Public Budget

“A government budget is an annual financial statement showing item wise estimates of expected revenue and anticipated expenditure during a fiscal year.”

Just as your household budget is all about what you earn and spend, similarly the government budget is a statement of its income and expenditure. In the beginning of every year, government presents before the Lok Sabha an estimate of its receipts and expenditure for the coming financial year.

The government plans expenditure according to its objectives and then tries to raise resources to meet the proposed expenditure. Government earns money broadly from taxes, fees and fines, interest on loans given to states and dividend by public sector enterprises. Government spends mainly on (i) securing and providing goods and services to citizens, (ii) on law and order and (iii) internal security, defence, staff salaries, etc. In India there is constitutional requirement to present budget before Parliament for the ensuing financial year. The financial (fiscal) year starts on April 1 and ends on March 31 of next year. For example, fiscal or budget year 2010-11 is from April 1, 2010 to March 31, 2011. Obviously, the budget is the most important information document of the government because government implements its plans and programmes through the budget.

Main elements of the budget are:

(i) It is a statement of estimates of government receipts and expenditure.

(ii) Budget estimates pertain to a fixed period, generally a year.

(iii) Expenditure and sources of finance are planned in accordance with the objectives of the government.

(Iv) It requires to be approved (passed) by Parliament or Assembly or some other authority before its implementation.

Objectives of a Government Budget:

It should be kept in mind that rapid and balanced economic growth with equality and social justice has been the general objective of all our policies and plans. General objectives of a government budget are as under:

(i) Economic growth:

To promote rapid and balanced economic growth so as to improve living standard of the people Economic growth implies a sustained increase in real GDP of the economy, i.e., a sustained increase in volume of goods and services. Public welfare is the main guide.

(ii) Reduction of poverty and unemployment:

To eradicate mass poverty and unemployment by creating employment opportunities and providing maximum social benefits to the poor .In fact, social welfare is the single most important objective. Every Indian should be able to meet his basic needs like food, clothing, housing (roti, kapda, makaan) along with decent health care and educational facilities.

(iii) Reduction of inequalities/Redistribution of income:

To reduce inequalities of income and wealth, government can influence distribution of income through levying taxes and granting subsidies. Government levies high rate of tax on rich people reducing their disposable income and lowers the rate on lower income group.

Again, government provides subsidies and amenities to people whose income level is low. Again public expenditure can be useful in reducing inequalities. More emphasis is laid on equitable distribution of wealth and income. Economic progress in itself is not a sufficient goal but the goal must be equitable progress.

Redistribution of income:

Equalities in income distribution mean allocating the income distribution in such a way that reduces income inequalities and also there is no concentration of income among few rich. It primarily requires that rate of increase in real Income of poor sections of society should be faster than that of rich sections of society. Fiscal instruments like taxation, subsidies and public expenditure can be made use of to achieve the object.

(iv) Reallocation of resources: (D11; A10):

To reallocate resources so as to achieve social and economic objectives .Again, government provides more resources into socially productive sectors where private sector initiative is not forthcoming, e.g., public sanitation, rural electrification, education, health, etc. Moreover govt. allocates more funds to production of socially useful goods (like Khadi) and draws away resources from some other areas to promote balanced economic growth of regions. In addition govt. undertakes production directly when required,

(v) Price stability/Economic stability: (A2012):

Government can bring economic stability, i.e., control fluctuations in general price level through taxes, subsidies and expenditure. For instance, when there is inflation (continuous rise in prices), government can reduce its expenditure. When there is depression, government can reduce taxes and grant subsidies to encourage spending by the people.

(vi) Financing and management of public enterprises:

To finance and manage public enterprises which are of the nature of national monopohes like railways, power generation and water lines etc.

Impact of the budget:

A budget impacts the society at three levels, (i) It promotes aggregate fiscal discipline through controlled expenditure, given the quantum of revenues, (ii) Resources of the country are allocated on the basis of social priorities, (iii) It contains effective and efficient programmes for delivery of goods and services to achieve its targets and goals.

Types of Budget:

Recall, a budget is defined as an annual statement of the estimated receipts and expenditure of the government over the fiscal year. Budgets are of three types: balanced, surplus and deficit budgets—depending upon whether the estimated receipts are equal to, less than or more than estimated receipts, respectively its three types are explained hereunder.

(a) Balanced Budget:

A government budget is said to be a balanced budget in which government estimated receipts (revenue and capital) are equal to government estimated expenditure. Let us suppose for the sake of convenience that the only source of revenue is a lump sum tax. A balanced budget will then imply that the amount of tax is equal to the amount of expenditure.

Put in symbols:

Balanced Budget

Estimated Govt. Receipts = Estimated Govt. Expenditure

Two main merits of a balanced budget are:

(a) It ensures financial stability and (b) It avoids wasteful expenditure.

Two main demerits are:

(i) Process of economic growth is hindered and (ii) Scope of undertaking welfare activities is restricted.

According to Adam Smith, public expenditure should never exceed public revenues, i.e., he advocated a balanced budget. But Keynes and modern economists do not agree with the policy of a balanced budget. They argue that in a balanced budget, total expenditure (public and private) falls short of the amount necessary to maintain full employment.

Therefore, government should increase its expenditure to close the gap between the expenditure essential for full employment and expenditure that actually takes place. Ideally, a balanced budget is a good policy to bring the near full employment economy to a full employment equilibrium.

Unbalanced Budget:

When government estimated expenditure is either more or less than government estimated receipts, the budget is said to be an unbalanced budget. It may be either surplus budget or deficit budget.

(b) Surplus Budget:

When government receipts are more than government expenditure in the budget, the budget is called a surplus budget. In other words, a surplus budget implies a situation where in government revenue is in excess of government expenditure.

Symbolically:

Surplus Budget =

Estimated Govt. Receipts > Estimated Govt. Expenditure

A surplus budget shows that government is taking away more money than what it is pumping in the economic system. As a result, aggregate demand tends to fall which helps in reducing the price level. Therefore, in times of severe inflation, which arises due to excess demand, a surplus budget is the appropriate budget. But in situation of deflation and recession, surplus budget should be avoided. Mind, balanced budget and surplus budget are rarely used by the government in modern-day world.

(c) Deficit Budget:

When government estimated expenditure exceeds government receipts in the budget, the budget is said to be a deficit budget. In other words, in a deficit budget, government estimated revenue is less than estimated expenditure.

Symbolically:

Deficit Budget = Estimated Govt. Expenditure > Estimated Govt. Receipts

These days’ popular democratic governments adopt mostly deficit budget to meet the growing needs of the people. It may be mentioned that Keynes had advocated a deficit budget to remedy the situation of unemplo3mient and under-employment.

Government covers the gap either through borrowing or through withdrawals from its reserves. Thus, a deficit budget implies increase in government liability and fall in its reserves. When an economy is in under-employment equilibrium due to deficient demand, a deficit budget is a good remedy to combat recession.

Merits and demerits of deficit budget:

A deficit budget has its own merits especially for developing economy For example (i) It accelerates economic growth and (ii) It enables to undertake welfare programmes of the people, (iii) It is a cure for deflation as it checks downward movement of prices. At the same time.

It has demerits also such as:

(i) It encourages unnecessary and wasteful expenditure by the government

(ii) It may lead to financial and political instability

(iii) It shakes the confidence of foreign investors

The situation of excess demand leading to inflation (continuous rise in prices) and the situation of deficient demand leading to depression (fall in prices, rise in unemployment, etc.). A surplus budget is recommended in the situation of inflationary trends in the economy whereas a deficit budget is suggested in the situation of recession.