Meaning, Definition and Kinds(Types) of Budget

Budget

Meaning: Government's revenue and expenditure decisions are presented in the budget. Budget, being an essential and important element of planning and development, provide the specific development objectives to be pursued and the required policy direction. They are necessary because income and expenditure do not occur simultaneously.

Thus, 'budget' has been defined as the annual financial statement of the estimated receipts and proposed expenditure of the government in a financial year, usually April 1 to March 31 of the next year.

The term budget is derived from the French word 'Bougette'. It means 'small bag'. As such, the Finance minister of a country carries a bag containing abstracts of budget papers while presenting the budget in the Parliament or a State Legislature. The governments, both Union and State, prepare their budget every financial year. Government budget indicates the probable income and expenditure of the government, the financial policies, taxation measures, investment opportunities, extent of saving, utilization of resources, mobilization of capital etc.

Definition: Various definitions have been formulated for the concept of Budget.

Prof. Dimock says, 'A budget is a balanced estimate of expenditures and receipts for a given period of time. In the hands of the administration, the budget is record of past performance, a method of current control and a projection of future plans'.

To quote Gladstone, 'Budgets are not merely matters of arithmetic but in a thousand ways go to the root of prosperity of individuals and relation of classes and the strength of Kingdom'.

Therefore, the budget is a document containing preliminary approval plan of public revenue and expenditures. It bridges the proposed revenue and proposed expenditure for the budget period.

Kinds of Budget

Balanced budget and unbalanced budget

        Balanced Budget : A balanced budget is that, over a period of time, revenue does not fall short of expenditure. In other words government budget is said to be balanced when its tax revenue and expenditure are equal.

Unbalanced Budget (Surplus or deficit) : An unbalanced budget is that, over a period of time, revenue exceeds expenditure or expenditure exceeds revenue. In other words, the government's income or tax revenue and expenditure are not equal. When there is an excess of income over expenditure, it is called a surplus budget. On the other hand, when there is an excess of expenditure over income, it is a case of deficit budget.

Classical economists advocated balanced budget. But it is not always helpful in achieving and sustaining economic growth.

Modern economists argue that an unbalanced budget is very useful for achieving and maintaining economic stability.

Revenue Budget and Capital Budget :     Budgeting is the most important constituent of the financial administration. Preparation of the budget is one of the main operations of budgeting. It is mandatory for the government to make a statement of estimated receipts and expenditures which must be laid before the Parliament every financial year. It has to distinguish expenditure on revenue account and capital account from other expenditures. So government budget comprises Revenue Budget and Capital Budget.

Revenue Budget : Revenue budget consists of revenue receipts of the government (tax revenue and non-tax revenue) and the expenditure met from these revenues. Expenditures which do not result in creation of assets are called revenue expenditure. (e.g. current revenues and current expenditure for normal functioning of the Government departments, interest charges on debt incurred by Govt. and other non-developmental expenditure).

Capital budget : Majority of the government expenditures form the capital expenditure. Capital budget consists of receipts and payments. Capital receipts are loans raised by government from the public which are called market loans, borrowings from the RBI, sale of treasury bills, loans received from foreign governments etc. Capital payments are expenditure on assets creation such as land, buildings, machinery, equipment investment loans to government companies and state governments and other developmental expenditures.

Performance budgeting

The process of fund allocation of governments in various countries has been changed from traditional expenditure budgeting to new forms of rationalistic budgeting, such as performance budgeting, programme budgeting and zero based budgeting.

Under performance budgeting, various activities of the government are identified in the budget both in financial and physical terms. This is necessary to ascertain the relationship between input and output and to assess the performance in relation to cost.

Performance budgeting is conceived as a system of presenting public expenditure in terms of distinguishable divisions such as government functions, programmes, activities and projects; such presentation would reflect the cost of running the government.

Under this technique, funds are granted for carrying out specific amount of work identified under a particular division. A cost-benefit approach is employed which facilitates meaningful and purposeful allocation of funds.

This method of budget technique promotes cost consciousness as well as cost efficiency and suggests corrections wherever required in the process of allocation of funds.

Zero based budgeting

Traditional technique of budgeting have been found to be inadequate for the reason that, the previous year's cost level is taken as the base for current year's budget. The traditional methods have not completely addressed the problem of efficiency in the matter of allocation of funds for various divisions. There is therefore a need for a new technique of budgeting which devices and uses a meaningful base for budgeting. Zero Based Budgeting is one such technique of budgeting.

In zero based budgeting, every year is considered as a new year thus providing a connecting link between the previous year and the current year. The past performance and programmes are not taken into account. The budget is viewed as entirely a fresh and whole fiscal initiative i.e. from zero bases.

Zero based budgeting evaluates and prioritizes the programmes of action at different levels. Each department has to justify its budget from its perspectives; evaluating feasible alternatives, before final selection and execution, the funds will be allocated for the selected programmes.