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GOVERNMENT BUDGET AND THE ECONOMY

Vasanth K S

28 March 2016

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PLAINSPEAK…

Government's view of the

economy could be summed

up in a few short phrases: If

it moves, tax it. If it keeps

moving, regulate it. And if it

stops moving, subsidize it. Ronald Reagan

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Contents

Government Budget – Meaning, Objective

• Components of Government Budget

• Classification of Receipts – Capital and Revenue

• Classification of Expenditure

Capital and Revenue

• Balanced Budget Surplus Budget, Deficit Budget

Meaning and Implication

• Revenue Deficit, Fiscal Deficit, Primary Deficit

Meaning and Implication

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…And One More

Be wary of strong drink. It

can make you shoot at tax

collectors... and miss.  

Robert A. Heinlein

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Meaning of Budget

• A government budget is an annual statement of the estimated receipts and estimated expenditure of the government during a fiscal year

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Public Finance…

• …is the study of the role of the government in the economy

•  It deals with: governmental effects on

efficient allocation of resources

distribution of income, and

macroeconomic stabilization

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Public Good…

• …is a good that is both non-excludable and non-rivalrous in that

individuals cannot be effectively excluded from use and where use by

one individual does not reduce availability to others. Examples include,

air, public infrastructure like roads, bridges, lighthouses and streetlights.

National defence is also another good example of a non-rival

consumption of a public good

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Private Good…

• …is "an item that yields positive benefits to people“, that is:

excludable, i.e. owners can exercise private property rights, preventing those

who have not paid for it from using the good or consuming its benefits

and rivalrous, i.e. consumption by one necessarily prevents that of another

Example: Broadband

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The Sort of Middle Land (Please remove headline from the graphic)

• “A distinctive combination of democracy, welfare, and capitalism…a sort

of middle ground between communism and capitalism”

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Objective of the Budget

Reallocation of resources

• It means managed and proper distribution of resources. As private sector can not provide all the goods and services the government has to provide these goods.

To reduce inequalities in income and wealth

• Through budget government tries to reduce the gap between rich and poor. This is achieved through taxing the rich and subsidizing the needs of poor people.

Reallocation of resources

• There may be inflation or depression in the economy. Inflation is the situation of rise in price level whereas depression is lack of demand. Both the situations are undesirable. During depression government reduces rate of tax and borrowing and increases public expenditure. During inflation government increases the rate of tax and borrowing and decreases public expenditure.

Management of public enterprises• Large no: of Public Enterprises

which are established and managed for social welfare of the public.

To achieve economic growth

• Depends upon rate of saving and investment.

Reducing regional disparities

• Through taxation and expenditure policy.

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History of Budget

Roots of contemporary budgetary practices can be traced back to the development of English Constitution

Origin of budget linked to the supremacy of Parliament

Budgetary control first applied only to the armed forces

Most of the policies, procedures, and technical practices that we associate with modern budgeting were developed during the Nineteenth Century. The first major changes occurred in France

Gladstone's legacies is the survival of his phrase, "the power of the purse"

Emergence of budgeting framework -- unity, annuality, balance, comprehensiveness, and control--in Europe

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• Bougette

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The Indian Budget

• The budget was first introduced in India on 7 April, 1860 by the East-

India Company to the British Crown. Pre-independence finance

minister, James Wilson presented the budget in 1860. And the budget

tabled by Arun Jaitley in 2016 is the 85th budget

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Budget and the Constitution

• Article 265: ‘No tax shall be levied or collected except by authority of

law’

• Article 266: ‘No expenditure can be incurred except with

the authorisation of the Legislature’

• Article 112: ‘...President shall, in respect of every financial year, cause

to be laid before Parliament, an Annual Financial Statement’

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(1/2)

• Along with the ‘Annual Financial Statement’ Government presents the following documents:

• The Budget documents presented to Parliament comprise, besides the Finance Minister's Budget Speech, of the following: A. Annual Financial Statement (AFS) B. Demand for Grants (DG) C. Appropriation Bill D. Finance Bill E. Memorandum Explaining the Provisions in the Finance Bill, 2016 F. Macro-economic Framework for the Relevant Financial Year G. Fiscal Policy Strategy Statement for the Financial Year H. Medium Term Fiscal Policy Statement

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(2/2)

I. Expenditure Budget Volume - 1 J. Expenditure Budget Volume - 2 (Part A and Part B) K. Receipts Budget L. Budget at a Glance

M. Highlights of Budget N. Status of Implementation of Announcements Made in Finance Minister's Budget

Speech of the Previous Financial Year

• The documents shown from Serial A, B, C and D are mandated by Art. 112, 113, 114(3) and 110(a) of the Constitution of India respectively while the documents at Serial F, G and H are presented as per the provisions of the Fiscal Responsibility and Budget Management Act 2003. Other documents are in the nature of explanatory statements supporting the mandated documents with narrative or other content in a user friendly format suited for quick or contextual references. Hindi version of all these documents is also presented to Parliament

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How it works...

• Process Starts August-September

• Estimates, Revised Estimates and Actuals

• Demands for Grants

• Discussion

• Standing Committees of Parliament

• Cut Motions

• Appropriation Bill

• Finance Bill

• Supplementary/Excess Grants

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Government Budget

Revenue Budget Capital Budget

Revenue Receipts

Revenue Expenditure

Capital Receipts

Capital Expenditure

Components of Government Budget

Tax Revenue Non-Tax Revenue

Direct Tax Indirect Tax

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Budget Receipts

Budget receipts refer to the estimated money receipts of the government from all sources during a given fiscal year.

Budget Receipts

Revenue Receipts Capital Receipts

Tax revenue Non-tax revenue Borrowing Recovery of loans Other receipts

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Revenue Receipts

• Any receipts which do not either create a liability or lead to reduction in assets is called revenue receipts. Two sources of revenue receipts

• Tax Revenue

• Non-Tax Revenue

Revenue Receipts

Tax Revenue Non-tax Revenue

Direct Tax In-direct Tax Interest Profit and Dividend

Gifts and Grants

Fees and Fines

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Capital Receipts

Refer to those receipts of the government which i) tend to create a liability or ii) Causes reduction in its assets. All the capital receipts are broadly classified into three

categories.

Recovery of Loans

• These are capital receipts because they reduce financial assets of the government

Borrowings • Funds raised by the government form the borrowing are treated as capital receipts as such receipts creates liability

Other Receipts • Funds raised through disinvestment are included in this category. By this government assets are reduced

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How to Classify a Tax As Direct Tax or Indirect Tax

• A tax is a direct tax, if its burden cannot be shifted

For example, income tax is a burden tax as its impact and incidence is on the

same person

• A tax is a indirect tax, if its burden can be shifted

For example, sales tax is an indirect tax as its impact and incidence is on

different persons

• Corporation tax

• Value added tax

• Service tax

• Excise duty

• Wealth tax

• Sales tax

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How to Classify a Receipt as Revenue Receipt or Capital Receipt?

• A receipt is a capital receipt, if it creates a liability or reduces an asset

• A receipt is a revenue receipt, if it neither creates a liability nor reduces

any asset

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Expenditure Budget

• Shows the revenue and capital disbursements of various

ministries/departments; presents the estimates in respect of each under

'Plan' and 'Non-Plan'

Expenditure Budget

Revenue Expenditure Capital Expenditure

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Revenue Expenditure

• An expenditure which do not creates assets or reduces liability is called

Revenue Expenditure

• It is recurring nature

• It is incurred on normal functioning of the government and the provisions

for various services

• Examples are – Salaries of government employees, interest payment

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An Expenditure is a Revenue Expenditure, If It Satisfies the Following Two Essential Conditions

• The expenditure must not create an asset of the government

• The expenditure must not cause decrease in any liability

Revenue Expenditure

Neither Creates an Asset Nor Reduces Any Liability

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Capital Expenditure

• It refers to the expenditure which leads to creation of assets and

reduction in liabilities

• It is non-recurring in nature

• It adds to capital stock of the economy and increases its productivity

through expenditure in long period development programmes like Metro

or Flyover

eg. Expenditure incurred on construction of building, roads, bridges etc.

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An Expenditure is a Capital Expenditure, If It Satisfies Any One of the Following Two Conditions

• The expenditure must create an asset for the government. Eg:

construction of metro

• The expenditure must cause a decrease in the liabilities. Eg: repayment

of borrowings

Capital Expenditure

Either Creates an Asset Or Reduces a Liability

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Plan and Non-plan Expenditure

• Plan expenditure refers to the expenditure that is incurred on the

programmes detailed in the current five year

• Non-plan expenditure refers to the expenditure other than the

expenditure related to the current five-year plan

Budget Expenditure

Plan Expenditure Non-Plan expenditure

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Plan Expenditure vs. Non-plan Expenditure

Plan Expenditure

• Plan expenditure is spent on current development and investment outlays

• It arises only when the plans provide for such expenditure

Non-plan Expenditure

• It is spent on the routine functioning of the government

• It is a must for every economy and the government cannot escape from it

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Developmental and Non-developmental Expenditure

Developmental Expenditure

• It refers to the expenditure which is directly related to economic and social development of the country

• It directly contributes to development of the economy

• It is productive in nature as it adds to the flow of goods and services

Non-developmental Expenditure

• It refers to the expenditure which is incurred on the essential general services of the government

• It does not contribute directly to the development , but it lubricates the wheels of economic development

• It is not concerned with the productivity of working class

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Measures of Government Deficit

Deficit Budget:

• When government expenditure exceeds government receipts in the

budget is said to be a deficit budget

Government Deficit

Revenue Deficit Primary DeficitFiscal Deficit

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Types Government Deficit

Revenue Deficit

• Revenue deficit refers to

the excess of revenue

expenditure of the

government over its

revenue receipts

• Revenue deficit = Total

revenue expenditure –

Total revenue receipts

Fiscal Deficit

• Fiscal deficit is defined as

excess of total

expenditure over total

receipts

• Fiscal Deficit = Total

budget expenditure - Total

budget receipts net of

borrowings

Primary Deficit

• It refers to the difference

between fiscal deficit of

the current year and

interest payments on the

previous borrowings

• Primary deficit= fiscal

deficit - interest payments

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Presented in the Lok Sabha on such a day as the president may direct. By convention, Union budget has been presented in Lok Sabha by the finance minister on the last working day of the month of February every year. Until the year 1999, the Union Budget was announced at 5:00 pm on the last working day of the month of February. This practice was inherited from the Colonial Era, when the British Parliament would pass the budget in the noon followed by India in the evening of the day. It was Mr.Yashwant Sinha, the then Finance Minister of India in the NDA government (led by BJP) of Atal Bihari Vajpayee, who changed the ritual by announcing the 2001 Union Budget at 11 am.[10]

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So Said the PM...

At a time when major powers are reducing their forces and rely more

on technology, we are still constantly seeking to expand the size of our forces. Modernisation

and expansion of forces at the same time is a difficult and unnecessary goal. We need forces that are agile, mobile and driven by technology,

not just human valour.”

--Prime Minister Narendra Modi, Combined Commanders Conference,

December 15, 2015

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The Budget and the Defence Forces

• Rs. 3,40,921.98 crore (US$ 52.2 billion) for the Ministry of

Defence (MoD)

• Change in format in defence resource allocation

• Impact of OROP and Pay Comission Recommendations

• Tax rationalisation for ‘Make in India’ initiative

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2016 Budgetary Allocation Across Sectors

Rs.340922 Cr

Rs.141392 Cr

Rs.72039 Cr

Rs.75219 Cr

Rs.87678 Cr

Rs.57816 Cr

(1.92%)Rs.38026 Cr

Rs.70453 Cr

Rs.44469 Cr

Rs.45000 Cr (1.47%)Rs.29161 Cr

(0.88%)Rs.17352 Cr

(1.22%)Rs.24130 Cr

(0.62%)Rs.12253 Cr

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Government Spending of BRICS Nations

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Government Earnings

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Shares of Various Taxes

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MoD Resource Allocation

Earlier Format New Format

Demand no. 20 - Ministry of Defence (Civil) Demand no. 20 - Ministry of Defence (Miscellaneous) (Revenue and Capital)

Demand no. 21 - Defence Pensions Demand no. 21 - Defence Pensions

Demand no. 22 - Defence Services, Army (Revenue) Demand no. 22 - Defence Services (Revenue)

Demand no. 23 - Defence Services, Navy (Revenue)

Demand no. 23 - Capital Outlay on Defence Services

Demand no. 24 - Defence Services, Air Force (Revenue)

Demand no. 25 - Defence Services, Ordnance Factories (Revenue)

Demand no. 26 - Defence Services, Research and Development (Revenue)

Demand no. 27 - Capital Outlay on Defence Services

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Budget and Revised Estimate for 2015-16 and 2016-17(Old Format)

Revenue Expenditure (Rs. in crore)

Capital Expenditure (Rs. in Crore)

Total (Rs. in Crore)

2015-16 (BE) 1,52,139.0 94,588.0 2,46,727.0

2015-16 (RE) 1,43,236.0 81,400.0 2,24,636.0

2016-17 (BE) 1,62,759.0 86,340.0 2,49,099.0

Note: BE: Budget Estimate; RE: Revised Estimate.Rs. 1.0 crore = Rs. 10 million = US$ 153093 (alternatively, $1 million = Rs. 6.5 crore) as per the average exchange rate for the first 11 months of 2015-16

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Comparative Statistics of Defence Budget: 2015-16 & 2016-17 (Old Format)  2015-16 2016-17

Defence Budget (Rs. in Crore) 2,46,727.0 2,49,099.0

Growth of Defence Budget (%) 7.74 0.96

Revenue Expenditure (Rs. in Crore) 1,52,139.0 1,62,759.0

Growth of Revenue Expenditure (%) 13.2 6.98

Share of Revenue Expenditure in Defence Budget (%) 61.7 65.3

Capital Expenditure (Rs. in Crore) 94,588.0 86340.0

Growth of Capital Expenditure (%) 0.0 -8.7

Share of Capital Expenditure in Defence Budget (%) 38.3 34.7

Capital Acquisition (Rs. in Crore) 77,406.69 70,413.92*

Growth of Capital Acquisition (%) 3.0 -9.4

Share of Defence Budget in GDP (%) 1.82 1.65

Share of Defence Budget in Central Government Expenditure (%) 13.9 12.6

MoD’s Budget (Rs. in Crore) 3,10,079.6 3,40,921.98

Growth in MoD’s Budget (%) 8.72 9.95

Share of MoD Budget in GDP (%) 2.29 2.26

* Approximate figure.

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Distribution of MoD’s Total Allocation minus Defence Pension

Note: Others include OFs, DGQA, RR, NCC, MF, and ECHS.

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Share of Pay and Allowances (P&A) of the Armed Forces in Defence Expenditure

Note: Pay and allowances (P&A) include that of Army, Navy, Air Force, Joint Staff, DGQA, NCC, MF, RR and ECHS. It does not include salary and wages of Military Engineer Services (MES) personnel.

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Held Strength of Indian Armed Forces Officers

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