Budget and Deficits Concepts for IBPS PO Interview

The term ‘Budget’ refers to the financial statement (or documents) placed by the government before the legislature every year on a specific date. A budget sets forth the anticipated expenditure of the government during the next financial year (called the budget year) and the receipts for the same period:

(a)  under existing laws in force, and

(b)  as a result of taxation proposals, if any, contemplated by the government.

More often than not, the budget is the manifestation of the political philosophy of the party in power.The primary objective of the budget is to reveal comprehensive information in order to present a complete picture of the financial position of the government and thereby enable the legislature to measure adequately the impact of such financial programmes on the country’s economy.

The budget comprises data for three years:

(a)   actual figures for the preceding year; (b)  budget estimates for the current year;

(c)   revised estimates for the current year, and

(d)  budget estimates for the following year.

For example, the Union Budget for 2011-12 contains:

(a)   actuals for 2009-10;

(b)  budget estimates for 2010-11;

(c)   revised estimates for 2010-11, and

(d)  budget estimates for 2011-2012.

Deficits

In a budget statement, there is a mention of four types of deficits:  

(a) revenue, (b) budget, (c) fiscal,

(d) primary.

(a)  Revenue Deficit refers to the excess of revenue expenditure over revenue receipts. In fact, it reflects one crucial fact: what is the government borrowing for? As an individual if you are borrowing to pay the house rent, then you are in a situation of revenue deficit, i.e. while you are borrowing and spending, you are not creating any durable asset. This implies that there will be a repayment obligation (sometime in the future) and at the same time there is no asset creation via investment.

(b) Budget Deficit refers to the excess of total expenditure over total receipts. Here, total receipts include current revenue and net internal and external capital receipts of the government.

(c)  Fiscal Deficit refers to the difference between total expenditure (revenue, capital, and loans net of repayment) on one hand, and on the other hand, revenue receipts plus all those capital receipts which are not in the form of borrowings but which in the end accrue to the government.

(d) Primary Deficit refers to fiscal deficit minus interest payments. In other words, it points to how much the government is borrowing to pay for expenses other than interest payments. Also, it underscores another key fact: how much the government is adding to future burden (in terms of repayment) on the

basis of past and present policy.