Economics · Ch 5 — Government Budget and the Economy
Government Budget — Meaning and its Components
Government Budget — Meaning and its Components
Government Budget — Meaning and Its Components
The Constitution of India, under Article 112, requires the government to present before Parliament a statement of estimated receipts and expenditures for every financial year. A financial year in India runs from 1 April to 31 March. This document, called the Annual Financial Statement, is the main budget document of the government.
Although the budget document relates to a single financial year, its impact often extends into subsequent years. For example, a decision to build a highway this year creates expenditure commitments for maintenance in future years.
Because some transactions affect only the current year while others create or reduce assets and liabilities that last beyond it, the budget is divided into two separate accounts:
- Revenue Account (Revenue Budget): Contains items that relate only to the current financial year.
- Capital Account (Capital Budget): Contains items that affect the assets and liabilities of the government.
Before we can understand these two accounts in detail, we must first understand the objectives that the government budget is meant to achieve. As the NCERT Class 12 Macroeconomics chapter sets out, the government performs exactly three functions through its budget — allocation, redistribution and stabilisation — and these are examined in detail in the next section (5.1.1).
Components of the Government Budget
The budget has two broad components: the Revenue Budget and the Capital Budget. Each is further divided into receipts and expenditure.
Revenue Budget
The Revenue Budget consists of revenue receipts and revenue expenditure.
Revenue Receipts are receipts that:
- Do not create a liability for the government (the government does not have to repay them), and
- Do not lead to a reduction in assets.
Revenue receipts are of two types:
- Tax Revenue: Money collected through taxes. Taxes are compulsory payments — there is no direct quid pro quo (the taxpayer does not receive a specific benefit in return). Examples: income tax, corporate tax, goods and services tax (GST), customs duties.
- Non-tax Revenue: Money the government earns from sources other than taxes. Examples: interest on loans given by the government, dividends from public sector undertakings, fees, fines, and grants received from foreign governments or international organisations.
Revenue Expenditure is expenditure that:
- Does not create an asset for the government, and
- Does not reduce a liability.
In other words, it is spending of a routine, day-to-day nature. Examples: salaries of government employees, interest payments on past loans, subsidies on food and fertiliser, defence revenue expenditure (pay, allowances, maintenance).
A common mistake is to think that all expenditure on defence is capital expenditure. It is not. Salaries and maintenance of defence personnel are revenue expenditure. Only spending on buying new tanks, ships, or aircraft (which creates assets) is capital expenditure.
Capital Budget
The Capital Budget consists of capital receipts and capital expenditure.
Capital Receipts are receipts that either:
- Create a liability for the government (the government must repay the amount), or
- Lead to a reduction in assets.
Examples:
- Borrowings from the public (market loans), from the Reserve Bank of India, or from foreign governments and institutions.
- Recovery of loans given by the government to states, union territories, or other parties.
- Proceeds from the sale of government assets (disinvestment of shares in public sector undertakings).
Capital Expenditure is expenditure that either:
- Creates an asset for the government (e.g., building a dam, a road, a school building), or
- Reduces a liability (e.g., repaying a loan). …