GOVERNMENT BUDGETING

WHAT IS A GOVERNMENT BUDGET?
A government budget is a statement of expected expenditure of the government and the sources of financing the expenditure during a financial year. Such an exercise is undertaken much before the financial year starts. The statement details all expenditures to be incurred during the coming financial year and the sources of meeting this expenditure.
In India, government budget is normally presented in the Parliament in the month of February every year. The 110 budget of a government is a summary of the item-wise intended/expected revenues and anticipated expenditures of the government during a fiscal year/financial year.

Budget is prepared, keeping in view the general policy of government towards the welfare of people.
•    Budget is presented before both the house of the Parliament on a date fixed by President of India
•    The General Budget is presented in Lok SabHA by the Minister of Finance. The ‘Annual Financial Statement’ is laid on the Table of Rajya Sabha at the conclusion of the speech of the Finance Minister in Lok Sabha.
•    Responsibility of budget presentation is with President of India.
•    The receipts and disbursements are shown under three parts in which Government accounts are kept viz., Consolidated Fund, Contingency Fund and Public Account.
•    The Annual Financial Statement distinguishes the expenditure on revenue account from the expenditure on other accounts, as is mandated in the Constitution of India. The Revenue and the Capital sections together, therefore make the Union Budget.

MAIN ELEMENTS OF THE BUDGET
•    It is a statement of estimates of government receipts and expenditure.
•    Budget estimates pertain to a fixed period, generally a year.
•    Expenditure and sources of finance are planned in accordance with the objectives of the government.
•    It requires to be approved (passed) by Parliament or Assembly or some other authority before its implementation.

Ministry of Finance consist of
•    Department of Economic Affairs
•    Department of Expenditure
•    Department of Revenue
•    Department    of    Investment    and    Public    Asset Management (DIPAM)
•    Department    of    Financial    Services    Budget    is    prepared    by Budget Division of Department of Economic Affairs.

The Budget documents presented to Parliament comprise, besides the Finance Minister's Budge Speech, the following:

• Annual Financial Statement (AFS)
• Demands for Grants (DG)
• Finance Bill
• Statements mandated under Fiscal Responsibility and Budget Management Act, 2003
• Macro-economic framework Statement
• Fiscal Policy Strategy Statement
• Medium Term Fiscal Policy Statement
• Expenditure Budget
• Receipts Budget
• Expenditure Profile
• Memorandum Explaining the Provisions in the Finance Bill
• Budget at a glance
• Outcome Budget
• FINANCIAL BILL

At the time of presentation of the Annual Financial Statement before Parliament, a Finance Bill is also presented detailing the imposition, abolition, remission, alteration or regulation of taxes proposed in the Budget. A Finance Bill is a Money Bill as defined in Article 110 of the Constitution.

Consolidated Fund of India (Article 266)
•    Consolidated Fund of India is the most important of all government accounts. Revenues received by the government and expenses made by it, excluding the exceptional items, are part of the Consolidated Fund.
•    This fund was constituted under Article 266 (1) of the Constitution of India. All revenues received by the government by way of direct taxes and indirect taxes, money borrowed and receipts from loans given by the government flow into the Consolidated Fund of India.
•    All government expenditure is made from this fund, except exceptional items which are met from the Contingency Fund or the Public Account. No money can be withdrawn from this fund without the Parliament’s approval.

CONTINGENCY FUND OF INDIA (ARTICLE 267)
•    Contingency Fund is created as an imprest account to meet some urgent or unforeseen expenditure of the government.
•    This fund was constituted by the government under Article 267 of the Constitution of India. This fund is at the disposal of the President.
•    Any expenditure incurred from this fund requires a subsequent approval from the parliament and the amount withdrawn is returned to the fund from the Consolidated Fund.

PUBLIC ACCOUNT
•    Public Account of India accounts for flows for those transactions where the government is merely acting as a banker.
•    This fund was constituted under Article 266 (2) of the Constitution. It accounts for flows for those transactions where the government is merely acting as a banker.
•    Examples of those are provident funds, small savings and so on. These funds do not belong to the government.
•    They have to be paid back at some time to their rightful owners. Because of this nature of the fund, expenditures from it are not required to be approved by the Parliament.

Demands for Grants (Article 113)
•    Estimated expenditure from the Consolidated Fund of India included in the Annual Financial Statement are submitted in the form of Demands for Grants.
•    Demands for Grants are presented to the Lok Sabha along with the Annual Financial Statement and required to be voted by the Lok-Sabha
•    Generally, one Demand for Grant is presented in respect of each Ministry or Department. However, more than one Demand may be presented for a Ministry or Department depending on the nature of expenditure
•    In regard to Union Territories without Legislature, a separate Demand is presented for each of the Union Territories.

OBJECTIVES OF A GOVERNMENT BUDGET
In a mixed economy like ours, the government plays a significant role along with the private sector. The three major functions served by this presentation of estimates.

•    Allocation function: Public goods (national defense, roads, government administration, measures of lower air pollution, etc.) can’t be provided by Market Mechanism (transaction between individuals).
•    Distribution function: Government can alter income distribution by making transfer payments and collecting taxes, therefore affecting personal disposable income of households. Thus, through its tax and expenditure policy government tries to achieve a fair income distribution in society.
•    Stabilization function: Fluctuations in economy may lead to inflation and unemployment. Government policy measures to stabilize domestic economy.

COMPONENTS OF THE GOVERNMENT BUDGET
There is a constitutional requirement in India (Article 112) to present before the Parliament a statement of estimated receipts and expenditures of the government in respect of every financial year which runs from 1 April to 31 March. This ‘Annual Financial Statement’ constitutes the main budget document. Further, the budget must distinguish expenditure on the revenue account from other expenditures.
Therefore, the budget comprises of the
(a)    Revenue Budget and the (b) Capital Budget The Revenue Budget
The Revenue Budget shows the current receipts of the government and the expenditure that can be met from these receipts.

Revenue Receipts: Revenue receipts are divided into tax and non- tax revenues.

Tax Revenue:
•    Tax revenues consist of the proceeds of taxes and other duties levied by the central government. Tax revenues, an important component of revenue receipts, comprise of direct taxes – which fall directly on individuals (personal income tax) and firms(corporation tax), and indirect taxes like excise taxes (duties levied on goods produced within the country), customs duties (taxes imposed on goods imported into and exported out of India) and service tax.
•    Excise taxes are the single largest revenue earner. Other direct taxes like wealth tax, gift tax and estate duty (now abolished) have never been of much significance in terms of revenue yield and have thus been referred to as ‘paper taxes’.

Non Tax Revenue:
•    Non Tax Revenue includes interest receipts on loans given by central government, dividends or profits in investment of government, fees & other receipts for services rendered by government. Also, cash grants-in-aid received from foreign countries and international organizations.

Revenue Expenditure:

Expense other than creation of physical or financial assets of central government, which means expenditure for normal functioning of government departments (day to day working)
•    Interest payments on debt taken by government
•    Grants to state government and others (even for creation of assets).

Revenue Deficit:
•    If the balance of total revenue receipts and total revenue expenditures turns out to be negative it is known as revenue deficit, a new fiscal terminology used since the fiscaL1997–98 in India.
•    Revenue deficit= Revenue expenditure – Revenue receipts

Effective Revenue Deficit
•    Revenue expenditures include all the grants which the Union Government gives to the state governments and the UTs— some of which create assets (though these assets are not owned by the Government of India but the concerned state governments and the UTs).
•    According to the Finance Ministry (Union Budget 2011–12), such revenue expenditures contribute to the growth in the economy and therefore, should not be treated as unproductive in nature like other items in the revenue expenditures.
•    And on this logic, a new methodology was introduced to capture the ‘effective revenue deficit’, which is the Revenue Deficit ‘excluding’ those revenue expenditures of the Government of India which were done in the form of GoCA (grants for creation of capital assets).
•    Effective Revenue Deficit= Difference between Revenue deficit and Grants for creation of capital assets

CAPITAL BUDGET OF GOVERNMENT OF INDIA:
Assets and liabilities of central government. Changes occurring capital is considered, shows capital requirements of government and pattern of their financing.

Capital Receipts:
Receipts creating liabilities and reducing financial assets. These are:
•    Market Borrowings: Loans raised from public.
•    Treasury Bills: Borrowings from RBI and other commercial banks and FIs through treasury bills.
•    Loans    received    from    foreign    government    and    international organization.
•    Recoveries of loans granted by central government.
•    Small    savings    in    PO    savings    account,    National    Saving Certificate, etc.
•    Provident Fund
•    PSU disinvestment (receipts from sale pf share in Public Sector Undertakings).

Capital Expenditure: Expense which result in creation of physical or financial asset. Reduction in financial liabilities.
They are:
•    Expenditure    on    Land    acquisition,    building    machinery, equipment.
•    Investment in shares
•    Loans & advances by Central government to states and UTs, PSUs or others.

Fiscal Deficit
•    When balance of the government’s total receipts (i.e., revenue
•    + capital receipts) and total expenditures (i.e., revenue + capital expenditures) turns out to be negative, it shows the situation of fiscal deficit, a concept being used since the fiscal 1997–98 in India.
•    The situation of fiscal deficit indicates that the government is spending beyond its means. To be simpler, we may say that the government is spending more than its income.
•    Fiscal Deficit = Total expenditure – (Revenue receipts+ Non-debt creating capital receipts)

Primary Deficit
•    The fiscal deficit excluding the interest liabilities for a year is the primary deficit, a term India started using since the fiscal 1997–98. It shows the fiscal deficit for the year in which the economy had not to fulfill any interest payments on the different loans and liabilities which it is obliged to, shown both in quantitative and percentage of GDP forms.
•    Primary Deficit= Fiscal deficit – Interest payment

Monetized Deficit
•    The part of the fiscal deficit which was provided by the RBI to the government in a particular year is Monetized Deficit, this is a new term adopted since 1997–98 in India.

BUDGET DEFICIT
•    When a government spends more than it receives by the way of revenue, it is known as the budget deficit.
•    The difference between revenue expenditure and revenue receipts is known as the budget deficit.

REVENUE DEFICIT.
•    The difference between the government’s total expenditure and its total receipts excluding borrowing is known as the fiscal deficit.
•    The growth of revenue deficit as a percentage of fiscal deficit points to a deterioration in the quality of government expenditure involving lower capital formation.
•    Government deficit can be reduced by an increase in taxes or/and reduction in expenditure.
•    Public debt is burdensome if it reduces the future growth in terms of output.
•    Budget deficit Total Expenditure - Total Receipts

DEFICIT FINANCING
Deficit financing is the budgetary situation where expenditure is higher than the revenue. It is a practice adopted for financing the excess expenditure with outside resources. The expenditure revenue gap is financed by either printing of currency or through borrowing.

Need of Deficit Financing
The idea and need of deficit financing was felt in the late 1920s. Government needs to spend more money than it was expected to earn or generate in a particular period, to go for a desired level of growth and development. To realize the socio-political goals as per the aspirations of the public policy. Once the growth had taken place, the extra money spent above the income would have been reimbursed or repaid.

Means of Deficit Financing
1.    External Aids are the best money as a means to fulfill a government’s deficit requirements even if it is coming with soft interest. If they are coming without interest nothing could be better.

2.    External Borrowings are the next best way to manage fiscal deficit with the condition that the external loans are comparatively cheaper and long-term.

External Borrowings are better than the internal borrowings due to two reasons.
•    External borrowing brings in foreign currency/hard currency which gives extra edge to the government spending as by this the government may fulfill its developmental requirements inside the country as well as from outside the country.
•    It is preferred over the internal borrowings due to ‘crowding out effect’. If the government itself goes on borrowing from the banks of the country, from where will others borrow for investment purposes?

3.    Internal Borrowings come as the third preferred route of fiscal deficit management. But going for it in a huge way hampers the investment prospects of the public and the corporate sector.

4.    Printing Currency is the last resort for the government in managing its deficit. But it has the biggest handicap that with it the government cannot go for the expenditures which are to be made in the foreign currency. Even if the government is satisfied on this front, printing fresh currencies does have other damaging effects on the economy:
•    It increases inflation proportionally. (India regularly went for it since the early 1970s and usually had to bear double digit inflations.)
•    It brings in regular pressure and obligation on the government for upward revision in wages and salaries of government employees- ultimately increasing the government expenditures necessitating further printing of currency and further inflation—a vicious cycle into which economies entangle themselves.

Government deficit can be reduced by an increase in taxes or reduction in expenditure.
•    In India, the government has been trying to increase tax revenue with greater reliance on direct taxes (indirect taxes are regressive in nature, they impact all income groups equally).
•    Govt. is trying to raise money through the sale of shares in PSUs. However, the major thrust has been towards reduction in government expenditure.
•    In case of a budget deficit, i.e., when Govt. cannot meet its expenses from the tax revenue. So it borrows money by selling treasury bills or government securities to RBI, which issues currency to the government in return. The government then pays for its expenses with this money. The money thus ultimately comes into the hands of the general public. If budget deficit is financed by raising money then, inflation may rise.

TYPES OF BUDGETING

1.    Performance Budgeting
•    A performance budget reflects the goal/objectives of the organization and spells out its performance targets.
•    These targets are sought to be achieved through a strategy. Unit costs are associated with the strategy and allocations are accordingly made for achievement of the objectives.
•    A Performance Budget gives an indication of how the funds spent are expected to give outputs and ultimately the outcomes.
•    However, performance budgeting has a limitation – it is not easy to arrive at standard unit costs especially in social programmes, which require a multi- pronged approach.

2.    Zero-based Budgeting
•    The basic purpose of ZBB is phasing out of programmes/activities, which do not have relevance anymore. ZBB is done to overhaul the functioning of the government departments and PSUs so that productivity can be increased and wastage can be minimized. Scarce government resources can be deployed efficiently. Therefore, Zero Based Budgeting is followed for rationalization of expenditure.
•    The concept of zero-based budgeting was introduced in the 1970s. As the name suggests, in the process every budgeting cycle starts from scratch.
•    Unlike the earlier systems, where only incremental changes were made in the allocation, under zero-based budgeting every activity is evaluated each time a budget is made and only if it is established that the activity is necessary, funds are allocated to it.
•    Under the ZBB, a close and critical examination is made of the existing government programmes, projects and other activities to ensure that funds are made available tohigh priority items by eliminating outdated programmes and reducing funds to the low priority items.
•    Governmental programmes and projects are appraised every year as if they are new and funding for the existing items is not continued merely because a part of the project cost has already been incurred.

3.    Programme Budgeting
Programme budgeting aimed at a system in which expenditure would be planned and controlled by the objective. The basic building block of the system was classification of expenditure into programmes, which meant objective- oriented classification so that programmes with common objectives are considered together.

4.    Programme and Performance Budgeting System (PPBS)
•    PPBS went much beyond the core elements of programme budgeting and was muchmore than the budgeting system. It aimed at an integrated expenditure management system, in which systematic policy and expenditure planning would be developed and closely integrated with the budget. Thus, it was too ambitious in scope.
•    Neither was adequate preparation time given nor was a stage- by-stage approach adopted. Therefore, this attempt to introduce PPBS in the federal government in USA did not succeed, although the concept of performance budgeting and programme budgeting endured.
•    Many governments today use the “programme budgeting” label for their performance budgeting system. As pointed out by Marc Robertson, the contemporary influence ofthe basic programme budgeting idea is much wider than the continuing use of the label.

It is defined in terms of its core elements as mentioned above. Programme budgeting is an element of many contemporary budgeting systems which aim at linking funding and results.

5.    Outcome Budget
With effect from Financial Year 2007- 08, the Performance Budget and the Outcome Budget hitherto which were presented to Parliament separately by Ministries/Departments, were merged and presented as a single document titled "Outcome Budget" in respect of each Ministry/ Department.

From Financial Year 2017-18 onwards, Department of Expenditure in the Ministry of Finance in collaboration with NITI Aayog is preparing the consolidated Outcome Budget for all Ministries and Departments. The Outcome Budget broadly indicates the outcomes of the financial budget of a Ministry/Department, indicating actual deliverables linked with outlays targeted during the year and in the medium term.
•    The Outcome Budget is a progress card on what various ministries and department shave done with the outlay announced in the annual budget.
•    It is a performance measurement tool that helps in better service delivery; decision making; evaluating programme performance and results; communicating programme goals; and improving programme effectiveness.
•    The Outcome Budget is likely to comprise scheme- or project- wise outlays for all central ministries, departments and organizations during 2005-06 listed against corresponding outcomes (measurable physical targets) to be achieved during the year.
•    It measures the development outcomes of all government programmes. The Outcome Budget, however, will not necessarily include information of targets already achieved.
•    This method of monitoring flow of funds, implementation of schemes and the actual results of the usage of the money is followed by many countries.

6.    Gender Budgeting
•    The 2005-06 Budget introduced a statement highlighting the gender sensitivities of the budgetary allocations.
•    Gender budgeting is an exercise to translate the stated gender commitments of the government into budgetary commitments, involving special initiatives for empowering women and examination of the utilization of resources allocated for women and the impact of public expenditure and policies of the government on women.

BALANCED AND UNBLANCED BUDGETS
A Balanced Budget is that budget in which Government receipts are equal to Government expenditure.

A.    Balanced Budgeting

Merits of the Balanced Budget
•    The Government does not indulge in wasteful expenditure.
•    Interference in economic functioning of the system is totally avoided by the government generally.
•    Financial stability is ensured with balanced budget.
•    However, balanced budget is not an achievement of the government when economy is in a state of depression for at that time, government is expected to increase its expenditure with a view to increasing aggregate demand.

Demerits of a Balanced Budget
•    Balanced budget does not offer any solution to the problem of unemployment during depression.
•    Balanced budget is not helpful to the growth and development programmes of the less developed countries.

B.    Unbalanced Budgeting
•    An unbalanced budget is that budget in which receipts and expenditure of the government are not equal.
•    In  this,  two  cases  concerning  surplus  Budget    and Deficit Budget arise.
•    In    Surplus    Budget,    Government    receipts    are    greater    than Government expenditures.

While in the case of Deficit Budget, Government expenditures are greater than Government receipts.

Merits of a Deficit Budget
•    It helps in addressing the problem of unemployment during depressions.
•    It    is    conducive    for    growth    and    development    in    less developed countries
•    It works towards social welfare of the people.

Demerits of Deficit Budget
•    It shows wasteful expenditure by the government.
•    It    shows    less    revenue    realization    in    comparison    with    the expenditure.
•    It increases debt burden of the government.