Public budget

Public Economics

1. Public Budgets Unit 2

2. 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.

3. 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.

4. 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.

5. 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.

6. Objectives of a Government Budget 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 .  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.

7. (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

8. (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

9. Components of Government Budget

10. 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.

11. 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

12. (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

13. 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

14. (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 .

15. Tax and Non Tax R evenue 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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

21. 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

22. 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.

23. 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.

24. 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 .

25. 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

26. 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.

27. 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.

28. 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 B ank of India

29. Objectives of Deficit F inancing To finance war  Remedy for depression Economic development Mobilization of Resources  For granting subsidies Increase in aggregate demand For payment of interest To implement anti-poverty program

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

31. 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

32. 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

33. 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: Process of economic growth is hindered Scope of undertaking welfare activities is restricted.

34. 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.

35. 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.

36. 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

37. 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.

38. 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

39. 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.

40. Merits and demerits of deficit budget A deficit budget has its own merits especially for developing economy For example, It accelerates economic growth and It enables to undertake welfare programmes of the people, It is a cure for deflation as it checks downward movement of prices. At the same time.

41. Demerits of Deficit Budget It encourages unnecessary and wasteful expenditure by the government, It may lead to financial and political instability, It shakes the confidence of foreign investors

42. 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.