The term ‘Budget’ refers to the financial statement (or documents) placed by the government before the legislature every year on a specific date.
A budget sets forth the anticipated expenditure of the government during the next financial year (called the budget year) and the receipts for the same period:
(a) under existing laws in force, and
(b) as a result of taxation proposals, if any, contemplated by the government.
More often than not, the budget is the manifestation of the political philosophy of the party in power.
The primary objective of the budget is to reveal comprehensive information in order to present a complete picture of the financial position of the government and thereby enable the legislature to measure adequately the impact of such financial programmes on the country’s economy.
The estimates included in the budget are simply estimates; the actuals may not conform to the original estimates. The budget must, however, estimate revenues and expenditures as accurately as possible. Accuracy becomes essential if equilibrium established in the estimates is to be maintained to the end and realised in actuals.
The budget comprises data for three years:
(a) actual figures for the preceding year;
(b) budget estimates for the current year;
(c) revised estimates for the current year, and
(d) budget estimates for the following year.
For example, the Union Budget for 2016-17 contains:
(a) actuals for 2014-15;
(b) budget estimates for 2015-16;
(c) revised estimates for 2015-16, and
(d) budget estimates for 2016-2017.
(a) Direct and Indirect Taxes: Direct taxes are defined as those taxes levied immediately on the property and incomes of persons and which are paid directly by the consumers to the state. Thus, income and wealth taxes, estate duties, and toll taxes paid directly to the state form the group of direct taxes.
All other taxes would be grouped as indirect, i.e. those whose burden can be shifted (like sales tax and excise duties). These are imposed upon and collected from producers and sellers. But producers and sellers can shift the burden of these taxes on to the consumers. However, when these taxes are passed on to the consumers, they indirectly tax the income of the consumers.
(b) Proportional, Progressive, and Regressive Taxation: A tax may be proportional, progressive or regressive according to the relationship between its rate structure and the income, wealth, and economic power of the tax-payer.
A tax is proportional, progressive or regressive according to the percentage of the tax to the tax payer’s income.
- Proportional Taxation: If the tax is the ‘same percentage’ on all incomes, large or small, it is called proportional taxation.
- Progressive Taxation: In this system, the rate of tax goes on increasing with every increase in income. In other words, lower income is taxed at a lower percentage, whereas higher income is taxed at a higher percentage.
- Regressive Taxation: If the rate of tax decreases with an increase in income, it is called regressive taxation.
When you scan the budget document, you come across terms like Revenue Receipts and Capital Receipts. What do these terms mean?
(a) Revenue Receipts may be classified into two major components: Tax Revenue and Non-Tax Revenue.
- Tax Revenue is one of the most important resources of public revenue. It refers to funds raised through taxation and implicit in it is an element of compulsion. It is compulsory in the sense that once the taxes are imposed, the person liable to pay them has to do so. Refusal to do so is treated as a crime for which the law prescribes severe punishment. Tax revenue is a steady source and is always certain to come because taxes are paid periodically. Some of the important taxes are income tax, excise duty, customs duty, sales tax, estate duty, wealth tax, and gift tax. In addition to these, the term tax revenue also includes special assessment and fees.
- Non-Tax Revenue is raised by the government in the form of the prices paid for the use of specific services and goods offered by it. It is purely voluntary in the sense that the individual concerned has to pay the price for a particular good or service, in case he purchases it, otherwise not. The revenue under this head comes irregularly and is somewhat uncertain.
(1) revenue from state monopolies and state undertakings (like railways, electricity, telecom, forests, and irrigation);
(2) revenue from social services (like education, hospital receipts);
(3) revenue from public property (like lease / rent from land);
(4) charges for specific benefits or improvements i.e. development charges, and
(5) voluntary gifts (such as donations to hospitals and charitable institutions) received by state authorities
(b) Capital Receipts include loans raised by the Government of India from the general public, government’s borrowings from the RBI as well as other similar bodies (through sale of treasury bonds), external loans (like from the IMF), recoveries of loans granted to states / UTs, and savings invested in PPF, etc.Expenditure
Expenditure may be classified into (a) Revenue Expenditure and Capital Expenditure, (b) Plan and Non-Plan Expenditure, and (c) Development and Non-Development Expenditure.
(a) Revenue Expenditure and Capital Expenditure: All expenditure incurred in the normal day-to-day running of the government is termed Revenue Expenditure. This includes expenditure incurred on provision of services, salaries, subsidies, interest payments made to service debts, etc.
Capital Expenditure is incurred in the creation of assets like land, plant & machinery, and investments in securities. Also, loans and advances granted to state governments and PSUs by the Centre are treated as Capital Expenditure.
(b) Plan and Non-Plan Expenditure: Any public expenditure incurred on current development and investment outlays that arise due to plan proposals (five year plan proposals) is termed Plan Expenditure.Deficits
In a budget statement, there is a mention of four types of deficits: (a) revenue, (b) budget, (c) fiscal, and (d) primary.
(a) Revenue Deficit refers to the excess of revenue expenditure over revenue receipts. In fact, it reflects one crucial fact: what is the government borrowing for? As an individual if you are borrowing to pay the house rent, then you are in a situation of revenue deficit, i.e. while you are borrowing and spending, you are not creating any durable asset. This implies that there will be a repayment obligation (sometime in the future) and at the same time there is no asset creation via investment.
(b) Budget Deficit refers to the excess of total expenditure over total receipts. Here, total receipts include current revenue and net internal and external capital receipts of the government.
(c) Fiscal Deficit refers to the difference between total expenditure (revenue, capital, and loans net of repayment) on one hand, and on the other hand, revenue receipts plus all those capital receipts which are not in the form of borrowings but which in the end accrue to the government.
(d) Primary Deficit refers to fiscal deficit minus interest payments. In other words, it points to how much the government is borrowing to pay for expenses other than interest payments. Also, it underscores another key fact: how much the government is adding to future burden (in terms of repayment) on the basis of past and present policy.