The Government Budget: Revenue Budget, Capital Budget, Government Deficits

Revenue Account

  • The revenue account shows the current receipts of the government and the expenditure that can be met from these receipts.
  • Revenue Receipts: RR are receipts of the government incomes which cannot be reclaimed back by the citizens from the government.

 

 

Revenue Expenditure

  • The expenditure incurred by thegovernment that neither creates any physical/financial asset nor reduces the liability of the government. The Revenue expenditure relates to thedaytoday functioning of the government.
  • Revenue expenditure is expenditure for normal running of the government department and various services, interest charges on debt incurred by government, subsidies and so on.
  • Example: Salaries of employees, Interest payments on past debts, grants given to state governments etc.

The Expenditure under Budget is divided into two subheads.

  • With the demise of Planning Commission, the Central Government has decided to do away with the classification of plan and non-plan expenditure. The 2018-19 Budget will not contain any such classification.

The Capital Account

  • The capital budget is an account of assets as well as liabilities of the central government.
  • Capital Receipts: All those receipts of the government which either creates liability or reduces financial asset are capital receipts.
  • Examples: Market borrowings by thegovernmentfrom the public, Borrowings from the RBI, Borrowings from commercial banks or financial institutions through thesale of T-BILLS, loans received from foreign governments or international financial institutions, post office savings, post office saving certificates and PSU’s Disinvestment.
  • Capital Expenditure: All those expenditures of the government which either result in thecreation of physical/financial assets or reduction in financial liabilities.
  • Examples: Purchase of land, machinery, building and equipment’s; investment in shares; loans and advances by the central government to state governments and UTs.
  • Capital Expenditure is also classified as plan and non-plan capital expenditure. Plan expenditure relates to central Five-yearPlan and Non-Plan relates to expenditure not covered under theFive-year

The Distinction in a Nutshell

Revenue Expenditure Capital Expenditure Capital Receipts
Neither Creates Any Assets nor reduces any liability for the government Either Creates Assets or Reduces Liabilities Either creates liabilities or reduces assets.
The revenue deficit happens when revenue receipts falls short of revenue expenditure.

RD = Revenue Expenditure – Revenue Receipts

 

The fiscal deficit is the difference between the government’s total expenditure (both revenue and capital) and its total receipts excluding borrowings.

FD= Total Expenditure- (Revenue Receipts+ Non-Debt Creating Capital Receipts)

 

 

 

Measuring Government Deficits

When a government spends more than it collects by way of revenues, it incurs deficits. There are various kinds of deficits incurred by thegovernment, and each has its own implications.

Let’s understand the concepts of deficits through a simple hypothetical household example of Robinson Crusoe.

The Revenue Side of Robinson Crusoe HHs:

Robinson Crusoe HHs has 5 members with a monthly family income of $1000. The family pays a rent 0f $2000, buys grocery worth of $3000, pays interest of student education loan $2000 and other expenses of $4000. Now examine the expenditure and receipts side of HHs of Robinson Crusoe. The monthly salary of the HH is $10000 (Revenue Receipts). The monthly expenditure of the HH is $11000. The expenditure of the HH is recurring expenditure and the salary also come every month. This means the HH is neither creating any assets or reducing its liabilities. But since the HH expenditure is more that its receipts; its running a deficit of $1000. Which is known as revenue deficit.

  1. Deficits on Revenue Account or Revenue Deficit
  • The revenue deficit happens when revenue receipts fall short of revenue expenditure.
  • RD = Revenue Expenditure – Revenue Receipts
  • Implications: When a government incurs revenue deficit, it implies that the government is not able to cover its day today expenses from its current receipts.
  • It also implies that the government is using its past saving to finance its current consumption expenditure.
  • The implication is the government will have to borrow in future to finance its current consumption expenditure. This will lead to building up of government debt and rising interest payments in future.
  • Increase in interest payment obligations will again lead to increase in revenue expenditure and hence revenue deficits.
  • The vicious circle of RD will continue until government start cutting on its wasteful expenditures.

The Capital Side of Robinson Crusoe HH.

Let’s assume now, the Crusoe family, owns an ancestral land worth $5000. The ancestral land is an asset. The family decides to sold this land, the proceeds from the selling of land is a capital receipt. Also, the selling of the land is a onetime process, thus it’s a onetime receipt. Since, the selling of the land has nor created any debt, it is also called Non-Debt Creating Capital Receipt(NDCR).

The family has also taken an education loan worth $2000. The loan is a liability since they have to return it. It’s a debt on the family. Since the loan is creating debt it is known as debt creating capital receipt. Together they both constitute Capital Receipts of the Robinson HH.

The Robinson family decides to buy a small shop ($5000) to supplement its family income. The buying of shop is leading to creation of an asset (the family can sale it latter or derive monthly income out of it by renting it out). This constitute the capital expenditure side of the HH.

The Fiscal deficit of the Robinson family will be:

{$11000(Revenue Exp) + $5000 (capital exp)} minus {$10000 (revenue rec) +$5000(NDCR)}

= $1000

  1. Fiscal Deficit

The fiscal deficit is the difference between the government’s total expenditure (both revenue and capital) and its total receipts excluding borrowings.

  • FD= Total Expenditure- (Revenue Receipts+ Non-Debt Creating Capital Receipts)
  • Non-Debt Creating Receipts are those receipts which are not classified as borrowings and do not give rise to debt.
  • Examples Disinvestment proceeds from Public Sector Undertakings and recovery of loans by the central government.
  • Implications: Fiscal deficits has to be financed through borrowings, thus indicating total borrowing requirements of the government.
  • Alternatively, FD can be seen as FD= Net borrowing at home+ Net borrowing from RBI+ Net borrowing from Abroad.
  • Fiscal Deficit reflects the health of the economy; A large FD indicates the economy is under stress.
  • A large FD can create inflation in the economy.
  • A large FD makes the country unattractive to foreigners.
  • A large FD can lead to outflow of capital from the country.
  • A large FD crowd out/reduces private investment from the economy.

If a large part of FD is due to revenue deficit, it implies the government is borrowing to finance its consumption requirement. This is a dangerous situation, and soon thegovernment will go bankrupt.

2.   Primary Deficit

  • The borrowing requirement of the government includes interest obligations on accumulated debt.
  • The goal of measuring primary deficit is to focus on present fiscal imbalances.
  • To obtain an estimate of borrowing on account of current expenditures exceeding revenues, we need to calculate what has been called the primary deficit.
  • It is simply the fiscal deficit minus the interest payments
  • Gross primary deficit = Gross fiscal deficit – Net interest liabilities

The Capital Account

  • The capital budget is an account of assets as well as liabilities of the central government.
  • Capital Receipts: All those receipts of the government which either creates liability or reduces financial asset are capital receipts.
  • Examples: Market borrowings by the government from the public, Borrowings from the RBI, Borrowings from commercial banks or financial institutions through the sale of T-BILLS, loans received from foreign governments or international financial institutions, post office savings, post office saving certificates and PSU’s Disinvestment.
  • Capital Expenditure: All those expenditures of the government which either result in the creation of physical/financial assets or reduction in financial liabilities.
  • Examples: Purchase of land, machinery, building and equipment’s; investment in shares; loans and advances by the central government to state governments and UTs.
  • Capital Expenditure is also classified as plan and non-plan capital expenditure. Plan expenditure relates to central Five-year Plan and Non-Plan relates to expenditure not covered under the Five-year

The Distinction in a Nutshell

Revenue Expenditure Capital Expenditure Capital Receipts
Neither Creates Any Assets nor reduces any liability for the government Either Creates Assets or Reduces Liabilities Either creates liabilities or reduces assets.
The revenue deficit happens when revenue receipts falls short of revenue expenditure.

RD = Revenue Expenditure – Revenue Receipts

 

The fiscal deficit is the difference between the government’s total expenditure (both revenue and capital) and its total receipts excluding borrowings.

FD= Total Expenditure- (Revenue Receipts+ Non-Debt Creating Capital Receipts)

 

Measuring Government Deficits

When a government spends more than it collects by way of revenues, it incurs deficits. There are various kinds of deficits incurred by the government, and each has its own implications.

Deficits on Revenue Account or Revenue Deficit

  • The revenue deficit happens when revenue receipts fall short of revenue expenditure.
  • RD = Revenue Expenditure – Revenue Receipts
  • Implications: When a government incurs revenue deficit, it implies that the government is not able to cover its day to day expenses from its current receipts.
  • It also implies that the government is using its past saving to finance its current consumption expenditure.
  • The implication is the government will have to borrow in future to finance its current consumption expenditure. This will lead to building up of government debt and rising interest payments in future.
  • Increase in interest payment obligations will again lead to increase in revenue expenditure and hence revenue deficits.
  • The vicious circle of RD will continue until government start cutting on its wasteful expenditures.

 

By
Himanshu Arora
Doctoral Scholar in Economics & Senior Research Fellow, CDS, Jawaharlal Nehru University

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