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A government budget is a statement showing estimated receipts and estimated expenditure under various heads during a fiscal year.


  1. Increase in government activities, requires large resources to be mobilised to meet the expenditure required which is not possible without budget.
  2. It helps in solving various problems like problem of inflation, defecit in balance of payment.
  3. It is required to reduce the inequalities in the distribution of income and wealth. The taxes and various other duties help to generate revenue which can be used for the welfare of weaker section.
  4. It is also necessary to know the government activities. It is the mirror of the performance of government.

Objectives of Government Budget

  1. Reducing Inequalities in income and wealth : This can be achieved in two ways.

(a)  First, by imposing higher taxes on the income of rich and the goods consumed by the rich, which will reduce the disposable income of the rich.

(b)  Increasing the Government expenditure by providing free services to poor like education, medical etc. This will raise the disposable income of the poor.

Thus the gap between rich and poor is reduced.


Reallocation of Resources in the Economy : There are many activities which are not undertaken by the private sector due to the lack of profits or huge investment involved. Activities like water supply, sanitation etc. has to be undertaken by the government itself. The government can encourage the private sector to take interest in the production of public goods by providing tax concession and subsidies and this is how, it helps in reallocating the resources.

  1. Bringing Economic Stability: Economic stability means stability in fluctuations of prices in the economy. Government can control these fluctuations through taxes and expenditure. Like: Government can reduce the expenditure in the situation of inflation and increase the expenditure in depression conditions.
  2. Providing Effective Administration : To fullfill this objective, Government increase the exp. on police, military, courts, Government offices etc.
  3. Infrastructural facilities : For this, Government spends on education, health, sanitation, water and electricity, transport communication etc.
  4. Provides employment opportunities : To fulfill this objective Government can undertake public work programmes on the construction of roads, bridges, Government building etc. These programmes generate large employment. It can encourage small scale and cottage industries.


Direct Tax : When the liability to pay the tax and the burden of the tax falls on the some person, it is called direct tax.

e.g.   income tax, wealth tax, corporate tax, gift tax, interest tax.

There are known as progressive tax.

Indirect Tax : When liabilty to pay a tax is on one person and the burden of the tax falls on another e.g. entertainment tax, excise duty, custom duty etc.

There are known as Regressive in nature because burden is more on poor as compared to be on rich.


There are two main components of budgets

Budget receipt may be refers to the estimated money receipt of the government from all sources during a fiscal year. These may be classified as follows:

(a)  Revenue receipts : It refers to those receipts of the government which neither

creates any liability for the government nor cause any reduction in the asset of

the government e.g. revenue from tax is a revenue receipt.

These are the current income receipts of the government from all sources. It is divided into two parts.

(i) Tax receipts: It refers to proceeds from taxes and other duties imposed by the government

(ii) Non-tax receipts: It includes all those revenue receipts such as commercial revenue (i.e. prices paid for government supplied goods, interest on government investment), administrative revenue, (i.e. school fees, fines, penalities etc.)

(b)  Capital receipts : These are the receipts which creates a liability for the

government or causes reduction in the assets of the government It includes the


(i)   Loans raised by the government from public, or RBI.

(ii)  Loans from foreign government or financial institution.

(iii) Recoveries of loan.

(iv) Disinvestment proceeds.

(v)  Small savings and deposits in public provident fund etc.



Difference between Revenue and Capital Receipts

Revenue Receipts Capital Receipts
1. It does not lead to creation of liability 1. It leads to creation of liability or
or reduction of assets. reduction of assets.
2. Govt is under no obligation to return 2. Govt, is under obligation to return the
the amount. amount along with interest.   –
3. It is recurring in nature. 3. It is non-recurring in nature.


Budget Expenditure

It implies an estimated expenditure of the government during the fiscal years. It can be classified as revenue and capital expenditure.

(1) Revenue Expenditure : These are the expenditure which neither leads to the creation of assets nor lead to reduction of liability for e.g. payment of salaries, subsidies, pensions, interest, grants etc.

Capital Expenditure : Expenditure which leads to the creation of assets or reduction of the liability of the government is known as capital expenditure, it leads to the capital formation in the economy, e.g. purchase of land and building, loans granted by central government to foreign government, public enterprises, repayment of loan by the government


Q. Which of the following are revenue and capital receipts.
•  Income tax
•  Excise duty
•  Loan from the world bank
•  National saving certificate
•  Interest received
•  Money received from the sale of shares
•  Rs. 5 crores received from Government of haryana against an outstanding loan
Q. Difference between Revenue and Capital Expenditure.
Revenue Expenditure Capital Expenditure
1 (1)   These are the expenditure which (1)   These are the expenditure which
neither creates assets nor reduces the either creates assets or reduces the
liability. liability.
i (2)   These are recurring in nature. (2)   These are non-recurring in nature.
(3)   It does not level to capital formation. (3)   It leads to capital formation.


(2)  Plan and Non-plan Expenditure :

Plan expenditure: Any expenditure that is included programmes that are decided under the current five year plan is termed as plan expenditure, for e.g. money given to state and union territories for executing five year plan programme.

Non-plan Expenditure : Expenditure undertaken by the government other than the expenditure related to the current five year plan is termed as non-plan expenditure.

(3)  Developmental and Non-developmental Expenditure

Non-development Expenditure :  Expenditure on essential general services of | the government e.g. Expenditure on defence and administrative expenses. Expenditure incurred by government on maintenance of law and order. Developmental Expenditure: It is the exp. which directly impacts the economics and social development of the economy eg. expenditure on agriculture and industrial development, education and health, scientific research.

Plan Expenditure Non-plan Expenditure
Definition :

Expenditure incurred on programmes that are decided under current five year plan.

Compulsory :

Plan   exp.   is   generally   for   the development of the economy. It is compulsory to incurr.

Permission :

The amount to be repesion plan exp. is allowed by planning commission.

Example :

Construction of road included in a plan is a plan exp.

Exp. undertaken by govt, other than the exp. related to current five year plan.

Non-plan exp. reduced if the govt, spending is already high.

The amount is not decided by planning commission.

Maintainence of road not included  in a plan is a non plan exp.


  1. Classify the following into Developmental and Non-developmental

(a)  Interest payment

(b)  Term loans from financial institutions to the government enterprises

(c)  Defence expenditure

(d)  Plan expenditure on railways

(e)  Expenditure on police

(f)   Setting up of hospital in Noida

Types of Budget and Its Impact

  1. Balanced Budget:

It is defined as one in which estimate receipts is equal to the estimated exp. Reduction in agg DD due to tax is equals to the increase in agg DD due to government exp. A balanced budget has on expansiory effect on the economy. An increase in income or Aggregate demand under the balanced budget is equal to the amount of Government exp. Thus the multiplier effect of the balanced budget is unity. A balance budget is a good policy to bring the economy which is at underemployment to a full employment level.

  1. Deficit Budget:

A deficit budget is when the government estimated receipts are less than the estimated expenditure under deficit budget, tax revenue is less than government exp. The rise in the government exp. rises the agg DD and imposition of tax reduces the agg DD. A fall in the AD is less than the rise in agg DD. The net impact of the deficit budget is that agg DD will increase. The multiplier effect of the defecit budget is higher than that of the balanced budget.

  1. Surplus Budget :

When the estimated receipt of the government is more than the estimated expenditure there is a surplus budget. Since imposition of tax is greater than expenditure it implies that fall in aggregate demand due to tax is greater than the rise in aggregate demand due to government expenditure. Thus impact of surplus budget is reduction in aggregate demand in an economy. Surplus budget is a good policy to control the inflation when the economy is in the over full employment situation due to excess demand.

Measure of Defect

(1)  Revenue Deficit

It refers to the excess of revenue exp. over the revenue receipts/

Significance/Implications :

  1. It signifies that government is living beyond its means to conduct day to day operations. It implies that government has to cover up the revenue deficit, through borrowings or sale of assets.
  2. It indicates dis-savings on government account.
  3. In case of revenue deficit, capital receipts are used to finance consumption of the government which leads to inflationary situations in the economy.
  4. It implies a repayment burden in the future.

Revenue deficit is bad for the economy because it implies that government is not borrowing to finance any capital formation in the country

Remedial Measures :

  1. Government should raise the rate of tax specially on rich people.
  2. The government should try to reduce the expenditure and avoid unnecessary expenditure.
  3. Fiscal Deficit:

Fiscal deficit is equal to the excess of all exp. (capital and revenue) over the sum of revenue and capital receipts excluding borrowings.


Fiscal deficit gives the amount of expenditure for which the government has to borrow money.


(1)  It shows the extent of dependence of the government on borrowings to meet its budget expenditure.

(2)  It encourages wasteful and unnecessary expenditure on the part of the government. |

(3)  It lead to inflationary pressures in the economy.

(4)  The entire amount of borrowing is not available for meeting expenditure because a part of it is used for interest payments.

Measure of Control

(1)      Deficit Financing :

It implies that government borrows from RBI in terms of tresary bills in return of cash to the government. It increases the money supply in the economy, leading to inflationary pressures.

2)       Borrowing from internal or external sources as it does not increases the money


(3) Monetising the Deficit: It can be met by borrowing from RBI. RBI issues new

currency notes to meet the fiscal deficit which is known as monetising the deficit.

  1. Is Fiscal deficit always Inflationary?

Ans.It may or may not be depending on the possibility adjustment of output by the firms. If the firms are able to produce more quantities against the rise in AD (caused by fiscal deficit), then it need not be inflationary. But if the firms are not able to increase the output, it will lead to inflation.


Primary Deficit => Fiscal Deficit – Interest Payments

It refers to fiscal deficit less interest payments. It indicates that how much amount of fiscal deficit (borrowings) will be used to pay interest payments.

(a)   High Primary Deficit : Indicates that less amount of fiscal deficit is used for making interest payments.


Low Primary Deficit: It indicates that high amount of fiscal deficit is used for making interest payments.


Zero Primary Deficit : It indicates that full amount of fiscal deficit is used for making interest payments.

Differentiate between fiscal Deficit and Revenue Deficit

Fiscal Deficit Revenue Deficit
It shows the excess of total expenditure over total receipts except borrowings It shows the excess of revenue expenditure over revenue receipts.
It shows the total borrowing requirement of the government It includes inability of the government to meet the regular and recurring expenditure


Differentiate between Primary Deficit and Fiscal Deficit       

Primary Deficit Fiscal Deficit
It shows the difference between the fiscal deficit and interest payments. It shows the excess of total expenditure over total receipts excluding borrowings
It shows the borrowing requirement of the government excluding interest It indicates the total borrowing requirement of the government.


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