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BASIC CONCEPTS ABOUT BUDGET

The finance minister, Shri Arun Jaitley, presented the budget on 29th February 2016. It would be interesting to understand various concepts associated with budget so that you are able to grasp the budget better now that you know the particulars. Understand why decisions are made in the Budget. This Basic Budget Concepts for Beginners is the best place to start.
The word ‘Budget’ is derived from the French word ‘bougette’ meaning a little bag to carry money or a small purse. This probably may be due to the fact that the entire wealth of one person could be carried in the little bag – a briefcase, these days!

So what is the Budget?

A budget is an annual statement of estimated revenue and expenditure in upcoming fiscal year. (Psst… Fiscal year lasts from April 1st to March 31st.)
TRIVIA: It is Article 112 of the Indian Constitution that lays down the meaning of the Union Budget of India.
The budget has several objectives such as:
  1. Reducing inequalities of income and wealth
    In Simple Terms: Making sure that there isn’t extreme poverty in the country and that the rich don’t get extra benefits because they are rich. The gap between the rich and the poor is reduced through taxation of the rich and subsidies to the poor.
  1. Reallocation of resources between government and private sectorIn Simple Terms: The government is responsible for proper and managed distribution of resources. The private sector cannot cater to all the needs of the people of the country. So the government must decide where and how much to divide its collected funds. How much goes to the public sector, how much to the development of private sector?
  1. Attaining economic stability
    In Simple Terms: Making sure India is economically independent and is protected from the shocks of international and domestic economic problems. The government must protect the economy from the risks of inflation and depression. During depression, the government reduces rates of taxation and borrowing, while increasing public expenditure. During inflation, the government increases the rate of tax and borrowing while reducing public expenditure.
  1. Managing public enterprises
    In Simple Terms: Allocating funds to public arms of the government and public sectors companies to make sure they function properly and provide the goods/services that they were created for.
  1. Achieving economic growth
    In Simple Terms: Making the country’s economy grows, both overall and in each state and region. Also to make India stand out in the global economy to achieve better standard of living for the citizens of the country.

Basic Budget Concepts for Beginners

There are three important concepts in relation to Budget
  1. Receipts
  2. Expenditures
  3. Deficits

Receipts

Receipts refer to revenues collected by the government through various means. There are two kinds of Receipts:
  1. Revenue Receipts
  2. Capital Receipts
Capital Receipts are those receipts which create a liability or cause reduction in government assets.
Let us now explore various sources of Capital Receipts:
  1. Recovery of LoansThis reduces assets of government and hence must be classified as Capital Receipt. It should be remembered that a loan given is an asset in the book of accounts. And recovery of loans reduces this asset class. 
  1. BorrowingsFunds raised by government from borrowing are treated as capital receipts as these create liability for government.Amount borrowed is a liability since one has to repay the borrowing.
  1. Disinvestment ReceiptsFunds raised by disinvestment are also capital receipts as these reduce assets of government. Disinvestment of public sector enterprise clearly reduces government ownership of these enterprises and thus reduces assets of government.
Revenue Receipts are those receipts (revenues) of government which do not create a liability or cause reduction in government assets. Examples of Revenue receipts are:
  1. Tax RevenuesTaxes are compulsory payments imposed by government on people. There are two kinds of taxes – direct tax and indirect tax.
    1. Direct Tax is when the burden of tax and liability of tax falls on the same person. Examples of direct taxes are Income Tax, Corporation Tax, Wealth Tax and Gift Tax. You pay these personally.
    2. In case the tax burden can be passed on to another person that kind of tax is called Indirect Tax – for instance – excise duty, custom duty, service tax, sales tax. These kinds of taxes are passed on by a person/organisation to another person/organisation i.e. you pay these taxes but recover them from the actual consumer.
  1. Non-Tax RevenueThese refer to those kinds of revenues other than taxes. Examples include: Profits and Dividends of Public Enterprises, Interest over loans granted, External Aid Received, Fees and Fines, etc.

 Expenditures

Budget expenditure refers to estimated expenditures incurred by the government under different heads in a year. Just as there is classification in Receipts as revenue receipts and capital receipts, similarly budget expenditures are also classified as:
  1. Capital Expenditures
  2. Revenue Expenditures
Let us look at both of these types of expenditures one by one.
  1. Capital Expenditure refers to those expenditures which result in creation of asset or reduction in liability. Examples of Capital Expenditure include expenses on creation of roads, bridges, buildings etc. Clearly a road, a bridge or a building is an asset.
  1. Revenue Expenditures do not create assets and do not reduce liability. Examples include salaries, interest payments, pensions, subsidies etc. Capital expenditures can also be understood as developmental and revenue expenditures as non developmental.
NOTE: A capital expenditure can be distinguished from a revenue expenditure in that capital expenditures are a one-time expenditure, whereas revenue expenditures are recurring expenditures.

 Deficits

Finally let us try to understand various kinds of deficits. A budget is said to be balanced when receipts equal expenditures.
Balanced Budget: Receipts = Expenditures
A budget is said to be in surplus when receipts are in excess of expenditures.
Surplus Budget: Receipts > Expenditures
A budget is said to be in deficit when receipts are short of expenditures.
Deficit Budget: Receipts < Expenditures
There are various kinds of deficits.
Revenue Deficit refers to excess of revenue expenditures over revenue receipts.
Revenue Deficit = Revenue Expenditures – Revenue Receipts
Capital Deficit on other hand refers to excess of capital expenditures over capital receipts
Capital Deficit = Capital Expenditures – Capital Receipts
Fiscal Deficit refers to excess of total expenditures over total receipt, excluding borrowings.
Fiscal Deficit = (Total Expenditures) – (Total Receipt – Borrowings)
Finally Primary Deficit means Fiscal deficit reduced by interest payments.
Primary Deficit = Fiscal Deficit – Interest Payments

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BASIC CONCEPTS ABOUT BUDGET Reviewed by sambasivan srinivasan on 6:22:00 PM Rating: 5

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