Public budget

 According to Tayler, "Budget is a financial plan of government for a definite period".
 According to Rene Stourm, "A budget is a document containing a preliminary approved plan of
public revenues and expenditure".
 Meaning
It is defined as a financial statement showing expected receipts and expenditure of the government
during the period of a financial year.
 A budget contains the following features.
• It is a statement of expected revenue and proposed expenditure of the government.
• It possesses periodicity which is generally one financial year.
• Expenditures and sources of finance are planned in accordance with the objective of the
government.

Types of Budget
1. Union Budget
It is the budget prepared by central government for the country as a whole.
2. State Budget
It is prepared by state govt. such as one budget of Punjab govt. UP govt. etc.
3. Plan Budget
It is a document which shows the budgetary provisions for important Projects, programs and schemes included in the central plan of the country. Non plan Budgets
relates to the budgetary provisions other than the plan expenditure.
4. Performance budget
It presents the main projects programs and activities in the light of specific objective and an assessment of the previous year budgets and achievement.
5. Supplementary budget
Budget estimates of the coming year are based on the forecast with regard to revenue and expenditure. It is not always possible to foresee and provide for all
emergencies such as riots, curfew, natural calamities or political instabilities which require extra expenditure. In these circumstances government presents in the
parliament a supplementary budget to deal with the expenditure related to emergencies
6. Vote on account budget
Under article 116 of the Indian constitution the budget can be split up during the year. The reason may be political in nature. The existing government may or may
not continue for the whole year on the account of the fact that elections are due then government prepares a lame duck budget this is called vote on account
budget.
7. Zero base budget
The government of India commenced Zero based budgeting 1987-88. It is a particular technique for the preparation of budget. It involves fresh evaluation of every
item of expenditure on the government budget assuming it as a new budget.

Budget
A "budget" is a plan for the accomplishment of programs related
to objectives and goals within a definite time period, including an estimate of resources
required, together with an estimate of resources available, usually compared with one or
more past periods and showing future requirements.
Public Budget
The Public 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, in the same way the government budget is a statement of its
income and expenditure. In the beginning of every year the government presents before the
Lok Sabha an estimate of its receipts and expenditure for the coming financial year.

Government of India Budget:
Meaning
“A government budget is an annual financial statement showing item wise estimates
of expected revenue and anticipated expenditure during a fiscal year.”
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
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.
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: 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: 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 monopolies like railways, power
generation and water lines etc

Components of Government Budget

1. Revenue Budget
This financial statement includes the revenue receipts of the government i.e. revenue collected by
way of taxes & other receipts. It also contains the items of expenditure met from such revenue.
(a) Revenue Receipts
These are the incomes which are received by the government from all sources in its ordinary course of
governance. These receipts do not create a liability or lead to a reduction in assets.
Revenue receipts are further classified as tax revenue and non-tax revenue.
i. Tax Revenue:-
Tax revenue consists of the income received from different taxes and other duties levied by the government. It
is a major source of public revenue. Every citizen, by law is bound to pay them and non-payment is
punishable.
Taxes are of two types, viz., Direct Taxes and Indirect Taxes.
Direct taxes are those taxes which have to be paid by the person on whom they are levied. Its burden cannot
be shifted to someone else. E.g. Income tax, property tax, corporation tax, estate duty, etc. are direct taxes.
There is no direct benefit to the tax payer.
Indirect taxes are those taxes which are levied on commodities and services and affect the income of a person
through their consumption expenditure. Here the burden can be shifted to some other person. E.g. Custom
duties, sales tax, services tax, excise duties, etc. are indirect taxes.

ii. Non-Tax Revenue
Apart from taxes, governments also receive revenue from other non-tax sources.
The non-tax sources of public revenue are as follows:-
• Fees: The government provides variety of services for which fees have to be paid. E.g. fees paid for
registration of property, births, deaths, etc.
• Fines and penalties: Fines and penalties are imposed by the government for not following
(violating) the rules and regulations.
• Profits from public sector enterprises: Many enterprises are owned and managed by the
government. The profits receives from them is an important source of non-tax revenue. For example
in India, the Indian Railways, Oil and Natural Gas Commission, Air India, Indian Airlines, etc. are
owned by the Government of India. The profit generated by them is a source of revenue to the
government.
• Gifts and grants: Gifts and grants are received by the government when there are natural calamities
like earthquake, floods, famines, etc. Citizens of the country, foreign governments and international
organisations like the UNICEF, UNESCO, etc. donate during times of natural calamities.
• Special assessment duty: It is a type of levy imposed by the government on the people for getting
some special benefit. For example, in a particular locality, if roads are improved, property prices will
rise. The Property owners in that locality will benefit due to the appreciation in the value of property.
Therefore the government imposes a levy on them which is known as special assessment duties

(b) Revenue Expenditure
Revenue expenditure is the expenditure incurred for the routine, usual and normal day to day running of
government departments and provision of various services to citizens. It includes both development and
non-development expenditure of the Central government. Usually expenditures that do not result in the
creations of assets are considered revenue expenditure.
In general revenue expenditure includes following:-
 Expenditure by the government on consumption of goods and services.
 Expenditure on agricultural and industrial development, scientific research, education, health and
social services.
 Expenditure on defence and civil administration.
 Expenditure on exports and external affairs.
 Grants given to State governments even if some of them may be used for creation of assets.
 Payment of interest on loans taken in the previous year.
 Expenditure on subsidies

2. Capital Budget
This part of the budget includes receipts & expenditure on capital account projected for the next
financial year. Capital budget consists of capital receipts & Capital expenditure.
(a) Capital Receipts
Receipts which create a liability or result in a reduction in assets are called capital receipts. They are
obtained by the government by raising funds through borrowings, recovery of loans and disposing of
assets.
The main items of Capital receipts (income) are:-
 Loans raised by the government from the public through the sale of bonds and securities. They are
called market loans.
 Borrowings by government from RBI and other financial institutions through the sale of Treasury
bills.
 Loans and aids received from foreign countries and other international Organisations like
International Monetary Fund (IMF), World Bank, etc.
 Receipts from small saving schemes like the National saving scheme, Provident fund, etc.
 Recoveries of loans granted to state and union territory governments and other parties

(b) Capital Expenditure
Any projected expenditure which is incurred for creating asset with a long life is capital expenditure.
Thus, expenditure on land, machines, equipment, irrigation projects, oil exploration and expenditure by
way of investment in long term physical or financial assets are capital expenditure.

Tax and Non Tax Revenue
Meaning of Public Revenue
The income of the government through all sources is called public income or public
revenue.
According to Dalton, however, the term “Public Income” has two senses — wide and
narrow. In its wider sense it includes all the incomes or receipts which a public authority
may secure during any period of time. In its narrow sense, however, it includes only those
sources of income of the public authority which are ordinarily known as “revenue
resources.” To avoid ambiguity, thus, the former is termed “public receipts” and the latter
“public revenue.”
In a modern welfare state, public revenue is of two types, tax revenue and non-tax revenue.

Tax Revenue
• A fund raised through the various taxes is referred to as tax revenue. Taxes are compulsory
contributions imposed by the government on its citizens to meet its general expenses incurred for
the common good, without any corresponding benefits to the tax payer.
• Seligman defines a tax thus: “A tax is a compulsory contribution from a person to the government
to defray the expenses incurred in the common interest of all, without reference to specific
benefits conferred.

The main features of a tax
1. A tax is a compulsory payment to be paid by the citizens who are liable to pay it. Hence, refusal to pay a tax is a
punishable offence.
2. There is no direct, quid pro quo between the tax-payers and the public authority. In other words, the tax payer cannot
claim reciprocal benefits against the taxes paid. However, as Seligman points out, the state has to do something for the
community as a whole for what the tax payers have contributed in the form of taxes.
“But this reciprocal obligation on the part of the government is not towards the individual as such, but towards the individual
as part of a greater whole.”
3. A tax is levied to meet public spending incurred by the government in the general interest of the nation. It is a payment for
an indirect service to be made by the government to the community as a whole.
4. A tax is payable regularly and periodically as determined by the taxing authority.
Taxes constitute a significant part of public revenue in modern public finance. Taxes have macro-economic effects. Taxation
can affect the size and mode of consumption, pattern of production and distribution of income and wealth.
Progressive taxes can help in reducing inequalities of income and wealth by lowering the high income group’s disposable
income. By disposable income is meant the income left in the hands of the tax payer for disbursement after tax payment.
Taxes imply a forced saving in a developing economy. Thus, taxes constitute an important source of development finance.

Non-Tax Revenue
Public income received through the administration, commercial enterprises, gifts and grants are the
source of non-tax revenues of the government.
Thus, nontax revenue includes:
(i) Administrative revenue
(ii) Profit from state enterprises
(iii) Gifts and grants
Administrative Revenues:
Under public administration, public authorities can raise some funds in the form of fees, fines and
penalties, and special assessments.

Fees
 Fees are charged by the government or public authorities for rendering a service to the beneficiaries. To
quote Seligman, “A fee is a payment to defray the cost of each recurring service undertaken by the
government, primarily in the public interest, but conferring a measurable advantage to the payer.”
 Court fees, passport fees, etc., fall under this category. Similarly, license fees are charged to confer a
permission for something by the controlling authority, e.g., driving license fee, import licence fee, liquor
permit fee, etc. Fees are to be paid by those who receive some special advantages. Generally the amount
of the fee depends upon the cost of services rendered.
 Fees are a bye- product of the administrative activities of the government and not a payment for a
business. Thus, fees are distinct from prices. Prices are always voluntary payments, but fees are
compulsory contributions, though both are made for special services. Sometimes a fee contains an
element of tax when it is charged high in order to bring revenue to the exchequer e.g., a license fee.

Fines and Penalties
Fines and penalties are levied and collected from offenders of laws as punishment. Here the main object
of these levies is not so much to earn an income as to prevent the commission of offences and
infringement of laws of the country. Fines and penalties are arbitrarily determined and have no relation to
the cost of administration or activities of the government. Hence, collections from such levies are
insignificant as a source of public revenue

Special Assessments
A special assessment,” as Seligman points out, “is a compulsory contribution levied in proportion to the
social benefits derived to defray the cost of a specific improvement to property undertaken in the public
interest.” That is to say, sometimes when the government undertakes certain types of public improvements
such as construction of roads, provision of drainage, street lighting etc., it may confer a special benefit to
those possessing properties nearby.
As a result, values of rents of these properties may rise. The government, therefore, may impose some
special levy to recover a part of the expenses so incurred. Such special assessment is levied generally in
proportion to the increase in the value of the properties involved. In this respect, it differs from a tax.
In India, these special assessments are referred to as “betterment levy.” Betterment levy is imposed on land
when its value is enhanced by the construction of social overhead capital such as roads, drainage, street-
lighting, etc. by the public authority in an area

Profits of State Enterprise
Profits of state undertakings also are an important source of revenue these days, owing to the expansion of the
public sector. For instance, the central government runs railways. Surplus from railway earnings can be
normally contributed to the revenue budget of the central budget.
Likewise, profits from the state transport corporation and other public undertakings can be important sources
of revenue for the budgets of state governments. Similarly, other commercial undertakings in the public sector
such as Hindustan Machine Tools, Bokaro Steel Plant, State Trading Corporation etc. can make profits to
support the central budget.
Earnings from state enterprises depend upon the prices charged by them for their goods and services and the
surplus derived therefrom. Thus, the pricing policy of state undertakings should be self-supporting and
reasonably profit-oriented. Again, prices are charged with an element of quid pro quo i.e., directly in
proportion to the benefits conferred by the services rendered.

Gifts and Grants
These form generally a very small part of public revenue. Quite often, patriotic people or institutions may
make gifts to the state. These are purely voluntary contributions. Gifts have some significance, especially
during war time or an emergency.
In modern times, however, grants from one government to another have a greater importance. Local
governments receive grants from state governments and state governments from the Centre. The central
government gives grants- in-aid to state governments in order to enable them to carry out their functions.
When grants are made by one country’s government to another country’s government it is called foreign aid.
Usually poor countries receive such aid from developed countries, which may be in the form of military aid,
economic aid, food aid, technological aid, and so on.

Public Expenditure
Public Expenditure refers to Government Expenditure. It is incurred by Central and State
Governments. The Public Expenditure is incurred on various activities for the welfare of the
people and also for the economic development, especially in developing countries. In other
words The Expenditure incurred by Public authorities like Central, State and local
governments to satisfy the collective social wants of the people is known as public
expenditure.

Need & importance/ significance of public expenditure
1. To promote rapid economic development.
2. To promote trade and commerce.
3. To promote rural development
4. To promote balanced regional growth
5. To develop agricultural and industrial sectors
6. To build socio-economic overheads e.g. Roadways, railways, power etc.
7. To exploit and develop mineral resources like coal and oil.
8. To provide collective wants and maximize social welfare.
9. To promote full - employment and maintain price stability.
10. To ensure an equitable distribution of income

Classification / types of public expenditure
1. Capital and Revenue Expenditure
Capital Expenditure of the government refers to that expenditure which results in creation of fixed assets. They
are in the form of investment. They add to the net productive assets of the economy. Capital Expenditure is also known as
development expenditure as it increases the productive capacity of the economy E.g. Expenditure - on agricultural and
industrial development, irrigation dams and public -enterprises etc. are all capital expenditures.
Revenue expenditures are current or consumption expenditures incurred on civil administration, defence forces,
public health and, education, maintenance of government machinery etc. This type of "expenditure is of recurrent type
which is incurred year after year.
2. Development and Non-Developmental Expenditure / Productive and Non - Productive Expenditure
Expenditure on infrastructure development, public enterprises or development of agriculture increase productive capacity
in the economy and bring income to the government. Thus they are classified as productive expenditure. All expenditures
that promote economic growth development are termed as development expenditure.
Unproductive (non - development) expenditure refers to those expenditures which do not yield any income. Expenditure
such as interest payments, expenditure on law and order, public administration, do not create any productive asset which
brings income to government such expenses are classified as unproductive expenditures.

3. Transfer and Non - Transfer Expenditure
Transfer expenditure refers to those kind of expenditures against there is no corresponding transfer of real resources i.e.,
goods or services. Such expenditure includes public expenditure on National Old pension Scheme, Interest payments,
subsidies, unemployment allowances, welfare benefits to weaker sections etc. By incurring such expenditure, the
government does not get anything in return, but it adds to the welfare of the people, especially to weaker sections of society.
Such expenditure results in redistribution of money incomes within the society.
The non - transfer expenditure relates to that expenditure which results in creation of income or output The non - transfer
expenditure includes development as well as non - development expenditure that results in creation of output directly or
indirectly. Economic infrastructure (Power, Transport, Irrigation etc.), Social infrastructure (Education, Health and Family
welfare), Internal law and order and defence, public administration etc. By incurring such expenditure, government creates
a healthy environment for economic activities.
4. Plan and Non - Plan Expenditure
The plan expenditure is incurred on development activities outlined in ongoing five year plan. In 2009-10, the plan
expenditure of Central Government was 5.3% of GDP. Plan expenditure is incurred on Transport, rural development,
communication, agriculture, energy, social services, etc.
The non - plan expenditure is incurred on those activities, which are not included in five-year plan. It includes
development and non - development expenditure. It includes: Defence, subsidies, interest payments, maintenance etc.

Deficit Financing
Dr. V.K.R.V. Rao defines deficit financing as “the financing of a deliberately created gap
between public revenue and public expenditure or a budgetary deficit, the method of financing resorted
to being borrowing or a type those results in a net addition to national outlay or aggregate expenditure.”
Deficit financing implies creation of additional money supply.
Meaning
Deficit financing is defined as financing the budgetary deficit through public loans and creation of new
money. Deficit financing in India means the expenditure which in excess of current revenue and public
borrowing. The government may cover the deficit in the following ways.
1. By running down its accumulated cash reserve from RBI.
2. Issue of new currency by government itself.
3. Borrowing from Reserve Bank of India

Objectives of Deficit Financing
1. To finance war
2. Remedy for depression
3. Economic development
4. Mobilization of Resources
5. For granting subsidies
6. Increase in aggregate demand
7. For payment of interest
8. To implement anti-poverty program

Effects of Deficit financing
1. Best use of resources
2. Helpful to develop countries
3. Additional purchasing power
Positive Effects of Deficit financing

Adverse Effects of Deficit Financing
Leads to inflation
Adverse effect on saving
Adverse effect on Investment
Inequality
Increase in the cost of production
Change in the pattern of investment

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.
Balanced Budget
Estimated Govt. Receipts = Estimated Govt. Expenditure

Merits and Demerits of Balanced Budget
Two main merits of a balanced budget are:
(a) It ensures financial stability and
(b) It avoids wasteful expenditure.
Two main demerits are:
(a) Process of economic growth is hindered
(b) 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.

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.
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.

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.
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 unemployment and under-employment.
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.

Demerits of Deficit Budget
(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.

Public budget

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