The Finance Ministry of every country prepares and presents its budget for each new Fiscal Year.
- A budget is an annual account of a Government’s estimated or projected receipts and expenditure. Government’s finance is called ‘Public Finance’ in economic literature. Government’s receipts are called ‘Public Revenue’ and Government’s expenditure is called ‘Public Expenditure’.
- A Fiscal Year refers to a 12-month period. India’s fiscal year begins on April 01 and ends on March 31. The 12-months period in a FY differs from country to country. For the US, it is October 01 to September 30 and for Pakistan and Bangladesh it is July 01 to June 30. South Korea’s Fiscal Year is January 01 to December 31 and so is it for China and Russia.
- Public revenue or Government’s receipts are made up of revenue from tax collection (Receipts from Direct and Indirect Taxes) and from non-tax sources that include among others market borrowing and disinvestment of public sector undertakings (sale of shares of Public Enterprises). Budget estimates for the ensuing fiscal year tell us about expected receipt of the government from tax sources and non tax sources.
- Once the Public Revenue estimates are ready, then Government estimates its total expenditure. The budget also shows expenditure separately for each head of expenditure done by government such as defense, education, health, infrastructure and welfare programmes like Mahatma Gandhi Employment Guarantee Scheme.
- After estimating total expenditure and total receipts, Government has now a clear picture about its total receipts and total expenditure. Thereafter, the government tries to find out what is the gap between its total expenditure and total receipts. It is necessary to know because if total expenditure is greater than total receipts, Government would need to mobilize funds to cover this gap. Gap between Government’s total expenditure and total receipts is called “fiscal deficit.” It is necessary to keep in mind that some of the receipts of the government are “debt creating receipts”, which means that they would have to be paid back to the fund provider such as borrowing from small savings provident and pension funds and money received through government securities. While calculating fiscal deficit it is necessary to subtract from total receipts these debt creating receipts of the government. Tax receipts and receipts from disinvestment of Public Sector Undertakings are non-debt creating receipts. Besides fiscal deficit, there are two other measures of deficit, i.e., ‘revenue deficit’ and ‘primary deficit’. While revenue deficit is the difference between revenue expenditure and revenue receipts, the primary deficit is equal to fiscal deficit minus interest payments by the government on previous borrowings
- Government has several options for managing funds to cover its fiscal deficit and revenue deficit. It may go for borrowing from internal money market or external markets. Internal borrowing constitutes a major source of funds for covering the gap between total expenditure and total receipts of the government. Government borrows from small savings in the banks, provident and pension funds and through government bonds and securities (technically known as Treasury Bills). Government may borrow from other financial institutions or issue new money.
- Next thing in the budget to understand is the classification of budget in two parts-( i) Revenue Budget and (ii) Capital Both the budgets have to sides, ie. receipts and expenditure. So Revenue budget shows both, revenue receipt and revenue expenditure. Likewise Capital budget also has two parts, capital receipts and capital expenditure.
- The revenue budget consists of revenue receipts of the government (revenues from tax and other sources), and its expenditure. Revenue receipts are divided into tax and non-tax revenue. Tax revenues are made up of taxes such as income tax, corporate tax, excise, customs and other duties that the government levies. In non-tax revenue, the government’s sources are interest on loans and dividend on investments like PSUs, fees, and other receipts for services that it renders. Revenue expenditure is the payment incurred for the normal day-to-day running of government departments and various services that it offers to its citizens. The government also has other expenditure like servicing interest on its borrowings, subsidies, etc.
- The capital budget consists of capital receipts and capital expenditure.
Capital receipts are government loans raised from the public, government borrowings from the Reseve Bank and treasury bills, loans received from foreign bodies and governments, divestment of equity holding in public sector enterprises, securities against small savings, state provident funds, and special deposits.
Capital expenditure comprises capital expenditure on acquisition of assets like land, buildings, machinery, and equipment. It also includes in shares, loans and advances granted by the central government to state and union territory governments, government companies, corporations and other parties. - Finally, it is important to know from the budget the allocation to different heads of development in the annual plan (Government total and sectoral outlays).
- Also in every budget government announces some new development and welfare programmes. It is important to know about these programmes and expenditure on them.
- Last but not the least, for overall assessment of the budget it is important to know its focus and objectives, government’s fiscal policy and fiscal health and also government debt.