Government Budget and the Economy: Characteristics, Objectives and Components of Budget
What is a Budget?
Both the Government and private sector are crucial in a mixed economy like India. The Government requires infrastructural, economic, and welfare activities for maximizing the welfare of the country. There is a need for a vast amount of money to finance these activities. The government also generates revenue from various sources like taxes, for which planning and government policies are necessary. A ‘Budget’ is prepared to manage these receipts and payments. A Budget is a detailed program and policies for the given fiscal year.
The Government budget is a statement of expected receipts and expected expenditures of the Government (for the coming fiscal year) that reveals the budgetary policy of the Government to achieve the twin objective of growth and stability. The financial/fiscal year is taken from 1st April to 31st March.
According to Article 112 of the Indian Constitution, the Central Government must give an account of estimated receipts and payments to the Parliament. The receipts and payments are presented in the estimated figures, not the actual figures in the budget.
The Budget unfolds:
- The financial performance of the Government during the past year.
- The expected financial performance and Government policies for the coming year.
The financial performance is an explanation of what happened during the past year. The budget’s focus is more on the other part, i.e. Government programs and policies for the upcoming year. Government policies (also known as Fiscal Policies) have two aspects; Revenue and Expenditure. Revenue includes the expected receipts, and expenditure includes the expected payments of the Government.
Characteristics of Budget
1. It is an estimate, not an actual statement.
2. It is prepared annually.
3. It is prepared at all levels of the Government, whether it is Central Government, State Government, or Local Government. However, our study is restricted to the Budget prepared by the Central Government, also known as the Union Budget.
4. The expected revenues and expenditures are planned as per the objectives of the Government.
5. In India, the Finance Minister presents the annual budget of the Government for its approval by the parliament. It is approved and then it is implemented.
6. A budget discloses both the financial performance of the Government in the last year and Government policies for the following year.
7. Budget impacts the economy through fiscal discipline and resource allocation.
Objectives of Government Budget
The Government plays a vital role in increasing the welfare of the people. Government achieves this through budget in the following ways:
1. Re-Allocation of Resources:
It refers to the direction of resources from one use to the other. In India, the public and private sectors play an essential role in the economy. However, Private enterprises always aim at maximising profits by allocating resources to those areas of production where they can earn higher returns. There are chances that an industry like alcohol may not promote the welfare of people. The Government of a country directs the distribution of resources through its resources in order to strike a balance between the goals of profit maximization and social welfare. For example, there is the production of both necessary and luxury goods. Besides, the Government can influence the allocation of resources through:
- Tax Concessions or Subsidies: Government encourages and discourages investment in useful and harmful goods respectively by providing concessions, subsidies, imposing heavy taxes, etc., on their production. For example, Government imposes heavy taxes on producing goods that are harmful to health, like ‘cigarettes’. Similarly, Government provides subsidies for the production of goods like ‘khadi’, which are helpful to society.
- Directly Producing Goods and Services: If the private sector does not take the initiative in certain non-profitable economic activities, the Government directly controls them, like water supply, sanitation, etc. It is also known as the allocation function as the Government attempts to provide certain goods and services which can not be provided through the market mechanism.
2. Reducing Inequalities in Income and Wealth:
Economic inequality means unequal distribution of income and wealth between different groups of society. The Government aims to reduce such inequalities through its budgetary policy. This policy places priority on the welfare of the poor at the same time, imposes heavy taxes on the rich. Higher taxes can be imposed by the Government on income earned by the rich and goods consumed by them to reduce their income. To increase the income of the poor, the Government provides free services like education and health. For example, Government provides free or subsidised rates for LPG connections and food grains to the poor.
Equitable distribution is a way to achieve social justice. It is the principal objective of a welfare-providing country like India. It is also known, as the distribution function as Government alters the income distribution to make it fair distribution between rich and poor.
3. Economic Stability:
Economic Stability refers to a situation without significant fluctuations in the price levels and stability of exchange rates in an economy. The Government ensures economic stability in the economy using its revenue and expenditure. Stability can be achieved by protecting the economy from the effects of various trade cycles and their phases like boom, recession, depression, and recovery. Budget is used as an essential policy to combat inflation and deflation in the economy.
- The Government reduces its own expenditure and increases revenue to correct inflation (Surplus Budget). (Inflation arises when the aggregate demand is higher than the aggregate supply)
- The Government increases its own expenditure and decreases revenue to correct deflation (Deficit Budget). (Deflation arises when the aggregate demand is lower than the aggregate supply)
The Government tries to achieve economic stability by increasing investment in the economy, which results in development and growth.
4. Growth of the Economy:
The growth of a country depends upon the rate of savings and investment. This will further promote capital formation and production levels, resulting in raising the country’s national income.
- The Government makes various policies and provisions through its budgetary policy to enhance savings and investment in an economy. This is done by providing various tax rebates and other incentives for productive ventures.
- The Government spends on essential services and facilities to have a solid infrastructural base for the economy, like health, education, housing, and transport, so that level of production rises in both the private sector and the public sector.
5. Employment Opportunities:
Budgetary policy focuses on employment generation through investment in public enterprises. Under these, various schemes like MNREGA are initiated to create employment among poor people and reduce the problem of poverty.
6. Management of Public Enterprises:
Public sector enterprises are owned and governed by the Government and the main aim of these enterprises is to promote the public’s welfare. The budget is prepared to manage these enterprises and provide financial help.
7. Reducing Regional Disparities:
To remove regional disparities, the Government encourages the setting up of production units in economically backward regions. Various types of tax concessions are offered to production units to take such initiatives. The Government also provides subsidies to encourage production units to support the Government in achieving the objective of regional balanced growth.
Components/ Structure of Budget
There are mainly two components of budget, i.e., (i) Revenue Budget and (ii) Capital Budget.
1. Revenue Budget
The revenue budget includes the revenue aspect of the Government budget. This budget shows the current receipts of the Government and the expenditure that can be met from these receipts. A Revenue Budget is a statement of estimated revenue receipts and expenditures during the fiscal year. It describes how the revenue is generated(collected) by the Government and how it is distributed among various heads of expenditure.
The Revenue Budget can be further classified into two parts:
(i) Revenue Receipts:
Revenue receipts are those estimated receipts of the Government during the fiscal year which do not affect the assets or liabilities status of the Government. The Government receives it in everyday activities.
(ii) Revenue Expenditure:
Revenue Expenditures are those estimated expenditures of the Government during the fiscal year which do not affect the assets or liabilities status of the Government.
2. Capital Budget
The capital budget includes the capital aspect of the Government budget. It is an account of assets and liabilities of the Central Government, which considers changes in capital. This budget shows the capital receipts of the Government and the expenditure that can be met from these receipts. A Capital Budget is a statement of estimated capital receipts and expenditures during the fiscal year.
The capital budget can be further classified into two parts:
(i) Capital Receipts:
Capital receipts are those estimated receipts of the Government during the fiscal year which reduce financial assets or create financial liabilities. These are obtained by the Government by raising funds through borrowings, recoveries of loans, and selling assets.
(ii) Capital Expenditure:
Capital Expenditures are those estimated expenditures of the Government during the fiscal year which result in the formation of physical or financial assets or a reduction in financial liabilities. It includes acquisition of machinery and equipment, investment in shares, and advances by the Central Government.
It can be concluded that the budget is an annual statement of the Government’s estimated revenues and expenditures for a fiscal year. The Government budget is a statement of Government income and expenditure, much like your family budget, it is all about what you earn and spend. The Government has to get approval for the budget from the Parliament. It plays a vital role in the stabilization of the economy.
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