Budget & Economy

7/27/2019 Budget & Economy

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Government Budget

&

the EconomySonu MalikDPS Vasant Kunj


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Meaning of a Government Budget

Budget is a statement showing the estimated income and

expenditure of a government during a fiscal year

Fiscal Year : 1 April 31 March

Budget is NOT actual expenditures and receipts

It is expected expenditures and receipts


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Impact of a Budget on the Economy

Deficit Budget

Estimated Receipts < Estimated Expenditure

impact : AD increases

Used to rectify a situation of Deficient Demand


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Impact of a Budget on the Economy

Surplus BudgetEstimated Receipts > Estimated Expenditure

impact of a Large Surplus budget : AD

decreases

Used to rectify a situation of Excess Demand


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Commercial revenue

Interest received

Dividends & profits

Administrative revenue

Structure of The Indian Governments Budget

Budget

Expenditure

Plan Non-Plan

Revenue Capital Revenue Capital

Receipts

Revenue Capital

TaxNon-Tax

Direct Indirect

Market Borrowing

Recovery of loans

Issuance of treasury bills

Other liabilities

Other receipts

Devt Devt DevtDevt

Non-

Devt

Non-

Devt

Non-

DevtNon-

Devt


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Budgetary Receipts

Revenue Receipts

Do not create a liability Do not reduce the value of an asset

Revenue Receipts

Tax

Commercial revenues: toll,

railway fares

Interest and dividend

Grants Foreign government/

aid agencies

Administrative Revenue Fee

License fee

Fines

Forfeitures

Escheat

Indirect

Sales tax

Excise duty

Direct

Income tax

Corporate tax

Govt.

payer +

bearer

Govt.

Rs. 100

Collected by

firm

customer(bearer)

Rs. 100 as taxRs. 100

paid by firm

as tax

Firm

(payer)

Non Tax


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Budgetary Receipts

Capital Receipts

Create a liability Reduce the value of an asset

Include:

Borrowing

Recovery of loans

Other liabilities

Other receipts - Disinvestment Funds

Market Loans

Issuance of treasury bills

Loans from foreign governments

Budgetary Receipts


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Budgetary Expenditures

Plan

Expenditure incurred onprogrammes under current

five year plan

Revenue Does not create an asset

Does not reduce liability

Developmental Expenditures directly impact

the social and economic

development of the country

Non-Plan

Expenditure not as percurrent five year plan

Capital Create as asset

Reduce liability

Non-Developmental Expenditures on essential,

general services of

government


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Measures of Deficit Revenue Deficit

Revenue Deficit = Total Revenue Expenditure

Total Revenue Receipts

Signifies: Governments own revenue is insufficient to meet its normal running

Government needs to make up short fall from capital receipts

Revenue deficit increases the liabilities of government


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Measures of Deficit Fiscal Deficit

Fiscal Deficit = Total Budget Expenditure

Revenue receiptsCapital receipts excluding borrowing

Signifies Borrowing of government

Measures the extent to which government needs to borrow to finance its

expenditure

borrowing

interest burdenVicious circle ofDebt

revenue deficit

(receipts constant)


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Measurement of Deficit Primary Deficit

Primary Deficit = Fiscal Deficit Interest payments

Signifies: Extent to which government is borrowing to meet interest burden of

previous loans

Low deficit government is largely borrowing to meet previous

years debt obligations


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Importance of Government Budget

Used as a policy instrument for: Enhancing productivity in the economy

Reducing inequalities in income and wealth

Channelising consumption

Reallocating resources to areas where private investment is not forthcoming

Controlling aggregate demand

Tax Expenditure

Fiscal Policy

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Budget & Economy