Economy Simplified: Government Budget: Meaning, Objectives and Components.

Fiscal policy is the guiding force that helps the government decide how much money it should spend to support the economic activity, and how much revenue it must earn from the system, to keep the wheels of the economy running smoothly. 
Hence it mainly deals with 2 components: Budget and Taxation.

Government Budget: Meaning, Objectives and Components 

1. There is a constitutional requirement in India (Article 112) to present before the Parliament a statement of estimated receipts and expenditures of the government in respect of every financial year which runs from 1 April to 31 March
2. This ‘Annual Financial Statement’ constitutes the main budget document of the government.
3. Although the budget document relates to the receipts and expenditure of the government for a particular financial year, the impact of it will be there in subsequent years. There is a need therefore to have two accounts- those that relate to the current financial year only are included in the revenue account (also called revenue budget) and those that concern the assets and liabilities of the government into the capital account (also called capital budget).
Objectives of Government Budget

1. Allocation Function of Government Budget : Government provides certain goods and services which cannot be provided by the market mechanism i.e. by exchange between individual consumers and producers. Examples of such goods are national defence, roads, government administration etc. which are referred to as public goods.
2. Redistribution Function of Government Budget: 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.
3. Stabilisation Function of Government Budget:  In any period, the level of demand may not be sufficient for full utilisation of labour and other resources of the economy. Since wages and prices do not fall below a level, employment cannot be brought back to the earlier level automatically. The government needs to intervene to raise the aggregate demand.
On the other hand, there may be times when demand exceeds available output under conditions of high employment and thus may give rise to inflation. In such situations, restrictive conditions may be needed to reduce demand. The intervention of the government whether to expand demand or reduce it constitutes the stabilisation function.

Components of Government Budget

Classification of Receipts 

1. Revenue Receipts:  
  1. Revenue receipts are those receipts that do not lead to a claim on the government. They are therefore termed non-redeemable.
    They are divided into tax and non-tax revenues
  2. Tax revenues, an important component of revenue receipts, have for long been divided into direct taxes (personal income tax) and firms (corporation tax), and indirect taxes like excise taxes (duties levied on goods produced within the country), customs duties (taxes imposed on goods imported into and exported out of India) and service tax. 
  3. Other direct taxes like wealth tax, gift tax and estate duty (now abolished) have never brought in a large amount of revenue and thus have been referred to as ‘paper taxes’.
  4. 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. With respect to excise taxes, necessities of life are exempted or taxed at low rates, comforts and semi-luxuries are moderately taxed, and luxuries, tobacco and petroleum products are taxed heavily.
  5. Non-tax revenue of the central government mainly consists of interest receipts on account of loans by the central government, dividends and profits on investments made by the government, fees and other receipts for services rendered by the government. Cash grants-in-aid from foreign countries and international organisations are also included.
  6. The estimates of revenue receipts take into account the effects of tax proposals made in the Finance Bill.
2. Capital Receipts: 
  1. All those receipts of the government which create liability or reduce financial assets are termed as capital receipts.
  2. For Instance, the government also receives money by way of loans or from the sale of its assets. Loans will have to be returned to the agencies from which they have been borrowed. Thus they create liability. 
  3. Furthermore, sale of government assets, like sale of shares in Public Sector Undertakings (PSUs) which is referred to as PSU disinvestment, reduce the total amount of financial assets of the government.
  4. When the government takes fresh loans it will mean that in future these loans will have to be returned and interest will have to be paid on these loans. Similarly, when the government sells an asset, then it means that in future its earnings from that asset will disappear. Thus, these receipts can be debt creating or non-debt creating.

Classification of Expenditure

Revenue Expenditure:
  1. Revenue Expenditure is expenditure incurred for purposes other than the creation of physical or financial assets of the central government. 
  2. It relates to those expenses incurred for the normal functioning of the government departments and various services, interest payments on debt incurred by the government, and grants given to state governments and other parties (even though some of the grants may be meant for creation of assets).
  3. Budget documents classify total expenditure into plan and non-plan expenditure.
  4. According to this classification, plan revenue expenditure relates to central Plans (the Five-Year Plans) and central assistance for State and Union Territory plans.
  5.  Non-plan expenditure, the more important component of revenue expenditure, covers a vast range of general, economic and social services of the government. The main items of non-plan expenditure are interest payments, defence services, subsidies, salaries and pensions.
  6. Interest payments on market loans, external loans and from various reserve funds constitute the single largest component of non-plan revenue expenditure.
  7. Defence expenditure, is committed expenditure in the sense that given the national security concerns, there exists little scope for drastic reduction.
  8. Subsidies are an important policy instrument which aim at increasing welfare. Apart from providing implicit subsidies through under-pricing of public goods and services like education and health, the government also extends subsidies explicitly on items such as exports, interest on loans, food and fertilisers.
Capital Expenditure
  1. There are expenditures of the government which result in creation of physical or financial assets or reduction in financial liabilities.
  2. This includes expenditure on the acquisition of land, building, machinery, equipment, investment in shares, and loans and advances by the central government to state and union territory governments, PSUs and other parties.
  3. Capital expenditure is also categorised as plan and non-plan in the budget documents. 
  4. Plan capital expenditure, like its revenue counterpart, relates to central plan and central assistance for state and union territory plans.
  5. Non-plan capital expenditure covers various general, social and economic services provided by the government.

Budget and FRBM Act 2003

1. The budget is not merely a statement of receipts and expenditures, it hasalso become a significant national policy statement. The budget, it has been argued, reflects and shapes, and is, in turn, shaped by the country’s economic life.
2. Along with the budget, three policy statements are mandated by the Fiscal Responsibility and Budget Management Act, 2003 (FRBMA). 
3. The Medium-term Fiscal Policy Statement sets a three year rolling target for specific fiscal indicators and examines whether revenue expenditure can be financed through revenue receipts on a sustainable basis and how productively capital receipts including market borrowings are being utilized.
4. The Fiscal Policy Strategy Statement sets the priorities of the government in the fiscal area, examining current policies and justifying any deviation in important fiscal measures.
5. The Macroeconomic Framework Statement assesses the prospects of the economy with respect to the GDP growth rate, fiscal balance of the central government and external balance.


1. The government may spend an amount equal to the revenue it collects. This is known as a balanced budget. If it needs to incur higher expenditure, it will have to raise the amount through taxes in order to keep the budget balanced. 
2. When tax collection exceeds the required expenditure, the budget is said to be in surplus
3. However, the most common feature is the situation when expenditure exceeds revenue. This is when the government runs a budget deficit.

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