Budget 101...

Not being from economics background is a handicap around this time of the year when all that people want to talk about is “budgetary implications”, “fiscal tightening”, “fiscal deficit”, and other such stuff which is “almost-Latin” to my ears. Here are excerpts from a Budget 101 article that I recently read somewhere and found really helpful in my constant struggle to “sound knowledgeable” in Budget-related conversations…

- The government needs money for its huge expenses. We can broadly divide government expenses into two types: revenue expenses and capital expenses.
- The government incurs revenue expenses in running its day-to-day business, whereas capital expenses include all expenses incurred by the government for creating assets. The money spent by the government for paying salary to its staff is revenue expense, and the money spent for constructing a hospital is capital expense.
- Some of these expenses ultimately come out of our pockets. But taxes alone can’t take care of all the government’s expenses. So, there are other sources through which our government earns money.
- We can broadly divide the sources of government earnings into two categories: tax and non-tax sources. Tax sources include all the direct and indirect taxes, and non-tax sources include revenue receipts and capital receipts. Revenue receipts consist of a variety of things such as dividends received from public sector companies, fees, fines forfeitures, etc., received by the government. Under the category of capital receipts, we keep the money received from the disinvestment of public sector undertakings, recovery of loans, borrowings of the government, etc.
- The main difference between revenue receipts and capital receipts is that revenue receipts are recurring in nature, which the government can expect to receive year after year, whereas capital receipts are a kind of one-time income.
- The government borrows money to cover the crack between its income and expenditure. But, to see the true picture, you need to put aside the borrowed amount. So if you remove government borrowings from government income, you will see the gap between what the government is spending and what the government is earning. This difference is what we call fiscal deficit. It is expressed as a percentage of gross domestic product.