Question

Explain governmental budget, its primary purpose, and its three distinct components. (2) Explain step-by-step the governmental budget cycle process.

Answer 1

A government budget is an annual financial statement which outlines the estimated government expenditure and expected government receipts or revenues for the forthcoming fiscal year.Through this budget, the government implements economic policy and realizes its program priorities. There are 3 types of governmen budget. They are:

BALANCED BUDGET
A government budget is said to be a balanced budget if the estimated government expenditure is equal to expected government receipts in a particular financial year. Advocated by many classical economists, this type of budget is based on the principle of “living within means.” They believed the government’s expenditure should not exceed their revenue.
Though an ideal approach to achieve a balanced economy and maintain fiscal discipline, a balanced budget.

SURPLUS BUDGET
A government budget is said to be a surplus budget if the expected government revenues exceed the estimated government expenditure in a particular financial year. This means that the government’s earnings from taxes levied are greater than the amount the government spends on public welfare. A surplus budget denotes the financial affluence of a country. Such a budget can be implemented at times of inflation to reduce aggregate demand.

DEFICIT BUDGET
A government budget is said to be a deficit budget if the estimated government expenditure exceeds the expected government revenue in a particular financial year. This type of budget is best suited for developing economies, such as India. Especially helpful at times of recession, a deficit budget helps generate additional demand and boost the rate of economic growth. Here, the government incurs the excessive expenditure to improve the employment rate.

Objectives of Government Budget

• Reallocation of Resources– It helps to distribute resources keeping in view the social and economic conditions of the country.
• Reducing Inequalities in Income and Wealth– Government aims to bring economic equality by imposing taxes on the elite class and spending the collected money on the welfare of the poor.
• Contributing to Economic Growth– A country’s economic growth is based on the rate of investment and savings. Therefore, the budgetary plan focuses on preparing adequate resources for investing in the public sector and raise the overall rate of investments and savings.
• Bringing Economic Stability– The Budget focuses on avoiding business fluctuations so as to accomplish the aim of financial stability. Policies such as Deficit Budget (during deflation) and Surplus Budget (during inflation) assist in balancing the prices in the economy.
• Managing Public Enterprises– Many public sector industries are built for the social welfare of the people. The Budget is planned to deliver different provisions for operating such business and imparting financial help.
• Reducing Regional Differences– It aims to reduce regional inequalities by promoting the installation of production units in the underdeveloped regions.

Components of Government Budget

• Revenue Budget– It consists of the Revenue Expenditure and Revenue Receipts.
  • Revenue Receipts are receipts which do not have a direct impact on the assets and liabilities of the government. It consists of the money earned by the government through tax (such as excise duty, income tax) and non-tax sources (such as dividend income, profits, interest receipts).
  • Revenue Expenditure is the expenditure by the government which does not impact its assets or liabilities. For example, this includes salaries, interest payments, pension, and administrative expenses.
• Capital Budget– It includes the Capital Receipts and Capital Expenditure.
  • Capital Receipts indicate the receipts which lead to a decrease in assets or an increase in liabilities of the government. It consists of: (i) the money earned by selling assets (or disinvestment) such as shares of public enterprises, and (ii) the money received in the form of borrowings or repayment of loans by states.
  • Capital expenditure is used to create assets or to reduce liabilities. It consists of: (i) the long-term investments by the government on creating assets such as roads and hospitals, and (ii) the money given by the government in the form of loans to states or repayment of its borrowings.

Government Budget Cyclic Process

There are five key steps in the government budget process:

1. The President submits a budget request to Congress
2. The House and Senate pass budget resolutions
3. House and Senate Appropriations subcommittees "markup" appropriations bills
4. The House and Senate vote on appropriations bills and reconcile differences
5. The President signs each appropriations bill and the budget becomes law

Step 1: The President Submits a Budget Request

The president sends a budget request to Congress each February for the coming fiscal year. The president's budget request is just a proposal. Congress then passes its own appropriations bills; only after the president signs these bills (in step five) does the country have a budget for the new fiscal year.

Step 2: The House and Senate Pass Budget Resolutions

After the president submits his or her budget request, the House Committee on the Budget and the Senate Committee on the Budget each write and vote on their own budget resolutions.A budget resolution is not a binding document, but it provides a framework for Congress for making budget decisions about spending and taxes. It sets overall annual spending limits for federal agencies, but does not set specific spending amounts for particular programs.

Step 3: House and Senate Subcommittees "Markup" Appropriation Bills

The Appropriations Committees in both the House and the Senate are responsible for determining the precise levels of budget authority, or allowed spending, for all discretionary programs.The Appropriations Committees in both the House and Senate are broken down into smaller appropriations subcommittees.Each subcommittee conducts hearings in which they pose questions to leaders of the relevant federal agencies about each agency's requested budget.ased on all of this information, the chair of each subcommittee writes a first draft of the subcommittee's appropriations bill, abiding by the spending limits set out in the budget resolution. All subcommittee members then consider, amend, and finally vote on the bill. Once it has passed the subcommittee, the bill goes to the full Appropriations Committee. The full committee reviews it, and then sends it to the full House or Senate.

Step 4: The House and Senate Vote on Appropriations Bills and Reconcile Differences

The full House and Senate then debate and vote on appropriations bills from each of the 12 subcommittees.After both the House and Senate pass their versions of each appropriations bill, a conference committee meets to resolve differences between the House and Senate versions. After the conference committee produces a reconciled version of the bill, the House and Senate vote again, but this time on a bill that is identical in both chambers. After passing both the House and Senate, each appropriations bill goes to the president.

Step 5: The President Signs Each Appropriations Bill and the Budget Becomes Law

The president must sign each appropriations bill after it has passed Congress for the bill to become law. When the president has signed all 12 appropriations bills, the budget process is complete. Rarely, however, is work finished on all 12 bills by Oct. 1, the start of the new fiscal year.