There is a constitutional requirement in India (Article 112) to present before the Parliament a statement of estimated receipts and expenditures of the government.
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- The budget document relates to the receipts and expenditure of the government for a particular financial year, the impact of it will be there in subsequent years.
- There is a need therefore to have two accounts- those that relate to the current financial year only are included in the revenue account (also called revenue budget) and those that concern the assets and liabilities of the government into the capital account (also called capital budget).
Objectives of Government Budget:
Allocation Function of Government:
- Budget Government provides certain goods and services which cannot be provided by the market mechanism i.e. by exchange between individual consumers and producers.
- Examples of such goods are national defence, roads, government administration etc. which are referred to as public goods.
- The benefits of public goods are available to all and are not only restricted to one particular consumer. In case of private goods anyone who does not pay for the goods can be excluded from enjoying its benefits.
Redistribution Function of Government Budget:
- The total national income of the country goes to either the private sector, that is, firms and households (known as private income) or the government (known as public income).
- Out of private income, what finally reaches the households is known as personal income and the amount that can be spent is the personal disposable income.
- The government sector affects the personal disposable income of households by making transfers and collecting taxes.
- It is through this that the government can change the distribution of income and bring about a distribution that is considered ‘fair’ by society. This is the redistribution function.
Stabilisation Function of Government Budget:
- The government may need to correct fluctuations in income and employment.
- The government needs to intervene to raise the aggregate demand. There may be times when demand exceeds available output under conditions of high employment and thus may give rise to inflation.
- In such situations, restrictive conditions may be needed to reduce demand. The intervention of the government whether to expand demand or reduce it constitutes the stabilisation function.
Components of the Government Budget: