Get the answer of: What is Budget?
A budget is an estimate of income and expenditure for a future period as opposed to an account which records financial transaction. Budget is an essential element in the planning and control of the financial affairs of a nation and is made necessarily (and essentially) because income and expenditure do not occur simultaneously (i.e., income or revenue receipts and expenditure flows do not always coincide).
The national budget sets out estimates of government expenditure and revenue for the financial year and is normally presented by the Finance Minister to the Indian Parliament on February 28, every year. In his statement the Finance Minister reviews economic conditions and government expenditure for the past year, makes forecasts for the coming year and announces changes in taxation.
With the increasing importance of government expenditure in the economy, the annual budget is an important instrument of the government’s macro economic policy. Fiscal changes have less to do with planned expenditure and more to do with decisions to modify the budgetary deficit (or at times surplus) in the interest of demand management (i.e., management of aggregate demand). Economic conditions sometimes require interim budgets.
The central government budget is in balance when current receipts are equal to current expenditure, that is to say, when taxes on income, expenditure, etc. are sufficient to cover payments for goods and services, interest on the national debt, etc. In practice, the Indian budget has generally been in deficit throughout the plan period.
A budgetary deficit refers to excess of total budgetary expenditure (both on revenue and capital accounts) over total budgetary receipts (both on revenue and capital accounts). (Budgetary surplus is the opposite of the deficit, i.e., an excess of government receipts over expenditure in an accounting year.)
Government receipts are primarily in the form of taxation of individuals, companies and institutions but there are various other receipts such as the sale of goods and services or even bonds. The operation of a budget deficit (deficit financing) as a tool of fiscal policy enables the government to influence the level of aggregate demand (which is sum of consumption investment and government spending on currently produced goods and services) and employment in the economy.
The classical economists argued that the government should operate a policy of balancing the budget, thereby allowing the economy to respond in its own way without government intervention. Keynes, however, explained how budgetary deficits and surpluses could be used to regulate the economy (i.e., to create employment as also to control inflation). More specifically, he suggested that the government should intervene by deliberating incurring a deficit in the budget in order to inject additional buying power into a depressed economy and vice-versa.
In the post-world war period most governments have tended to operate a budget deficit to keep employment high and to promote long-term economic growth. That portion of deficit which cannot be covered by borrowing (through the issue of Treasury Bills and long-term gifts) is covered by borrowing money from the central bank against foreign exchange reserves.
And the central bank makes loan to the government by printing paper currency. This is known as deficit financing (spending). This is acceptable as long as the economy is growing and the interest payments on such borrowings do not become disproportionate to the overall level of government expenditure. Government borrowing in excess of the amount required to promote long-term growth and to control business (trade) cycles will ultimately result in inflation.