POWERPOINT PRESENTATION

MACROECONOMICSCHAPTER – 10:GOVERNMENT

BUDGET AND THE ECONOMY

In the modern world, every government aims at maximising the welfare of its country. It require a number of infrastructural, economics and welfare activities. All these activities require huge expenditure to be incurred. This requires appropriate planning and policy of the government. The solution to all these problems is “Budget”. A Budget is a document containing detailed programmes and policies of action for the given fiscal year.

Introduction

Government budget is an annual statement, showing item wise estimates of receipts and expenditure during fiscal year i.e. financial year. The receipts and expenditure, shown in the budget, are not the actual figure, but the estimated values for the coming fiscal year.

Meaning

Budget is prepared by governments at all levels, i.e. central government, state government and local government, prepares its respective annual budget.

Estimated expenditures and receipts are planned as per the objectives of the government.

In India, Budget is presented in the parliament on such a day, as the President may direct. By convention, it is prepared on the last working day of February each year.

It is required to be approved by the parliament, before it can be implemented.

Important Point of Government Budget

OBJECTIVES OF GOVERNMENT BUDGET

REALLOCATION OF

RESOURCES

MANAGEMENT OF PUBLIC ENTERPRISES

ECONOMIC STABILITY

REDUCING INEQUALITIES IN

INCOME AND WEALTH

REDUCING REGIONAL

DISPARITIES

ECONOMIC GROWTHTAX

CONCESSIONS OR SUBSIDIES

DIRECTLY PRODUCING GOODS

AND SERVICES

ObjectivesGovernment prepares the budget for fulfilling certain objectives. These objectives are the direct outcome of the government’s economic, social and political policies. The various objectives of government budget are: Reallocation of Resources: Through the budgetary policy,

Government aims to reallocate resources in accordance with the economic and priorities of the country. Government can influence allocation of resources through:

Tax concession or subsidies: To encourage investment, government can give tax concession, subsidies etc. to the producers. For example, Government discourages the production of harmful consumption goods(like liquor, cigarettes etc.) through heavy taxes and encourages the use of “Khadi Products” by providing subsidies.

Directly producing goods and services: If private sector does not take interest, government can directly undertake the production.

Reducing Inequalities in income and wealth: Economic inequality is an inherent part of every economic system. Government aims to reduce such inequalities of income and wealth, through its budgetary policy. Government aims to influence distribution of income by imposing taxes on the rich and spending more on the welfare of the poor.

Economic Stability: Government budget is used to prevent business fluctuation of inflation of deflation to achieve the objective of economic stability. The government aims to control the different phases of business fluctuations through its budgetary policy.

Management of Public Enterprises: There are large numbers of public sector industries(especially natural monopolies), which are established and managed for social welfare of the public. Budget is prepared with the objectives of making various provisions for managing such enterprises and providing them financial help.

Economic Growth: The growth rate of a country depends on rate of saving and investment. For this purpose, budgetary policy aims to mobilise sufficient resources for investment in the public sector. Therefore, the government makes various provisions in the budget to raise overall rate of savings and investment in the economy.

Reducing regional disparities: The government budget aims to reduce regional disparities through its taxation and expenditure policy for encouraging setting up of production units in economically backward regions.

Components of budget refers to structure of the budget. Two main components of Budget are: Revenue Budget: It deals with the revenue aspect of

the government budget. It explains how revenue is generated or collected by the government and how it is allocated among various expenditure heads. Revenue budget has two parts:

i. Revenue Receipts ii. Revenue Expenditures Capital Budget: it deals with the capital aspect of the

government budget and it consists of:i. Capital Receiptsii. Capital Expenditures

Components Of Budgets

Budget Receipts refer to the estimated money receipts of the government from all sources during a given fiscal year. Budget receipts may be further classified as:i. Revenue Receiptsii. Capital Receipts

Budget Receipts

Budget Receipt

sRevenue Receipts

Tax Revenue

Capital Receipts

Non-Tax Revenue

Other Receipts

Borrowings

Recovery Of Loans

Revenue ReceiptsRevenue receipts refer to those receipts which neither create any liability nor cause any reduction in the assets of the government. They are regular and recurring in nature and government receives them in its normal course of activities.A receipts Is revenue receipt, if it satisfies the following two essential conditions: The receipts must not create a liability for the

government. The receipts must not cause decrease in the

assets.

Sources Of Revenue Receipts

Tax Revenue

Non-Tax Revenue

Tax Revenue refers to sum total of receipts from taxes

and other duties imposed by the government.

Non Tax revenue refers to receipts of the government from all sources other than

those of tax receipts.

Basis Direct Taxes Indirect Taxes

Meaning

Direct Taxes refer to taxes that are imposed on property and income of individuals and companies and are paid directly by them to the government.

Indirect Taxes refer to those taxes which affect the income and property of individuals and companies through their consumption expenditure.

ImpactDirect Taxes are levied on individuals and companies.

Indirect Taxes are levied on goods and services.

Shift Of Burden

The burden of a shift tax cannot be shifted, i.e. impact and incidence is on same person.

The burden of an indirect tax can be shifted, i.e. impact and incidence is on different person.

NatureThey are generally progressive in nature.

They are generally proportional in nature.

Coverag

e

They have limited reach as they do not reach all the sections of the economy.

They have a wide coverage as they reach all sections of the sections of the society.

Sources OF Non-Tax Revenue Interest: Government receives interest on loans given by it to

state government union territories, private enterprises and general public. Interest receipts from these loans is an important source of non tax revenue.

Profit and Dividends: government earns profit through public sector undertakings like Indian Railways , LIC, BHEL, etc. It earns profit from the sale proceeds of the products of such public enterprises.

Fees: Fees refer to those charges imposed by the government to cover the cost of recurring services provided by it. Such services are generally in public interest and fees is paid by those, who receive such services. It is also a compulsory contribution like tax.

License Fee: It is a payment charged by the government to grant permission for something. For example, license fee paid for permission of keeping a gun or to obtain National Permit for commercial vehicles.

Fines and Penalties: They refer to those payments which are imposed on law breakers. For Example, fine for jumping red light or penalty for non-payment of taxes.

Escheats: It refers to claim of the government on the property of a person who dies without leaving behind any legal heir or a will.

Gifts and Grants: Government receives gifts and grants from foreign governments and international organisations.

Forfeitures: These are in the form of penalties which are imposed by the courts for non-compliance of orders or non-fulfilment of contracts etc.

Special Assessment: It refers to the payment made by owners of those properties whose value has appreciated due to developmental activities of the government. For example, if a value of property near a metro station has increased, then a part of developmental expenditure is recovered from owners of such property in the form of special assessment.

Capital

Receipts

Capital receipts refer to those receipts which either create a liability or cause a reduction in the assets of the government. They are non-recurring and non-routine in nature. A receipt is a capital receipt if it satisfies any one of the two conditions: The receipt must create a liability for the

government The receipts must cause a decrease in

the assets

Capital receipts are broadly classified into three group: Borrowings: Borrowings are the funds raised by government to

meet excess expenditure. Government borrow fund from:a)Open Market(Public) b)Reserve Bank of India(RBI)

c)Foreign governments(loans from USA) d)International Institution Recovery from Loans: Government grants various loans to state

governments or union territories. Recovery of such loans is a capital receipt as it reduces the assets of the government.

Other Receipts: These include:1. Disinvestment: Disinvestment refers to the act of selling a part or

the whole of shares of selected public sector undertakings(PSU) in the form of equity shares.

2. Small Savings: Small saving refer to funds raised from the public in the form of Post Office deposits, National Saving Certificates, Kisan Vikas Patra etc.

Sources Of Capital Receipts

BasisRevenue Receipts

Capital Receipts

MeaningThey neither create any

liability nor reduce any asset of the government.

They either create any liability or reduce any asset of the government.

Nature They are regular and recurring

in nature.They are irregular and

non-recurring in nature.

Future Obligation

There is no future obligation to return the amount.

In case of certain capital receipts(like

borrowings), there is future obligation to

return the amount along with interest.

ExampleTax revenue and Non-tax

revenueBorrowings,

Disinvestment, etc.

Budget Expenditure

Budget expenditure refers to the estimated expenditure of the government during a given fiscal year. The budget expenditure can be broadly categorised as:Revenue ExpenditureCapital Expenditure

Revenue Expenditure refers to the expenditure which neither creates any asset nor causes any reduction in any liability of the government. It is recurring in nature. It is incurred on normal functioning of the

government. Examples: Payment of salaries, pensions, interests,

etc.An expenditure is a revenue expenditure, if it satisfies the following two essential condition:a) The expenditure must not create an asset of the

government.b) The expenditure must not cause decrease in an

liability.

Revenue Expenditure

Capital

ExpenditureCapital expenditure refers to the expenditure which either creates an asset or causes a reduction in the liabilities of the government. It is non-recurring in nature. It adds to capital stock of the economy and increases

its productivity through expenditure on long period development programmes.

Examples: Loan to states and Union Territories, etc.An expenditure is a capital expenditure, if it satisfies any one of the following two conditions:1. The expenditure must create an asset for the

government.2. The expenditure must cause a decrease in the

liabilities.

Budget expenditure can also be classified as Plan and Non-Plan expenditure. Plan Expenditure: It refers t the expenditure that is

incurred on the programmes detailed in the current five year plan. For example, expenditure on agriculture and allied activities, irrigation, energy, transport, communication, etc. Plan expenditure shows the expenditure to be incurred on:

1. Projects covered under the Central Plans2. Central Assistance for State and Union Territories. Non Plan Expenditure: It refers to the expenditure other

than the expenditure related to the current five year plan. For example, payment of interest, expenditure on defence services, subsidies etc. It is incurred on routine functioning of the government. Therefore, it is a must for every country.

Plan and Non-Plan Expenditure

Developmental and Non-Developmental ExpenditureBudget Expenditure can also be classified as Developmental and Non-Developmental Expenditure.1) Developmental Expenditure: It refers to the

expenditure which is directly related to economic and social development of the country. For example, expenditure on education, health, social welfare etc. It adds to the flow of goods and services in the economy.

2) Non Developmental Expenditure: It refers to the expenditure which is incurred on the essential general services of the government. For example, expenditure on defence, administrative services, police, justice etc. It does not directly contribute to economic development, but it indirectly helps in the development of the economy.

There are three types of budgets:o Balanced Budget: Government budget is said to

be balanced budget if estimated government receipts are equal to the estimated government expenditure.

o Surplus Budget: If estimated government receipts are more than the estimated government expenditure, then the budget is termed as “Surplus Budget”.

o Deficit Budget: If estimated government receipts are less than the estimated government expenditure, then the budget is termed as “Deficit Budget”.

Types Of Budget

Measures Of Government Deficit

Budgetary deficit is defined as the excess of total estimated over total estimated revenue. When the government spends more than it collects, then it incurs a budgetary deficit. With reference to budget of Indian government, budgetary deficit can be of 3 types:1) Revenue Deficit2) Fiscal Deficit3) Primary Deficit

Revenue Deficit is concerned with the revenue expenditures and receipts of the government. It refers to excess of revenue expenditure over revenue receipts during the given fiscal year.

Revenue Deficit = Revenue Expenditure – Revenue Receipts

It signifies that government’s own revenue is insufficient to meet the expenditures on normal functioning of government departments and provisions for various services.

Revenue Deficit

Implication Of Revenue Deficit It indicates the inability of the government to meet its

regular and recurring expenditure I the proposed budget. It implies that government is dissaving, i.e. government is

using up savings of other sectors of the economy to finance its consumption expenditure.

It also implies that the government has to make up this deficit from capital receipts, i.e. through borrowings or disinvestment.

Use of capital receipts for meeting the extra consumption expenditure leads to an inflationary situation in the economy. Higher borrowings increase the future burden in terms of loan amount and interest payments.

A high revenue deficit gives a warning signal to the government to either curtail its expenditure or increase its revenue.

Reduce Expenditure: Government should take serious steps to reduce its expenditure and avoid unproductive or unnecessary expenditure.

Increase Revenue: Government should increase its receipts from various sources of tax and non-tax revenue.

Measure to Reduce Revenue Deficit

Fiscal DeficitFiscal deficit presents a more comprehensive view of budgetary imbalances. Fiscal Deficit refers to the excess of total expenditure over total receipts (excluding borrowings) during the given fiscal year.Fiscal Deficit= Total Expenditure – Total Receipts excluding borrowingsSources Of Financial Fiscal Deficit:Government has to look out for different options to finance the fiscal deficit. The main two sources are: Borrowings: Fiscal Deficit can be met by borrowings from

the internal sources or external sources. Deficit Financing: Government may borrow from RBI

against its securities to meet the fiscal deficit. RBI issues new currency for this purpose. This process is known as deficit financing.

The implications of fiscal deficit are as follows: Debt Trap: Fiscal deficit indicates the total

borrowings requirements of the government. Borrowings not only involve repayment of principal amount, but also require payment of interest.

Inflation: Government mainly borrows from Reserve Bank of India (RBI) to meet its fiscal deficit. RBI prints new currency to meet the deficit requirements.

Foreign Dependence: Government also borrows from rest of the world, which raises its dependence on other countries.

Hampers the Future growth: Borrowings increase the financial burden for future generations. It adversely affects the future growth and development prospects of the country.

Implications Of Fiscal Deficit

*Primary

DeficitPrimary deficit refers to difference between fiscal deficit of the current year and interest payments on the previous borrowings.Primary Deficit = Fiscal Deficit – Interest Payments

Implications Of Primary Deficit:It indicates, how much of the government borrowings are going to meet expenses other than the interest payments. The difference between fiscal deficit and primary deficit shows the amount of interest payments on the borrowings made in past. So, a low or zero primary deficit indicates that interest commitments have forced the government to borrow.

THAN

K YOUMADE BY:

VIBHOR XII – ‘B’

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