Government budget

The essentials

A government budget is an annual financial statement showing the item-wise estimates of expected receipts and planned expenditure of the government for a financial year (in India, 1 April to 31 March). In India it is presented to Parliament as the Annual Financial Statement. The budget is not just an accounting document; it is a tool of economic policy.

Objectives of the budget

• Allocation of resources: the government provides public goods such as defence, roads and street lighting, which the market under-supplies because they are non-rival and non-excludable. It can also encourage or discourage goods by taxes and subsidies.
• Redistribution of income: progressive taxes on the rich and spending on the poor (subsidies, free services) reduce inequality.
• Economic stability: the budget is used to control inflation and deflation, for example by changing taxes and spending.
• Management of public enterprises: running enterprises in areas of national importance.
• Economic growth: spending on infrastructure and capital formation.

Components

• Revenue budget: revenue receipts and revenue expenditure.
• Capital budget: capital receipts and capital expenditure.

Key points

• Public goods are non-rival (one person's use does not reduce others') and non-excludable (people cannot easily be prevented from using them), which causes the free-rider problem.
• Private goods, by contrast, are rival and excludable.

Exam tips

Case questions describe a budget step and ask which objective it serves. Higher tax on luxury goods or free school meals point to redistribution; a tax cut in recession points to stability.

Common mistakes

• Treating the budget as only a statement of accounts and forgetting its policy role.
• Saying public goods are goods produced by the government; the defining feature is non-rivalry and non-excludability.