What is a government budget?
A government budget is a written plan. It shows the money the government expects to receive and plans to spend in one financial year. In India this year runs from 1 April to 31 March.
The Constitution (Article 112) calls it the Annual Financial Statement. It has two main parts: the revenue budget and the capital budget.
Try it at home
Write your family's money for one month in two lists: money in and money out. Mark each item: does it create a loan or asset (capital) or not (revenue)?
Objectives of a government budget
Why does a government make a budget? Six simple aims:
- Reallocation of resources: move money toward things people need, like schools and health. Tax harmful goods (tobacco), give subsidy to useful ones.
- Reducing inequality: take more tax from the rich (progressive tax) and spend on the poor (free ration, scholarships).
- Economic stability: control booms and slumps. In inflation, spend less or tax more. In a slump, spend more.
- Managing public enterprises: run and support businesses like railways that serve people.
- Economic growth: build roads, power and ports so that more can be produced.
- Reducing regional gaps: spend more in backward regions.
Components: receipts
A receipt is money the government gets.
Revenue receipts
They do not create a debt and do not reduce an asset.
- Tax revenue: direct taxes (income tax, corporation tax; the person taxed pays it) and indirect taxes (GST, customs; the burden passes to buyers).
- Non-tax revenue: interest and dividends from public companies, fees, fines, licence charges, gifts and grants.
Capital receipts
They create a debt or reduce an asset.
- Borrowings from the public, RBI or abroad (creates debt).
- Recovery of loans the government gave earlier (reduces an asset).
- Disinvestment: selling government shares in public companies (reduces an asset).
Recovery of loans and disinvestment are called non-debt capital receipts.
Components: expenditure
Revenue expenditure does not create an asset and does not reduce a debt. Examples: salaries, pensions, interest payments, subsidies, grants to states.
Capital expenditure creates an asset or reduces a debt. Examples: building roads, dams, hospitals, buying machines, giving loans to states, repaying old loans.
| Test | Revenue | Capital |
|---|---|---|
| Receipt | No debt, no asset sold | Debt up or asset down |
| Spending | No asset, no debt cut | Asset up or debt down |
Balanced, surplus and deficit budgets
- Balanced budget: estimated receipts = estimated expenditure. It looks safe, but gives no room to fight a slump.
- Surplus budget: receipts > expenditure. Useful to control inflation because it takes money out of the economy.
- Deficit budget: expenditure > receipts (receipts here leave out borrowing). Useful in a slump and for growth, but it raises debt. Most countries, including India, run deficit budgets.
Measures of deficit
1. Revenue deficit
Revenue deficit = revenue expenditure − revenue receipts. It means the government borrows even to pay its day-to-day costs. That is a warning sign, because the borrowed money builds no asset.
2. Fiscal deficit
Fiscal deficit = total expenditure − (revenue receipts + non-debt capital receipts). It equals the total borrowing the government needs. It is the most watched number.
3. Primary deficit
Primary deficit = fiscal deficit − interest payments. It shows borrowing for this year's needs, leaving out interest on old loans.
Why a high deficit worries us
- More debt means more interest next year (a debt trap).
- Government borrowing can leave less money for private firms.
- If met by printing money it can cause inflation.
A deficit spent on roads and power can also raise growth, so the use of the money matters.
Key formulas and definitions
- Revenue deficit = Revenue expenditure − Revenue receipts
- Fiscal deficit = Total expenditure − (Revenue receipts + Non-debt capital receipts) = Borrowings
- Primary deficit = Fiscal deficit − Interest payments
- Non-debt capital receipts = Recovery of loans + Disinvestment
- Deficit as % of GDP = (Deficit ÷ GDP) × 100
Worked examples
1. Classify: (a) GST collected, (b) money from selling shares of a public company, (c) interest paid on loans, (d) building a dam.
(a) Revenue receipt (tax). (b) Capital receipt (disinvestment, asset down). (c) Revenue expenditure (no asset). (d) Capital expenditure (asset created).
2. Revenue receipts 300, revenue expenditure 350. Find the revenue deficit.
Revenue deficit = 350 − 300 = ₹50 crore.
3. Total expenditure 450, revenue receipts 300, recovery of loans 10, disinvestment 20. Find the fiscal deficit.
Non-debt capital receipts = 10 + 20 = 30. FD = 450 − (300 + 30) = ₹120 crore. This is also the borrowing.
4. Fiscal deficit 120, interest payments 80. Find the primary deficit.
PD = 120 − 80 = ₹40 crore.
5. Fiscal deficit is ₹6,000 crore and GDP is ₹1,50,000 crore. Find the fiscal deficit as % of GDP.
(6,000 ÷ 1,50,000) × 100 = 4%.
6. Primary deficit is zero. What does it mean?
Fiscal deficit = interest payments. The government borrows only to pay interest on old loans; its current needs are fully met from its own receipts.
7. Borrowings 200, revenue deficit 80, interest 90. Find fiscal and primary deficit and explain what share of borrowing went to revenue spending.
FD = borrowings = 200. PD = 200 − 90 = 110. Revenue deficit/FD = 80/200 = 40%, so 40% of borrowing paid for day-to-day costs that build no asset.
Common mistakes
- Calling recovery of loans a revenue receipt. It reduces an asset (the loan), so it is a capital receipt.
- Treating all government spending on education as capital. Teachers' salaries are revenue expenditure; building a school is capital.
- Including borrowings in the receipts when finding the fiscal deficit. Fiscal deficit IS the borrowing.
- Writing primary deficit = fiscal deficit + interest. It is minus interest.