Government budgeting is a fundamental aspect of public administration and governance, serving as a critical tool for economic management, policy implementation, and social development. It reflects the government’s priorities, commitments, and plans for the nation’s future. This article of NEXT IAS aims to explain in detail the meaning of government budgeting, key components of a government budget and other related concepts.
Government budgeting is the process by which governments plan, allocate, and monitor the spending of public funds. It involves estimating government revenues (from taxes, fees, and other sources) and deciding on the expenditures necessary to achieve the government’s policy objectives within a specified fiscal period, usually a year.
Government budgeting in India is a comprehensive process involving the preparation, enactment, and execution of budgets by the Center and/or the states. For the purpose of this article, we will focus on the budget of the central government, called as the Union Buget of India.
As per Article 112 of the Constitution of India, the Union Budget of a fiscal year refers to the annual financial statement of the Union Government for that particular fiscal year. It contains a detailed account of the estimated receipts and expenditures of the government for a particular fiscal year that runs from 1st April to 31st March.
The data contained in the Union Budget of India can be categorized into the following three categories:
For example, the Union Budget 2023-24 was presented towards the end of the fiscal year 2022-23 in February 2023. Thus, for the Union Budget 2023-24, the 2022-23 became the current fiscal year, 2021-22 became the previous fiscal year and 2023-24 became the upcoming fiscal year. Thus, the Union Budget 2023-24 contained these three categories of data:
The process of government budgeting in India comprises four distinct phases:
The enactment of the Union Budget forms the most crucial part of the government budgeting process. The whole process of enactment of the Union Budget is described in chronological order as follows:
There are, broadly, two main components of the Government Budget – Revenue Budget and Capital Budget
This component comprises the details of revenue receipts and expenditures for the upcoming fiscal year. Thus, this, in turn, has 2 sub-components:
This includes the income the government expects to receive within the fiscal year that is not to be paid back by the government.Revenue Receipts are not reclaimed from the government, and hence they don’t impact the liabilities and assets of the government.
Revenue Receipts are of 2 types:
Tax Revenue
It consist of the proceeds of taxes and other duties levied by the Central Government.
Tax revenues comprise of proceeds coming from the following types of taxes:
Non-Tax Revenue
It comprises earnings from sources other than taxes, and mainly consists of:
Revenue Expenditure is expenditure incurred for purposes other than the creation of physical or financial assets. Thus, these expenses do not yield any revenue in the future.
Some major components of the Revenue Expenditure include expenses incurred for the purpose of
The Capital Budget is an account of the assets as well as liabilities of the Central Government. This shows the capital requirements (for creating long term durable infrastructure) of the government and the pattern of their financing.
The Capital Budget, in turn, has 2 sub-components:
They comprise the funds received by the government that are not part of the regular income sources. All those receipts of the government which create liability or reduce financial assets are termed as capital receipts.
Capital Receipts are of two types:
Debt Creating
These include fresh loans and other liabilities raised by the government.
Non-Debt Creating
These include amounts received by the government from the disposal of its assets and recovery of loans.
It comprises expenses incurred by the government to create long-term assets and investments that give profits or dividends in the future.
Some of the major components of Capital Expenditure include:
The government budget (central budget or state budget) can be of three types – Balanced Budget, Surplus Budget, and Deficit Budget.
A balanced budget is the one wherein the expected or actual receipts are equal to proposed expenditures. This means that the income equals the total spending.
A Balanced Budget increases the level of aggregate demand in the economy moderately. Hence, it is recommended in a situation when the economy is close to achieving full employment.
A surplus budget is the one wherein receipts exceed expenditures. In other words, more money is coming in than going out.
A Surplus Budget reduces the aggregate demand. Hence, it is recommended in an economic situation when there is a large inflationary gap
A deficit budget is the one wherein expenditures exceed receipts. This means the government is spending more money than it is earning or receiving.
A Deficit Budget increases the aggregate demand. Hence, it is recommended in an economic situation of depression.
In the context of Government Budget, the gap between the receipts and expenditure is called Deficit.
There are various types of Deficit in the context of government budgeting:
Budget Deficit refers to the difference between all receipts and expenses in both revenue and capital account of the government.
Budget Deficit = Total Expenditure – Total Receipts
Since it, usually, equals to zero (0), it does not have much significance.
Revenue Deficit is the excess of government’s revenue expenditure over its revenue receipts.
Revenue Deficit = Revenue Expenditure – Revenue Receipts
A high revenue deficit, usually, results in borrowing by the government to finance recurring and non-asset creating expenditure. Since it may lead to unsustainable levels of debt, it is a warning to the government either to curtail its expenditure or increase its tax and non-tax receipts.
Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets. Thus, it indicates the actual revenue deficit after grants given for capital expenditure.
Effective Revenue Deficit = Revenue Deficit – Grants for Creation of Capital Assets
Effective Revenue deficit was introduced in the Union Budget 2012-13, on the suggestion of Rangarajan Committee
Fiscal Deficit is defined as excess of total budget expenditure (revenue and capital) over total budget receipts (revenue and capital) excluding borrowings during a fiscal year.
Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-Debt Creating Capital Receipts)
Fiscal deficit is a measure of how much the government needs to borrow from the market to meet its expenditure when its resources are inadequate.
Primary Deficit is defined as fiscal deficit of current year minus interest payments on accumulated debt.
Primary Deficit = Fiscal Deficit – Net Interest Liabilities
It is a measure of current year’s fiscal operation after excluding the liability of interest payment created due to borrowings undertaken in the past.
Monetized Deficit refers to that part of the fiscal deficit which is financed by the government either by borrowing money or drawing-down its cash from the RBI.
Monetized Deficit = Borrowing from RBI + Draw-down by the government of its cash balance from the RBI.
It involves infusion of new money and hence expansion in money supply in the economy.
Based on the underlying philosophy and the process followed, there are various types of government budgeting:
The crowding out effect is an economic theory suggesting that increased government spending leads to a reduction in private sector spending. The government increases taxation or borrowing in order to fund the increased spending. This leads to lesser money supply in the market as well as an increase in interest rates. This leads to reduction in private investment spending, which dampens the initial impact of the increase of total investment spending.
Fiscal consolidation is a process where government’s fiscal health is improved by reducing fiscal deficit to levels which is manageable and bearable for the economy. Improved tax revenue realization and better aligned expenditure are important components of fiscal consolidation.
Fiscal drag is an economic term whereby an increase in income or inflation or income moves taxpayers into higher tax brackets. The increase in taxes reduces aggregate demand and consumer spending from taxpayers as a larger share of their income now goes to taxes, which leads to deflationary policies, or drag, on the economy. Thus, it acts as an automatic fiscal stabilizer by controlling a rapidly expanding economy from overheating.
Pump priming is the action taken to stimulate an economy usually during a recessionary period, through government spending, and interest rate and tax reductions. It, usually, involves measures to prompte higher demand for goods and services. The increase in demand experienced through pump priming can lead to increased profitability within the private sector, which assists with overall economic recovery.
An economic stimulus is the use of monetary or fiscal policy changes to kick start growth during an economic recession. It involves measures such as lowering interest rates, increasing government spending and quantitative easing etc.
For example, during the COVID-19 Pandemic, the Government announced 3 tranches of economic stimulus under the Atma Nirbhar Bharat Programme.
