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What are the three kinds of budget

ICICI Securities 25 Jan 2022 0 COMMENT

Introduction:

Each year at the beginning of February, the finance minister of India presents the annual union budget before the parliamentary houses – the Lok Sabha and Rajya Sabha. A financial statement stating the government's estimated tax revenue/ receipts and expenditure gets presented at the budget. Aspects like tax revenue, non-tax revenue, capital expenditure, and more get discussed. The Union Budget sets the tone of governmental spending for the fiscal year. It addresses the core concerns of the public in areas of healthcare,education, infrastructure, and others that require financing. Budget could be of three types  – a balanced budget, surplus budget, and deficit budget. Read on to learn more about them and their consequences on the Indian economy.

Balanced budget

A balanced budget is where the government's estimated expenditure tallies with or equal to its estimated receipts or revenue in a particular fiscal. This budget type aims at living or spending within one's means and is often known by economists as an ideal budget. Under a balanced budget, a government should seek to spend only within the slated revenue/ receipt for the year. However, due to fluctuations in the economy, inflation, and other unprecedented external or internal factors, following a balanced budget can be near impossible or a challenge at the very least. In theory, planning this budget is doable, but in reality, implementing it is difficult. Ultimately, if executed correctly, a balanced budget ensures economic stability and keeps the government expenditure in check. However, on the flip side, it may not solve some recurring problems like unemployment and restricts economic growth.

Surplus budget

A surplus budget is where the government's estimated revenue or receipts exceeds the estimated expenditure in a particular fiscal. In simpler terms, what the government earns in a year, primarily from taxes, import/ export duties, fees, and other revenue, are more than what it spends on public or other projects. On the surface, a surplus budget makes a nation seem like it is doing well and is affluent. As the government has extra financial reserves, it can settle its outstanding dues and reduce its pending loans, interest burden, and debt. However, reducing debt can cause deflation and affect consumer behaviour. If consumers' money goes mostly towards taxes, they will have lesser to spend. Less expenditure can hurt businesses and investments, which can slow down the economy. Ultimately, a budget surplus serves well in times of high inflation but can have adverse effects if adopted for an extended time.

Deficit budget

A deficit budget is a budget in which the government's estimated expenditure exceeds or exceeds the expected revenue/ receipts of that fiscal year. In a budget deficit, the government spends more than it receives in revenue. As a result, it might have more borrowings and debt. To bridge the fiscal deficit, the government might rely on its surplus reserve or increase tax rates. A deficit budget can carry positive implications for developing countries like India if the deficit remains within limits.. For instance, the first indicator of a deficit budget is government spending on public projects in infrastructure, healthcare, pension programs, and other areas. It can also lower taxes and boost the employment rate in recession. As the government takes it upon itself to increase employment opportunities, the result would be an indirect increase in the total demand for goods and services. This, in turn, can boost a sluggish economy. However, just as a continued surplus budget carries its cons, so does a continued deficit budget.

Conclusion:

The union government budget is a great way to analyze a nation's economic growth. It shows that a government is transparent with its citizens by sharing its deficit and surplus expenditure. By understanding the types of budget, you can understand the state of the economy for a particular fiscal.

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