Article 112 of the Indian Constitution mandates that the government should submit a financial statement to the Parliament - detailing its expected receipts and expenditures for each fiscal year, which begins on April 1 and ends on March 31. The primary government budget document is called “Annual Financial Statement.”
Objectives of Government Budget
Improving people’s welfare is a major responsibility of the government. The government uses the following methods of economic intervention to achieve that goal.
Allocation Function of Government Budget
Certain goods and services that are not available through the market mechanism that is, through direct trade between producers and individual consumers are supplied by the government. These goods are referred to as public goods
or things like government administration, highways, and national defence.
But public production and public provision are not the same thing. By public provision, we mean that they are funded by the government and are available for use without requiring a direct contribution. The private sector or the government may produce public goods. Public production is the term used to describe things that are directly produced by the government.
Redistribution Function of Government Budget
Personal income is the portion of private income that ultimately reaches households; it is often referred to as personal disposable income. Through tax collection and transfer, the government sector influences households’ personal discretionary income. By doing this, the government can alter the income distribution and establish what society views as a “fair” distribution and this is known as redistribution function.
Stabilisation Function of Government Budget
Aggregate Demand Management: The government manages overall economic activity (employment and prices) by influencing aggregate demand (total spending in the economy). Government does this with spending and taxation tools. During economic downturns (low demand, high unemployment), the government increases spending or lowers taxes to stimulate demand and economic recovery. Conversely, during inflationary periods (high demand), the government might raise taxes or decrease spending to cool down the economy.
TYPES OF BUDGETS
Balanced Budget
If the anticipated government spending for a certain fiscal year is equal to the forecast government receipts, the budget is considered balanced. Most classical economists back this type of budget as it is based on the virtue of “living within one’s means”. To put it simply, a balanced budget emphasises the idea that a government’s expenditure should never exceed their collected revenue. A balanced budget does not guarantee financial stability, even if it appears to be the best method for preserving financial discipline and achieving economic balance. This is especially true during times of deflation, recession, and economic depression.
Surplus Budget
If the government’s projected revenue for a given fiscal year is more than its actual expenditures, the budget that the government presents is deemed to be surplus. In essence, it indicates that the government has more money from taxes collected from residents than it does from spending on development and public welfare. Accordingly, a nation’s financial prosperity is indicated by a surplus budget. During times of inflation, the government usually implements a surplus budget because it lowers the nation’s aggregate demand.
Deficit Budget
When projected government spending exceeds anticipated revenue for a given fiscal year, the budget is considered to be in deficit. India is one of the developing economies that will benefit most from a deficit budget. A budget like this is especially helpful in recessions since it increases demand and accelerates the country’s economic growth. The government is largely responsible for the excessive spending that is incurred in a deficit budget in order to increase employment.
Major Reforms in Union Budget
Improved fiscal transparency and realistic revenue assumptions in the Budget: The Union Government raised above-the-line expenditures from below the line in an effort to increase openness in fiscal accounts and disclosures. From Rs 1.48 lakh crore in FY20 and Rs 1.21 lakh crore in FY21, the government’s extra-budgetary borrowings were reduced to Rs 750 crore in FY22 (RE). There were no estimates for Extra Budgetary Resources in the FY23 budget.
In addition to having clearer fiscal accounting, the previous year’s budget relied on reasonable assumptions for revenue predictions, giving the government a buffer against global uncertainty.
Discontinuation of Plan-Non Plan Classification: Plan and Non-Plan classifications of Government expenditure were discontinued in Budget FY18. The classification of government expenditures into revenue and capital was given more weight by the reform. The Economic Survey pointed out that a misconception that developed over time, that Plan expenditures were good and Non-Plan ones weren’t led to distorted budget allocations.
Merger of Railway Budget with the main Budget:
In 1924, the Railway Budget was separated from the General Budget, as per the recommendations of the Acworth Committee (1920-21). The Union Budget and the Railway Budget were combined in FY18 on the recommendations of a committee headed by Bibek Debroy, a member of NITI Aayog. This was done to provide a comprehensive picture of the government’s financial situation. The goal of the initiative was to make it easier to plan multimodal transportation between inland waterways, highways, and railroads. Gatishakti Programme has reportedly strengthened this in subsequent years.
Additionally, it assisted in increasing the Union Government’s and the Railways’ resources. Railways are not required to pay dividends to Government Revenues as a result of the merger, and the survey indicates that the Finance Ministry will have more flexibility in allocating resources during the mid-year review. It also allowed the Ministry of Finance to ensure there is a coherent emphasis on Capex across sectors in recent times.
Shifting the date of the Budget to February 1: The date of the Budget was shifted from Budget FY18 to February 1.
Advancing it by a month paved the way to complete the Budget cycle. Ministries can also now plan better and execute schemes from the start of the financial year.
Components of the Government Budget
The impact of the budget document will persist into subsequent years even though it pertains to the government’s
receipts and expenditures for a specific fiscal year. As a result, two accounts are required: the revenue account, also known as the revenue budget, contains all of the information pertaining to the current fiscal year, while the capital account, also known as the capital budget, contains all of the information pertaining to the government’s assets and liabilities.
