Key Points

The government budget is a statement of the estimated receipts and expenditures of the government for a particular financial year, which runs from April 1 to March 31. It is constitutionally required under Article 112 as the 'Annual Financial Statement'.

The government budget has three main objectives: the allocation function, the redistribution function, and the stabilisation function, all aimed at increasing the welfare of the people.

The allocation function involves the government providing public goods like national defense and roads. Public goods are non-rivalrous (consumption by one does not reduce availability for others) and non-excludable (it is not feasible to prevent anyone from using them).

The redistribution function aims to create a fair distribution of income through taxes and transfers. The stabilisation function involves government intervention to correct economic fluctuations like inflation or unemployment by managing aggregate demand.

Revenue receipts are those that do not create any liability or cause a reduction in the assets of the government, such as tax revenue and non-tax revenue. Capital receipts are those that either create a liability (like borrowings) or reduce financial assets (like disinvestment).

Revenue expenditure is incurred for the normal functioning of the government and does not create assets, like salaries and interest payments. Capital expenditure is expenditure that results in the creation of physical or financial assets or a reduction in liabilities.

Revenue deficit is the excess of the government's revenue expenditure over its revenue receipts. It indicates that the government is dissaving and using the savings of other sectors to finance its consumption expenditure.

Fiscal deficit is the difference between the government's total expenditure and its total receipts, excluding borrowings. It indicates the total borrowing requirements of the government from all sources.

Primary deficit is calculated by subtracting net interest liabilities from the gross fiscal deficit. It focuses on the borrowing requirements needed to meet the current year's expenditures, excluding interest payments on past debt.

Fiscal policy is the use of government expenditure and taxation to influence the economy. Changes in these instruments are used to stabilize the level of output and employment.

The government expenditure multiplier (1/(1-c)) shows how much national income changes for a unit change in government spending. The tax multiplier (-c/(1-c)) shows the change in income from a unit change in taxes and is smaller in absolute value than the expenditure multiplier.

The balanced budget multiplier has a value of one. This means that if government spending and taxes are increased by the same amount, the equilibrium income will rise by exactly that amount.

Proportional income taxes and welfare transfers act as automatic stabilisers. They reduce the impact of economic shocks on the economy without any deliberate government action by making disposable income less sensitive to fluctuations in GDP.

Deficits are a flow concept, representing the shortfall of revenue from expenditure in a single year. Debt is a stock concept, representing the total accumulation of past deficits that the government owes.

Public debt can be a burden on future generations if it reduces capital formation and growth by crowding out private investment. However, if the borrowing is used for productive investment, it may benefit future generations.

This theory suggests that financing government spending through debt is equivalent to financing it through taxes. It argues that rational consumers will save more in anticipation of future tax increases to pay off the debt, leaving national saving unchanged.

The FRBMA is a legislative framework that binds the government to pursue a prudent fiscal policy. It sets targets for reducing the fiscal deficit and eliminating the revenue deficit to ensure long-term macroeconomic stability.

Introduced on July 1, 2017, GST is a single, comprehensive indirect tax on the supply of goods and services. It replaced multiple central and state taxes to create a unified market, aiming to reduce tax cascading and simplify compliance.