Question

what is the impact of the budget on public finance

Answer 1

Budget Meaning

An estimate of income and expenditure for a set period of time. Before starting up of a business every entrepreneurs should prepare a Budget on an Estimated Income and Expenditure which will effect their Business in future.

Impact of Budget in Public Finance or Economy

The Budget impacts the economy, the interest rate and the stock markets. How the finance minister spends and invests money affects the fiscal deficit. The extent of the deficit and the means of financing it influence the money supply and the interest rate in the economy. High interest rates mean higher cost of capital for the industry, lower profits and hence lower stock prices.

The fiscal measures undertaken by the government affect public expenditure. For instance, an increase in direct taxes would decrease disposable income, thus reducing demand for goods. This decrease in demand will translate into a decrease in production, therefore affecting economic growth.

Similarly, an increase in indirect taxes would also decrease demand. This is because indirect taxes are often partially or completely passed on to consumers in the form of higher prices. Higher prices imply a reduction in demand and this in turn would reduce profit margins of companies, thus slowing down production and growth.

Non-plan expenditure like subsidies and defence also affect the economy as limited government resources are used for non-productive purposes.