CLASSIFICATION OF BUDGET: Balanced Budget, Surplus Budget, Deficit Budget, Budgetary deficit, Fiscal Deficit, Non-debt creating capital receipts, Twin deficit,Gross Primary Deficit,Monetised Deficit,Effective Revenue Deficit

 

CLASSIFICATION OF BUDGET:

Budgets are broadly categorized into three main types based on their financial outcomes, each playing a distinct role in fiscal planning:

●        Balanced Budget

●        Surplus Budget

●        Deficit Budget

 

A balanced budget occurs when planned revenue match or exceed the amount of planned expenses. A balanced budget occurs when tax revenue is equal to government spending.

A surplus budget is a condition when incomes exceeds the expenditures. In simpler words, when government revenue exceeds the expenses then it is known as a surplus budget.

A budget deficit occurs when expenditures exceeds revenue. In simpler words, when government revenue is less than the expenses then it is known as a deficit budget.

Revenue Deficit: The revenue deficit refers to the excess of government’s revenue expenditure over revenue receipts.

 Revenue deficit = Revenue expenditure – Revenue receipts.

The revenue deficit includes only such transactions that affect the current income and expenditure of the government. When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.

Budgetary deficit :

• It is the difference between all receipts and expenses in both revenue and capital account of the government. 
• Budgetary deficit is the sum of revenue account deficit and capital account deficit. 
• Budgetary deficit is usually expressed as a percentage of GDP. 
• Prior to 1997, GOI  used the following methods for making budget deficit zero:

1.Printing of new currency

2.Borrowing from RBI.

But after 1991 reforms ,Sukhmoy Chakraborty committee recommended for FISCAL DEFICIT.

Fiscal Deficit: Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing.

Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts).

From financing side:

Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad.

Net borrowing at home includes directly borrowed from the public through debt instruments (for example, the various small savings schemes) and indirectly from commercial banks through Statutory Liquidity Ratio (SLR). 

Non-debt creating capital receipts:

Those receipts which are not borrowings and, therefore, do not give rise to debt. Examples are recovery of loans and the proceeds from the sale of PSUs.

The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources.

TWIN DEFICIT / DOUBLE DEFICIT :

• When a country has both current account deficit and fiscal deficit, it is said to be twin/double deficit. 
• This means the country's economy is importing more than it is exporting, and the country's government is spending more money than it is generating.

Gross Primary Deficit:

• It is Gross Fiscal Deficit less interest payments of the current fiscal year .
• This deficit is about actual liability for the particular year.
•  A shrinking primary deficit indicates progress towards fiscal health as it shows that your deficit in the current year is decreasing . 
• When the primary deficit is zero, the fiscal deficit becomes equal to the interest payment. 
• This means that the government has resorted to borrowings just to pay off the interest payments. Further, nothing is added to the existing loan.

Monetised Deficit: 

• Monetised deficit means the increase in the net RBI credit to the central government without increasing public debt, such that the monetary needs of the government could be met easily. 
• Making money from a deficit means printing more money in layman’s terms. 
• It results in increase in High powered money. 
• RBI does so by purchasing government securities directly in the primary market. Monetisation of deficit was in practice in India till 1997, whereby the central bank automatically monetised government deficit through the issuance of ad-hoc treasury bills. 
• Two agreements were signed between the government and RBI in 1994 and 1997 to completely phase out funding through ad-hoc treasury bills.
• And later on, with the enactment of FRBM Act, 2003, RBI was completely barred from subscribing to the primary issuances of the government from April 1,2006.
•  Post 1997, monetisation is done  indirectly by buying government bonds in the secondary market through what are called open market operations (OMOs).
• As the  government started borrowing in the open market, interest rates went up. High interest rates incentivized saving and thereby spurred investment and growth.

EFFECTIVE REVENUE DEFICIT (ERD):

• Effective Revenue deficit is a new term introduced in the Union Budget 2011-12. 
• The concept of effective revenue deficit has been suggested by the Rangarajan Committee on Public Expenditure.
• Revenue deficit is the difference between revenue receipts and revenue expenditure but  the present accounting system includes all grants from the Union Government to the state governments/Union territories/other bodies as revenue expenditure, even if they are used to create assets. 
• Such assets created by the sub-national governments/bodies are owned by them and not by the Union Government. Nevertheless they do result in the creation of durable assets. 
• According to the Finance Ministry, such revenue expenditures contribute to the growth in the economy and therefore, should not be treated as unproductive in nature.
• Effective Revenue Deficit signifies that amount of revenue deficit that is being used for actual consumption expenditure of the Government and not for creating the assets. 
• ERD is revenue deficit excluding capital expenditures  used for creating durable assets out of revenue expenditure .