<h5 id="51-government-budget---meaning-and-its-components">5.1 Government Budget - Meaning and its Components</h5> <ul> <li>The budget is a constitutional requirement in India, presented before the Parliament, that provides an estimate of receipts and expenditures of the government for a financial year.</li> <li>The budget document is divided into two main accounts: the revenue account (revenue budget) and the capital account (capital budget).</li> <li>The revenue account includes receipts and expenditures related to the current financial year, while the capital account concerns the assets and liabilities of the government.</li> <li>The budget’s impact extends beyond the current financial year, making it essential to have separate accounts for each year.</li> <li>The objectives of the government budget should be understood to fully comprehend the accounts, although they are not specified in the text.</li> </ul> <p>======</p> <h5 id="511-objectives-of-government-budget">5.1.1 Objectives of Government Budget</h5> <ul> <li>The Allocation Function of Government Budget:</li> </ul> <ol> <li>Government provides certain goods and services that cannot be provided by the market mechanism, known as public goods.</li> <li>Public goods are non-rivalrous, meaning one person’s consumption does not reduce the amount available for consumption for others.</li> <li>Public goods are non-excludable, meaning there is no feasible way of excluding anyone from enjoying the benefits of the good.</li> <li>Public provision refers to goods financed through the budget and can be used without any direct payment.</li> <li>Public goods may be produced by the government or the private sector.</li> </ol> <ul> <li> <p>The Redistribution Function of Government Budget:</p> <ol> <li>Government affects the personal disposable income of households by making transfers and collecting taxes.</li> <li>This function allows the government to change the distribution of income and bring about a distribution that is considered ‘fair’ by society.</li> </ol> </li> <li> <p>The Stabilisation Function of Government Budget:</p> <ol> <li>Government may need to correct fluctuations in income and employment.</li> <li>The government can intervene to raise the aggregate demand when it is not sufficient for full utilisation of labour and other resources.</li> <li>The government can also reduce demand when it exceeds available output under conditions of high employment to prevent inflation.</li> </ol> </li> </ul> <p>======</p> <h5 id="512-classification-of-receipts">5.1.2 Classification of Receipts</h5> <ul> <li>Revenue receipts are non-redeemable receipts, divided into tax and non-tax revenues.</li> <li>Tax revenues, a significant part of revenue receipts, include direct taxes (personal income tax, corporation tax) and indirect taxes (excise taxes, customs duties, service tax, and abolished taxes like wealth tax, gift tax, estate duty).</li> <li>Progressive income taxation aims to achieve redistribution, with higher tax rates for higher income. Firms are taxed proportionally.</li> <li>Non-tax revenue includes interest receipts, dividends, profits, fees, grants-in-aid, and other services.</li> <li>Capital receipts are received through loans or sale of assets, creating liability or reducing financial assets. They can be debt-creating or non-debt-creating.</li> </ul> <p>======</p> <h5 id="513-classification-of-expenditure">5.1.3. Classification of Expenditure</h5> <ul> <li>Revenue expenditure is for purposes other than creation of physical/financial assets of central government, including:</li> <li>Normal functioning of government departments and services</li> <li>Interest payments on debt</li> <li>Grants to state governments and other parties</li> <li>Budget documents classify total expenditure into plan and non-plan expenditure</li> <li>Non-plan expenditure, the more important component, covers a vast range of general, economic and social services with main items: interest payments, defence services, subsidies, salaries and pensions</li> <li>Capital expenditure results in creation of physical or financial assets or reduction in financial liabilities, with main items: expenditure on land, building, machinery, equipment, investment in shares, and loans and advances by the central government</li> </ul> <p>======</p> <h5 id="52-balanced-surplus-and-deficit-budget">5.2 Balanced, Surplus and Deficit Budget</h5> <ul> <li>A balanced budget is when the government spends an amount equal to the revenue it collects.</li> <li>If tax collection exceeds the required expenditure, the budget is in surplus.</li> <li>When expenditure exceeds revenue, the government runs a budget deficit.</li> <li>Higher expenditure requiring more funds than available in revenue leads to a deficit budget.</li> <li>The need to keep the budget balanced may lead to raising taxes if expenditure is higher.</li> <li>The most common feature is the situation when expenditure exceeds revenue, leading to a deficit budget.</li> </ul> <p>======</p> <h5 id="521-measures-of-government-deficit">5.2.1 Measures of Government Deficit</h5> <ul> <li>The Revenue Deficit is the difference between revenue receipts and revenue expenditure. In 2020-21, it was 2.7% of GDP.</li> <li>Fiscal Deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing. It is calculated as Gross fiscal deficit = Total expenditure - (Revenue receipts + Non-debt creating capital receipts). In 2020-21, it was 3.5% of GDP.</li> <li>The Fiscal Deficit indicates the total borrowing requirements of the government from all sources. It is a key variable in judging the financial health of the public sector and the stability of the economy.</li> <li>Primary Deficit is the borrowing requirement of the government, excluding interest obligations on accumulated debt. It is calculated as Gross primary deficit = Gross fiscal deficit - Net interest liabilities.</li> <li>Changes in Government Expenditure and Taxes affect the level of equilibrium income. An increase in government purchases increases aggregate demand, leading to a higher equilibrium income level. A cut in taxes increases disposable income, leading to an increase in consumption and total spending.</li> </ul> <p>======</p>