired during periods to inflation
There are three important types of budget deficit.
Revenue deficit :-
Revenue deficit is the excess of revenue expenditure over revenue receipts.
RD = RE – RR when RE>RR
RD = revenue deficit
RE = Revenue expenditure
RR = Revenue receipts
High revenue deficit gives a warning to the government either to cut its expenditure or increase its tax or non-tax receipts. In less developed countries like India, often the situation arises when the government is to incur huge expenditure on administration and maintenance and it is difficult to force the poor people to pay high taxation, In such situation, the government is compelled to cope with high revenue deficit through borrowing or disinvestment. While borrowing increases liability of the government ,disinvestment reduces her assets. A well planned thought strategy is needed to strike a balance between assets and liability .other wise the whole financial system of the economy mat get destabilised
Implication :-
- Reduction of Assets :- Revenue deficit indicate dissaving on government account because government has to make up the uncovered gap by drawing upon capital receipts either through borrowing or through sale of its assets (Disinvestment)
- Inflationary Situation :- Since borrowed funds from capital account are used to meet generally consumption expenditure of the government. It leads to inflationary increasing government liabilities or in reduction of government assets.
- More Revenue Deficit :- Large borrowings to meet revenue deficit will increase debt burden due to repayment liability and interest payment. This may lead to larger and lager revenue deficits in future.
FISCAL DEFICIT : Fiscal deficit is the excess of Total expenditure (revenue +capital ) over total receipts (revenue+ capital other then borrowing ).
Fiscal deficit = Total or Budget expenditure (revenue expenditure + capital expenditure) – Total or Budget receipts other than borrowing = Loan
Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad
Implications :-
1. The Reserve Bank of India is a major source of credit taken by the government in India. It is also called deficit financing system because generally the Reserve Bank prints more notes to lend to the government, it is convenient for the government but harmful to the economy. Because the increase in money supply leads to inflation.
2. When the country borrows from the rest of the world, then the foreign dependence on the country increases and we become financially slaves, due to which the burden of debt and its interest on the future generation increases as well as the need to repay a loan. For this we have to take another loan, due to which we get caught in the debt trap.
3. The financial burden for the future generation of the country increases because they have to pay the interest on the loans taken.
Can there be Fiscal deficit without a Revenue deficit?
Yes, It is possible (i) When revenue budget is balanced but capital budget shown a deficit or (ii) When revenue budget is in surplus but deficit in capital budget is greater than the surplus of revenue budget.
Primary Deficient :- it is defined as fiscal deficit (-) minus interest payment on previous borrowing. Borrowing requirement of the govt. includes not only accumulated debt. But also interest payment on debt to calculate primary deficit which cab be done by subtracting interest from fiscal deficit
Symbolically :- Primary Deficit = fiscal deficit – interest payment
Note:– Nil primary deficit means that the government is forced to borrow to pay interest on old loans.
Significance: The borrowing requirement of the government includes interest obligations on accumulated debt. Primary Deficit indicates how much borrowings are required by the government to meet expenses other than the interest payments. Thus, it focuses on present fiscal imbalances i.e. borrowing on account of current expenditures exceeding revenues.
- A low or zero primary deficit indicates that the interest payments constitute a majority of the borrowings taken by the government and the past interest payments have forced the government to borrow.
Thus, in case of zero primary deficit Fiscal deficit = Interest payments i.e. All borrowings are going towards payment of interest on past loans.
Measures to control deficit budget:-
The government will have to increase its government receipts or will have to reduce public expenditure.
1 Increase in government receipts: – There are three main sources of income for the government.
Tax:- The rate of tax should be increased in all the direct and indirect taxes, progressive, regressive, value addition tax, specific tax etc. levied by the government or those which are not taxed should be taxed.
Sector Receipts:- Efforts should be made by the government to increase the income received from fines, confiscation, license and permit fees, government enterprises.
Public Sector Disinvestment:- The process of selling the public sector to the private sector in the form of shares is called disinvestment. Disinvestment appears as a way for the government to increase its income but it leads to reduction in government assets.
2. Reducing Government Expenditure:- It is believed that the government should reduce the expenditure of its developmental and non-developmental works, but by doing so the rate of development will fall in developing countries, for this the government should reduce the role of private sector. Give more importance so that the rate of growth does not decrease.
In Government Budget Distinguish between Capital expenditure and Revenue expenditure
| Capital Expenditure | Revenue expenditure |
| 1. Either creates assets or reduces liability
2. Investment incurred on land, building, machinery etc. 3. Expenditure on construction of Hospitals and school etc. 4. It is repayment of loans etc. |
1. Neither creates an assets or reduces liability.
2. Expenditure incurred on govt. department of maintained and service 3. Expenditure on medicines, salaries of doctors etc. 4. It is assistance to finance state and central plans etc. |
Distinguish between Capital Receipt and Revenue Receipt in Government Budget
| Capital Receipt | Revenue Receipt |
| 1. Govt. receipt which creates liabilities.
2. Creates reduction in Assets. 3. Examples:- Govt. Borrowing. 4. Selling of Public shares. |
1. Govt. receipt which neither creates liabilities.
2. does not creates any reductions in assets 3. Taxes, interest, Dividend etc. 4. Current income receipts of Govt. |
| Direct Tax | Indirect Tax |
| 1. It refers to a tax where the ‘liability to pay’ (impact) and ‘the actual burden’ (incidence) of the tax lies on the same person.
2. The actual burden of the tax cannot be shifted or passed on to a third person (i.e. Incidence of tax cannot be shifted) 3. It is usually imposed on the income and property of individuals and companies and are paid directly by them to the government. 4.E.g. Income tax, Wealth tax, Corporation tax. Wealth tax |
1. It refers to a tax where the ‘liability to pay’ (impact) and ‘the actual burden’ (incidence) of the tax lies on different persons.
2. The actual burden of the tax can be shifted on to the consumers/ buyers in the form of increased prices. (i.e. Incidence of tax can be shifted) 3.It is usually imposed on goods and services i.e. they affect the income and property of individuals and companies through their consumption expenditure. 4. E.g. VAT, Goods and Services Tax, Excise duty, Custom duty etc. |
| Public Goods | Private Goods |
|
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Public Provision vs Public Production :-
- Public provision – Public provision means that they (goods) are financed through the budget and can be used without any direct payment.
- Public production – When goods are produced directly by the government it is called public production. Public goods may be produced by the government or the private sector.