The Government Budget, Types of Deficit and Implications

 

Government Budget : Government Budget is a statement of estimated revenue and estimated expenditure of the government during an accounting year. 

 TYPES OF BUDGET:

1.       Balanced Budget: Balanced budget are those where estimated revenue and estimated expenditure of the government during an accounting year are equal.

2.       Surplus Budget: Surplus budget are those where estimated revenue is more than estimated expenditure of the government during a financial year.

3.       Deficit Budget: Deficit budget are those where estimated revenue is less than estimated expenditure of the government during a financial year. 

TYPES BUDGET DEFICIT:

 Budget deficit are those where government expenditure is more than government revenue of a financial year. Generally, there are three types of budget deficit.  These are:

1.      Revenue deficit.:

2.      Fiscal deficit:

3.      Primary deficit:

1.      Revenue deficit: Revenue deficit are those where revenue expenditure of the government  is more than  revenue receipts of a financial year.

Revenue deficit= Revenue expenditure- Revenue receipts

Implications of revenue deficit:

i)                    Dissavings: Revenue deficit reaveals that current expenditure is more than current revenue. Therefore, to meet that expenditure government withdraw to it’s saving to meet the deficit. As a result government saving decreases.

ii)                  Increased liability of the Government: When the government tries to fill it up by taking loan from internal and external sources, it will increase burden to the country. This will also increase the  burden to the future generation.

iii)                Reduction of Assets: If government unable to meet the excess expenditure through borrowings , then it is bound to sell its share of public sector undertaking(PSU) i.e disinvestment. This will reduce the assets of government.

iv)                Inflationary Pressure: When the government  borrows funds either from central bank or from abroad and use them to meet its consumption expenditure, it leads to inflationary pressure in the economy. It is because borrowing increases money supply in the economy.

2.      Fiscal deficit:

Fiscal deficit is defined as the excess of total expenditure over revenue receipts plus capital receipts excluding borrowing.

Fiscal deficit= Total expenditure- (Revenue receipts +capital receipts) excluding borrowing.

Implications of fiscal deficit:

i)                    Causes of inflation: An important component of revenue of government is borrowing from abroad and its central bank. This will lead to increase of money supply of an economy which  causes inflation.

ii)                  Increase of foreign dependence: To meet the deficit, the government take loan from abroad also. Taking loan from abroad leads dependence of other country. Moreover, lending country try to interfere in the field of economics and political decisions.   This will push a country to economic slavery of other country.

iii)                Financial burden to future generation: Excessive borrowing by the government increased repayment of loan as well as interest payment. As there is a gap of time  between borrowing and repayment of loan. So, economics burden will fall to the future generation. It is the future generation who need to repay loan along with interest payment.

iv)                Deficit multiply borrowing:  Borrowing implies repayment of capital as well as interest payment. Interest payment falls on revenue expenditure which will increase the gap of revenue and expenditure. Therefore, excess borrowing increases revenue deficit which further increase government  budget deficit.

So, deficit increase multiple effect on an economy.

3.      Primary deficit:

Primary deficit is defined as fiscal deficit minus interest payment.

Primary deficit= Fiscal deficit- Interest payment.

Implications of primary deficit:

i)                    Primary deficit shows that how much money government need to take loan as a compulsion to repayment of interest and how much to create future problem in an economy.

ii)                  It also indicates how much money is going to utilized to meet expenditure other than interest payment.

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National Income Accounting: Practice Paper