Rajasthan Board RBSE Class 12 Economics Notes Chapter 23 Government Budget and Economy
In mixed economy, along with the private sector, public sector also plays an important role.
Budget is a practical manifestation of fiscal policy of the government.
Government influences the financial life of people through its vital role. Three important tasks of government are –
Public goods; like – Roads, National Defence, Public administration, etc. where supply cannot be made from the market, the task of their supply and allotment is called assignment functions.
Through their tax and expenditure policies, government tries to distribute the income in the economy in an equitable way. This is called distribution function.
To control inflation and unemployment, various policies are adopted by the government to control the demand, so that the ratio between Inflation and Unemployment might not face extreme variations. This is called stabilization of economy.
Budget is important in financial administration. It is the pivot of financial administration.
The origin of the word ‘Budget’ is traceable from the French word “Bougette”, which means a small leather bag.
In 1733, in England, the word ‘budget’ was used to denote a magic box.
In the Indian Parliament, government presents the statement of Government Revenue and Government Expenditure for one financial year (1st April to 31st March) and this is termed as government budget.
In government budget, different statements are presented for revenue receipts, for expenditure and for capital receipts and expenditure.
Main elements of government budget are :
- Revenue budget
- Capital budget
- Surplus budget
- Balanced budget
- Deficit Budget.
Revenue budget is the first part of the budget and it shows the current Revenue Receipts and current Revenue Expenditure.
Revenue receipts of the government are those money receipts which do not create a liability for the government and as well as do not lead to reduction in assets of the government.
Revenue receipts are divided into tax revenue and non-tax revenue.
Tax revenue includes tax receipts and other cess imposed by the central government.
Two taxes are imposed by the central government – Direct Tax and Indirect Tax.
Those taxes whose burden falls directly on the public, are called direct taxes. Example – Income tax, corporate tax, etc.
Those taxes whose burden falls indirectly on the public, are called Indirect taxes. Example – production duty custom duty, service tax, etc.
In non – tax revenue – mainly interest receipts, dividends, profit, duty received for govt, services are included.
Revenue expenditure refers to estimated expenditure of the government in a fiscal year which does not create assets or causes a reduction in liabilities. Example – It includes expenditure on operation of government departments, governmental subsidy, governmental grants to states and interest payments on loans taken by government.
Revenue expenditure is of two kinds – Plan Expenditure, non-plan expenditure.
Capital budget includes the loans received by the government and expenses on obtaining the loans and income from government assets and expenses made for this income.
Under capital budget, capital receipts and capital expenditure are included.
The budget shows the government financial needs and their financial administration.
There are two parts of capital budget :
- Capital receipts
- Capital expenditure.
Capital Receipts – Capital receipts include loans collected from public, Reserve Bank, Commercial Bank, foreign governments, International Organizations. Also, realisation of loans given by the central goverment, small savings, Provident found and income received from sale of shares of public enterprises is included in it.
Capital Expenditure – Those expenditures that are helpful in the creation of physical and financial properties are called capital expenditure. Under this, land acquisition, construction of buildings, machinery, equipment, investment in shares and loans granted by central govt, to state governments and Union territories, public enterprises and other units etc. are included.
Capital expenditure is shown in the budget in two parts :
- Planned expenditure
- Non planned expenditure.
On the basis of equality or difference in government’s total income and expenditure, following are the major three forms of government budget:
- Surplus budget – When government receipts are more than government expenditure.
Total Income > Total Expenditure - Balanced budget – Government’s estimated receipts are equal to the government’s estimated expenditures.
Total Income = Total expenditure - Deficit budget – When government’s estimated expenditure exceeds government’s estimated receipts.
Total Income < Total Expenditure
Financial year in India is from 1st April to 31st March.
General Budget – Main objective of this budget was to control government expenses rather than ensuring fast development.
Supplementary budget : If amount approved in the budget gets exhausted even before 31st March, then, in such situation, the government submits a supplementary budget before the parliament and the additional amount is demanded.
Accounting grant : The previous budget is upto 31st March and it cannot be extended, therefore the government requires a new budget to incur its expenses. Parliament advances the amount temporarily for meeting the expenses of the government.
Performance budget : It is a budget that reflects the input of resources and the output of services for each unit of an organization. This type of Budget is commonly used by the government to show the link between funds provided to the public and the outcome of these services.
The Pioneer of zero-base budget is Peter A. Pyer of America.
There are three concepts to measure the Budget Deficit :
- Revenue Deficit – It is the excess of Revenue Expenditure over revenue receipts. Mathematically, Revenue Deficit = Revenue Expenditure – Revenue Receipts
- Fiscal Deficit – It refers to the difference of total expenditure over the total government receipts except borrowings. Total Fiscal Deficit = Total expenditure – (revenue receipts + Capital receipts created by non-loans)
or, Total Fiscal Deficit = Net domestic loan receipt + loan received from Reserve Bank of India + loans received from abroad. - Financial Deficit – It explains the real situation of governmental funds. In this item, along with budgetary deficit, we add the net borrowings of the government also.
- Primary Deficit – Primary deficit is defined as fiscal deficit minus (-) Interest Payments.
Primary deficit = fiscal deficit – Net Interest Liability
Net interest liabilities are equal to the interest payment minus interest receipts by the government on domestic lending.
The fiscal policy implies the receipt and expenditure policy of the government. It is also . called Budgetary Policy.
In budget of 2016-17, the announcement of various schemes such as Digital Literacy
scheme, scheme regarding disclosure of black money, Make in India scheme and Ek Bharat-Shrestha Bharat scheme was made.
Indian parliament passed FRBM Act (Fiscal Responsibility and Budget Management Act), on 7th May, 2003 to make fiscal deficit zero.
Finance commission makes suggestions to the government from time to time for the division of resources between central and state governments.
Important Terminology
- Government budget: It is a statement of government’s expenses for one financial year and of resources for fulfilling those expenses.
- Balanced budget: A government budget is said to be a balanced budget when Government Estimated Receipts are equal to the Government Estimated Expenditures.
- Surplus budget: When government receipts are more than the government expenditure in the presented budget, the budget is said to be a Surplus budget.
- Deficit budget : When Government Estimated Expenditure exceeds Government Estimated Receipts in the budget, the budget is said to be Deficit budget.
- Performance budget: It is a budget that reflects the inputs of resources and the output of services for each unit of an organization.
- General budget : It is also called traditional budget. The main objective of this type of budget is to establish financial control of legislature on executive.
- Zero-base budget : The pioneer of zero based budget is “Peter A. Pyer” of America. Zero-Base Budgeting is a logical system to control the expenditure.
- Fiscal deficit : Fiscal deficit refers to the excess of total anticiptated expenditure over the sum of anticipated government revenue receipts and capital receipts, excluding borrowings.
- Fiscal policy : A policy regarding the government expenditure and government revenues is termed as fiscal policy. It is also called budgetary policy.
- Primary deficit : Primary deficit is defined as fiscal deficit minus interest payments.
- Financial deficit: It explains the real situation of government funds. In this item, along with the budgetary deficit, we also add the Net Borrowings of the government.
- Revenue deficit : Revenue deficit is the excess of revenue expenditure over Revenue receipts. Revenue Receipts include both tax revenue and non-tax revenue.
- Capital receipts : Capital receipts may be defined as those money receipts of the government which either create a liability for the government or cause a reduction in its assets.
- Capital expenditure : It refers to the estimated expenditure of the government in a fiscal year which creates assets or causes a reduction in liabilities.
- Revenue receipts : Revenue receipts are those money receipts which do not create a liability for the government and also do not lead to reduction in assets of the government.
- Revenue expenditure : Revenue expenditure refers to estimated expenditure of the government in a fiscal year which does not create assets or cause a reduction in liabilities.
- Tax revenue : It is a compulsory payment made by people to the government.
- Non-tax revenue : Sources of revenues other than taxes are called non-tax revenues. It includes interest, profits, foreign grants, etc.
- Planned expenditure : Planned expenditure refers to that expenditure which relates to a specified plan and programmes of development and assistance of Central government to State Governments. It includes both Revenue Expenditure and Capital Expenditure.
- Non-planned expdnditure : Non-planned expenditure refers to the expenditure which is not related to the specified plans and programmes of development as well as not related to assistance of central government to state governments.
- Direct tax : A tax where final burden is borne by the person on whom it is imposed.
- Indirect tax : An indirect tax is imposed on one person but paid partly or wholly by another.
- Fines : Fines are those payments which are made by the law breakers to the government.
- Grants and donations : Grants are also a source of government revenue. It is very common for the people to offer donations and grants to the government when there are natural calamities like earthquake, floods, famines, etc.
- Disinvestment: Selling of public enterprises ownership (shares) by government to their investors.