Budget: meaning, objectives, components and types; balanced and unbalanced budgets

1. Meaning

The word comes from the old French bougette, a small leather bag in which the British Chancellor of the Exchequer carried his papers. A budget is a statement of the estimated receipts and expenditure of the government for a financial year, together with the policies by which they are to be achieved.

• Constitutional meaning in India. Article 112 requires the President to cause to be laid before both Houses of Parliament an annual financial statement of the estimated receipts and expenditure of the Government of India for each financial year. The word “budget” does not appear in the Constitution.
• Rene Stourm: a budget is a document containing a preliminary approved plan of public revenues and public expenditure.

The Union Budget is presented on 1 February (since 2017, moved from the end of February so that it is passed before the financial year begins), and the separate Railway Budget was merged into it from 2017–18. Expenditure charged on the Consolidated Fund (Article 112(3)) is not voted; other expenditure is voted as demands for grants (Article 113), then the Appropriation Bill (Article 114) and the Finance Bill (tax proposals, a Money Bill under Article 110) are passed. A vote on account (Article 116) allows spending before the Budget is passed.

2. Objectives of a budget

1. Allocation of resources to public goods and priority sectors.
2. Reducing inequality through progressive taxes and welfare spending.
3. Economic stability — controlling inflation and unemployment.
4. Economic growth through capital expenditure and incentives to saving and investment.
5. Balanced regional development.
6. Management of public enterprises.
7. Employment generation.
8. Accountability — legislative control of the executive’s finances.

3. Components (structure) of the budget

A. Revenue budget

• Revenue receipts — receipts that neither create a liability nor reduce an asset:
  • Tax revenue: income tax, corporation tax, GST, customs, Union excise.
  • Non-tax revenue: interest, dividends and profits, fees, external grants.
• Revenue expenditure — expenditure that neither creates an asset nor reduces a liability: interest payments, salaries, pensions, subsidies, grants to States, defence revenue expenditure.

B. Capital budget

• Capital receipts — receipts that create a liability or reduce an asset:
  • Debt receipts: market borrowings, treasury bills, small savings, provident funds, external loans.
  • Non-debt receipts: recovery of loans, disinvestment proceeds.
• Capital expenditure — expenditure that creates an asset or reduces a liability: construction of roads, railways and buildings, defence capital, loans to States and public enterprises, repayment of debt.

4. Types of budget

1. Balanced budget — estimated receipts equal estimated expenditure.
2. Surplus budget — receipts exceed expenditure.
3. Deficit budget — expenditure exceeds receipts.
4. Line-item (traditional) budget — amounts shown against objects of expenditure (salaries, travel, stores), designed for legislative control rather than results.
5. Performance budget — links spending to programmes, activities and measurable output. Recommended by the Hoover Commission in the United States (1949) and in India by the Administrative Reforms Commission (1968).
6. Zero-based budget — every item must be justified afresh each year from a base of zero, instead of adding to last year’s figure. Developed by Peter Pyhrr at Texas Instruments around 1970; introduced in Indian government departments in the 1980s.
7. Outcome budget — links outlays to outcomes (results on the ground); introduced by the Union from 2005–06.
8. Gender budget — a statement showing allocations for women; part of the Union Budget from 2005–06.
9. Revenue and capital budgets — the two parts described in section 3.
10. Supplementary budget — additional demands during the year (Article 115).
11. Interim budget / vote on account — in an election year, the outgoing government seeks authority for expenditure for part of the year.

5. Balanced and unbalanced budget

The classical case for a balanced budget

Adam Smith and the classical economists held that the State should balance its budget every year, like a prudent household. The arguments: a deficit leads to borrowing and debt, or to printing money and inflation; a surplus means over-taxation and withdrawal of resources from the productive private sector; a balanced budget keeps the government small and disciplined, and is consistent with Say’s law under which full employment is automatic.

The Keynesian case for an unbalanced budget

Keynes and A.P. Lerner (functional finance) argued that the budget should be judged by its effects on the economy, not by whether it balances. In a depression, a deficit budget (more spending, lower taxes) raises effective demand and employment. In a boom, a surplus budget removes excess demand and checks inflation. The budget should be balanced over the cycle, not every year. Even a balanced budget is not neutral: Haavelmo’s balanced budget multiplier shows that an equal rise in spending and taxes raises income by the amount of the rise, because the tax reduces consumption by less than the spending adds.

Merits and demerits compared

Reasons for a deficit budget in India

• Rising interest payments, subsidies and pensions (committed expenditure).
• Large development needs relative to tax capacity; a low tax-to-GDP ratio.
• Defence needs.
• Transfers to States.
• Counter-cyclical spending in slowdowns and crises (the 2008 crisis, the 2020 pandemic).
• Political pressure for welfare schemes and tax concessions.
• Losses of public enterprises.

How this is examined

“Explain the meaning, objectives and components of a budget” (January 2026, 100-mark, 16 marks); “Define budget. Explain types of budget” (June 2025); “Write the meaning, structure and components of Budget” (October 2023). Short notes: “Components of budget” (June 2025, August 2024), “Types of Budget” (October 2023), “Balanced and unbalanced budget” and “Reasons for deficit budget” (January 2026). Draw the structure as a two-column chart: revenue budget and capital budget, each split into receipts and expenditure.