BUDGET
An annual financial statement of income and expenditure is generally used for a government, but it could be of a firm, company, corporation etc. The ‘word’ has its origin in the British parliamentary exercise of preparing such statement way back
in the mid-18th century from the French word ‘Bugeut’ meaning a leather bag out of which the financial statement was brought out and presented in the parliament. Today, this word is used to mean the annual financial statement in almost all economies around the world.
The Constitution of India has a provision under Article 112 for Annual Financial Statement. Article 112 states that annual financial statement needs to be presented in the Parliament before
the commencement of every new fiscal year popular as the Union Budget.
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➤ Developmental and Non-developmental Expenditure All expenditure of a productive nature is developmental, like all investments on the heads of new
factories, dams, bridges, highways, railways, etc.
The expenditures which are of consumptive kind and do not involve any production are non- developmental, i.e., paying salaries, pensions, interest payments, subsidies, defence expenses, etc. ► Plan and Non-Plan Expenditure
All expenses paid to the public exchequer are divided into two groups: those that are part of the plan and those that are not.
The expenses that are made in the name of planning are all considered plan expenses; all other expenses are not.
Basically, every expense that creates an asset or is productive is planned. Expenses that are consumptive, non-productive, and asset-building are not included in plans or development.
The creation and execution of the budget as a whole used to be negatively impacted by this classification.
In light of this peculiarity, the government has changed the way it classifies spending from “plan” and “non-plan” to “revenue” and “capital” as of fiscal 2017–18 (as stated in the Union Budget 2017–18).
Revenue
Every form of money generation in the nature of income, earnings acts as revenue for a government or a firm.
Such forms of money generation do not increase the financial liabilities of the government-i.e..
the tax incomes, non-tax incomes along with foreign grants. Non-revenue: Every form of money generation which is neither income nor earnings for a government or a firm (i.e., money raised through borrowings) is considered a non-revenue source. Receipts
Receipt means receiving or accrual of money to a government by revenue and non-revenue sources. Their sum is called total receipts. Receipts include all incomes & non-income accruals of a government. Revenue Receipts: Revenue receipts of a government are of two kinds Tax Revenue Receipts and
Non-tax Revenue Receipts consisting of the following income receipts in India: Tax Revenue Receipts: This includes all money earned by the government through the collection of different taxes, i. e, all direct and indirect tax collections.
Non-tax Receipts
Non tax Revenue Recelearned by the government from sources other than taxes. In India, they are Profits and dividends, Fees, Penalties and Fines received by the government, etc. Revenue Expenditure
It includes all the expenditures incurred by the government that are either of the current kind o revenue kind or compulsive kind. The basic nature of such expenditures are that, they do not involve the creation of productive
assets & they are of a consumptive kind.
They are used either in running a: productive process or government. Many such things fall under such expenditures in India. They are: 1) Interest payment made by the govt on the internal and external loans;
ii) Salaries, Pension and Provident Fund paid by the government to the government employees
iii) Subsidies forwarded to all sectors by the government;
iv) Defence expenditures by the government; v) Postal Deficits of the government;
vi) Law and order expenditures (i.e., police & paramilitary);
A deficit occurs when expenses exceed revenues, imports exceed exports or liabilities exceed assets.
Revenue deficit (RD):
It is the difference between the revenue receipts (RR) and the revenue expenditure (RE). RD-RR-RE.
Effective Revenue deficit (ERD): It is defined as the difference between the revenue deficit and creation of capital assets.
Fiscal deficit (FD):
It is the difference between what the government earns and its total expenditure (excluding non-
debt creating capital expenditure).
FD (Revenue receipts + non-debt creating capital receipts) – Total expenditure
Budget deficit (BD):
The difference between the total budgeted receipts and expenditure.
BD = Budgetary receipt – Budgetary expenditure
Primary deficit (PD): It is the difference between fiscal deficit and interest payments
PDFD-interest payment Capital Deficit
In economics or public finance, there is no such word. However, in actuality, the phrase “capital crunch” or “scarcity of capital” is typically heard in daily economic news articles. Typically, the government has to manage the amount of capital, money, and finances needed for public expenditures. These expenses could be either capital or revenue-related.
The developing economies have long faced these challenges because of their large capital expenditure requirements.
Deficit financing
Financing of the gap between government receipts and expenditure. How does the government manage its deficits?
1. Monetised deficit:
PRowing diaderom Bi through printing fresh currency. The printed money is called high power moner FRBM act disallows RBI to do this under normal conditions.
2. Ways and Means Advances (WMA): The Reserve Bank of India gives temporary loan facilities to the centre as
INDIAN ECONOMY
against the ad-hoc treasury bill. There is no collateral but the penal interest rate is charged. Non-tax Receipts
Non tax Revenue Recelearned by the government from sources other than taxes. In India, they are Profits and dividends, Fees, Penalties and Fines received by the government, etc.
)
Revenue Expenditure:
It includes all the expenditures incurred by the government that are either of the current kind o revenue kind or compulsive kind. The basic nature of such expenditures are that, they do not involve the creation of productive assets & they are of a consumptive kind.
They are used either in running a: productive process or government. Many such things fall under such expenditures in India.
They are: 1) Interest payment made by the govt on the internal and external loans;
ii) Salaries, Pension and Provident Fund paid by the government to the government employees
iii) Subsidies forwarded to all sectors by the government;
iv) Defence expenditures by the government; v) Postal Deficits of the government;
vi) Law and order expenditures (i.e., police & paramilitary);
A deficit occurs when expenses exceed revenues, imports exceed exports or liabilities exceed assets.
Revenue deficit (RD):
It is the difference between the revenue receipts (RR) and the revenue expenditure (RE). RD-RR-RE.
Effective Revenue deficit (ERD): It is defined as the difference between the revenue deficit and creation of capital assets.
Fiscal deficit (FD):
It is the difference between what the government earns and its total expenditure (excluding non-
debt creating capital expenditure).
FD (Revenue receipts + non-debt creating capital receipts) – Total expenditure
Budget deficit (BD):
The difference between the total budgeted receipts and expenditure.
BD = Budgetary receipt – Budgetary expenditure
Primary deficit (PD): It is the difference between fiscal deficit and interest payments
PDFD-interest payment Capital Deficit
There is no such term in public finance or in economics as such. But in practice, one usually hears the use of the term capital crunch, scarcity of capital in day-to-day economic news items.
Usually, the government faces the problem of managing as many funds, money, capital as is required by it for public expenditure.
Such expenditure might be of capital kind or revenue kind.
Such difficulties have always been with the developing economies due to their high-level requirement of capital expenditures.
Deficit financing
Financing of the gap between government receipts and expenditure. How does the government manage its deficits?
1. Monetised deficit:
PRowing diaderom Bi through printing fresh currency.
The printed money is called high power moner FRBM act disallows RBI to do this under normal conditions.
2. Ways and Means Advances (WMA):
The Reserve Bank of India gives temporary loan facilities to the centre as a banker to the government against the ad-hoc treasury bill.
There is no collateral but the penal interest rate is charged.
Revenue Budget
The part of the Budget which deals with the income and expenditure of revenue by the government,
This presents the annual financial statement of the total revenue receipts and the total revenue expenditure. If the balance emerges to be positive, it is a revenue surplus budget, and if it comes out to be negative, it is a revenue deficit budget.
Capital Budget The part of the Budget which deals with the receipts and expenditures of the capital by the government. This shows the means by which the capital is managed and the areas where capital is spent.
Capital Receipts
All non-revenue receipts of a government are known as the capital receipts.
Such receipts are for investment purposes and supposed to be spent on plan-development by a government. But, the receipts might need their diversion to meet other needs, to take care of the rising revenue
expenditure of a government, as the case had been with India.
The capital receipts in India include the following capital kind of accruals to the government:
1) Loan Recovery,
II) Borrowings by the Government &
III) Other Receipts by the Governments.
Capital Expenditure
All the areas which get capital from the government are part of the capital expenditure.
It includes so many heads in India.
1) Loan Disbursals by the Government
ii) Loan Repayments by the Government of the Borrowings Made in the Past.
iii) Plan Expenditure of the Government
iv) Capital Expenditures on Defence by the Government
v) General Services-the railways, postal department, water supply, education, rural extension, etc.
Charged Expenditure
It is the public expenditure which is beyond the voting power of the Parliament and is directly withdrawn from the Consolidated Fund of India.
As a case study, consider the salaries of the President, the Speaker and Deputy Speaker of the Lok Sabha, the Chairman and Deputy Chairman of the Rajya Sabha, Indian High Court and Supreme Court judges, etc.
Unique approaches to budgeting:
Incremental budgeting: To create the current year’s budget, incremental budgeting uses the actual numbers from the previous year and adds or subtracts a percentage. Due to its simplicity and ease of understanding, this budgeting strategy is among the most popular.
Budgeting based on activities
Using a top-down method, activity-based budgeting establishes how many inputs are needed to meet the goals or outcomes.
Budgeting for value propositions Value proposition budgeting is essentially a way of thinking about ensuring that every line item in the budget adds value for the company or government.
Zero-based budgeting:
The foundation of zero-based budgeting is the idea that all department budgets are zero and need to be created from the ground up.
Zero-based budgeting is extremely strict and tries to prevent any and all expenses that aren’t thought to be absolutely necessary for the business to operate successfully (profitably).