ECONOMICS PROJECT –GOVERNMENT BUDGET

Meaning of govt 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. 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. 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 GOVT 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:
1. Reallocation of Resources:Through the budgetary policy,
Government aims to reallocate resources in accordance with the
economic (profit maximisation) and social (public welfare) priorities
of the country. Government can influence allocation of resources
through:

(i) Tax concessions 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
‘Khaki products’ by providing subsidies.
(ii) Directly producing goods and services:If private sector does
not take interest, government can directly undertake the
production.

2.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. It will reduce income of the rich and raise
standard of living of the poor, thus reducing inequalities in the
distribution of income.

3. Economic Stability:Government budget is used to prevent

business fluctuations of inflation or deflation to achieve the objective
of economic stability. The government aims to control the different
phases of business fluctuations through its budgetary policy. Policies
of surplus budget during inflation and deficit budget during deflation
helps to maintain stability of prices in the economy.
4. 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 investments in the economy.

5. 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 objective of making various provisions
for managing such enterprises and providing those financial help.

6. 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.

TYPES OF BUDGET
1.BALANCED BUDGET
A government budget is said to be a balanced budget if the estimated
government expenditure is equal to expected government receipts in
a particular financial year. Advocated by many classical economists,
this type of budget is based on the principle of “living within means.”
They believed the government’s expenditure should not exceed their
revenue. Though an ideal approach to achieve a balanced economy
and maintain fiscal discipline, a balanced budget does not ensure
financial stability at times of economic depression or deflation.
Theoretically, it’s easy to balance the estimated expenditure and
anticipated revenues but when it comes to practical implementation,
such balance is hard to achieve.
MERITS OF A BALANCED BUDGET
1. Ensures economic stability, if implemented successfully.

2. Ensures that the government refrains from imprudent

expenditures.

DEMERITS OF A BALANCED BUDGET

Unviable at times of recession and does not offer any solution to
problems such as unemployment.

2.SURPLUS BUDGET
A government budget is said to be a surplus budget if the
expected government revenues exceed the estimated
government expenditure in a particular financial year. This
means that the government’s earnings from taxes levied are
greater than the amount the government spends on public
welfare. A surplus budget denotes the financial affluence of
a country. Such a budget can be implemented at times of
inflation to reduce aggregate demand.
3.DEFICIT BUDGET
A government budget is said to be a deficit budget if the
estimated government expenditure exceeds the expected
government revenue in a particular financial year. This type
of budget is best suited for developing economies, such as
India. Especially helpful at times of recession, a deficit
budget helps generate additional demand and boost the rate
of economic growth. Here, the government incurs the
excessive expenditure to improve the employment rate. This
res ..

MERITS OF A DEFICIT BUDGET

1.Helps in addressing public concerns such as

unemployment at times of economic recession.

2.Enables the government to spend on public welfare.

DEMERITS OF A DEFICIT BUDGET

1.Can encourage imprudent expenditures by the

government.

2.Increases burden on the government by accumulating

debts.