Quick Notes on Budget: Need and Types

Quick Notes on Budget: Need and Types!

Need for Budget:

The word ‘budget’ is derived from the French word ‘bougett’ or ‘buje’ which means a “small leather bag” that contains financial proposals. Modern business makes annual financial proposals. Usually, monthly budget proposals are made by individuals. Government develops national annual budget. State Governments also make annual budgets.

To facilitate annual decision-making on expenditures, government prepares a budget. India’s national budget contains estimates of government expenditure and revenue of the Union Government for the coming financial year that starts from 1 April. Usually, the Union budget is presented by the Finance Minister of India in the Parliament on the last day of February.

A budget may be defined as a financial plan of a nation that serves as the basis for expenditure decision-making and subsequent control of expenditures. It is a financial statement of the government’s planned revenues and expenditures for the fiscal year (April-March).

A budget is, therefore, an estimate of income and expenditure for a future period. “Budgets usually contain financial data for the previous year (or years), estimated figures for the current year, and recommended figures for the coming year, for both expenditures and revenues.”

A budget for the financial year 2009-2010 contains budget estimates of incomes and expendi­tures for the year 2009-10, revised estimates of incomes and expenditures for the year 2008-09, and actual figures for the year 2007-08.

Important characteristics of a budget are noted below. Firstly, it is a statement of anticipated receipts and expenditures of the public authority. Secondly, it is usually presented every year. It means it possesses periodicity.

Thirdly, it is a document containing the policies and programmes of the public authority in a year. Fourthly, it clearly spells out how revenues of the coming year are to be collected and spent. Fifthly, it reflects the indebtedness of the government and suggests actions to recover deficits. It also suggests how to utilize the surplus.

Thus, any budget proposals of the govern­ment are expected to contribute to economic growth. It is an instrument through which the legislature controls the executive. It is part and parcel of the economic plan of a public authority. It is an instrument that describes the government’s economic policies. Thus, the budget document has many uses.

Firstly, it forms the basis of the government’s long-term financial planning of its own economic and social commitments. Government sets out its various activities according to the preferences of the society. On the basis of preferences made by people the government determines its expenditures and incomes. A budget is, thus, an essential element in the planning of the financial affairs of a nation.

That is why a budget contains information relating to expenditures and revenues not only for the future year but also for the previous years. Thus, a budget indicates performance of a government. Government prepares macroeconomic financial planning because income and expenditures do not occur simultaneously.

Secondly, a budget is an instrument of fiscal policy in regulating the aggregate demand in an economy. In its developmental path, an economy may experience inflationary situation or deflationary situation. Neither of the situations is desirable. In view of this, the government prepares its budget in such a way that inflation or deflation is controlled.

In other words, in the interest of demand management, decisions are taken by the government to prepare either a deficit budget or a surplus budget.

To tackle inflation, government imposes new taxes and/or raises existing tax rates and curtails its expenditure programmes. To tackle deflation, tax rates are lowered down and more expenditure are made in the budget. Thus, a budget helps the financial administration to control and coordinate the activities in a given year.

Thirdly, a budget helps in attaining greater efficiency in the use of governmental resources. Efficiency in the collection of resources as well as efficiency in expenditures are required to be attained. The job is, of course, a complex one since goals may be conflicting. A budget determines relative priorities so that efficiency can be improved.

Fourthly, it is an instrument through which savings and investments are encouraged. By giving various tax concessions, government can generate more savings. Similarly, investment rates can be raised by various means. A budget reflects all these ingredients of economic development.

Finally, a budget not only reflects financial planning but also financial control as far as tax and expenditure programmes are concerned. Since a budget informs us about the actual figures relating to taxation and expenditures, transparency and accounta­bility of the government get reflected in it. People know how taxes are collected and disbursed for various economic activities in the previous years.

Types of Budget:

The budget in India is divided into two parts— the revenue budget and the capital budget. The former deals with the government receipts from taxation, public sector undertakings, etc., and the expenditures incurred on them.

Capital budget is related to all capital expenditures and the borrowings (such as market loans, external assistance, etc.,) to meet it. Usually, revenue budget covers those items of financial transactions which are of a recurring nature while capital budget covers those items which are in the nature of acquisition and disposition of capital assets.

The plan budget is also presented. It is a document that shows the budgetary provisions for important projects, programmes and schemes included in the central plan. That is to say, under the plan budget, budgetary receipts are used to finance plan expenditures.

The plan budget gives the details of the budgetary support for the central plan by the sectors of development, including the central assistance for States and Union Territories.

The concept of Zero-Base Budgeting (ZBB) was devised in the 1970s. “ZBB means the past is cut-off; the present is regarded as a clean slate and all departments have to start from a scratch (hence zero-base).”

Thus, what has happened in previous years is not covered in ZBB. Obviously, no item of receipts and expenditures get automatic incorporation in the budget. Every item is justified anew even if it was included in the previous year’s budget. Hence the name ‘zero base.’

Sometimes, government places ‘supple­mentary budget’ or ‘vote on account budget’ during special circumstances. Suppose the term of a present government expires in the month of March of a year. Election is then to be made to form a new government.

Let us assume that a new government will assume power in the month of May-June. Meanwhile, a supplementary or interim budget has to be presented for a few (2 or 3) months of a full year. Such budget is called ‘vote on account’ budget so that the government can function smoothly.

Further, the budget may be classified into a balanced budget, surplus budget and a deficit budget.

A budget is said to be balanced if total receipts and total expenditures are equal. A balanced budget is also called zero-deficit budget.

A surplus budget will arise when total receipts exceed total expenditures.

On the other hand, a deficit budget is said to occur if total expenditures exceed total receipts. Total expenditures comprise both revenue and capital expenditures and total receipts cover both revenue and capital receipts.

The Union Government meets the budgetary deficit by the:

(i) Net sale of Treasury Bills to the Reserve Bank of India

(ii) Reduction of its cash balances with the RBI. This budgetary deficit is called deficit financing of the Central Government.

There are three types of deficits in budget:

i. Revenue deficit

ii. Budget deficit 

iii. Fiscal deficit.

i. Revenue Deficit:

Revenue deficit is the difference between revenue expenditures (both plan and non-plan) and revenue receipts (both tax and non-tax revenues).

Thus,

Revenue deficit = Revenue expenditure — Revenue receipts

Or, = (plan and non-plan expenditures) — net revenue tax and tax revenue).

Revenue deficit, thus, measures how much the government is consuming its capital or getting into debt. In this sense, it represents dissaving by the government.

ii. Budget Deficit:

Budget deficit equals the difference between total expenditures and total receipts.

Thus,

Budget deficit = Total expenditure – Total receipts

iii. Fiscal Deficit:

Fiscal deficit is defined as the budgetary deficit plus market borrowing and other liabilities of the government.

Thus,

Fiscal deficit = (Revenue Receipts + Non- debt Capital Receipts) – Total Expenditure (both plan and non-plan)

Or = Budget deficit + Government’s market borrowings and liabilities

Thus, fiscal deficit indicates the extent of total borrowing requirements of the govern­ment in a fiscal year. Budgetary deficit, on the other hand, measures the extent of governments borrowing only from the RBI.

iv. Primary Deficit:

Finally, a new concept of deficit, called primary deficit, has been introduced in recent years.

Its definition is:

Primary deficit = Fiscal deficit − Interest payments.