Government Budget & Fiscal Policy
The Union Budget — the Annual Financial Statement, the structure of receipts and expenditure, the three government funds, and how fiscal policy steers the economy.
Key Takeaways
- The Union Budget is the 'Annual Financial Statement' under Article 112 of the Constitution.
- The budget has two parts — receipts (revenue + capital) and expenditure (revenue + capital).
- Fiscal policy uses taxation and government spending to influence growth, employment and prices.
Core concept
The Budget is the government's annual statement of estimated receipts and expenditure. Fiscal policy is the use of the budget — taxation and public spending — to influence aggregate demand, growth, employment and price stability. When the government spends more than it earns, it runs a deficit; the reverse is a surplus.
Static foundation — structure of the budget
The budget is split into a Revenue account and a Capital account, on both the receipts and expenditure sides.
Budget Receipts and Expenditure
| Category | Revenue | Capital |
|---|---|---|
| Receipts | Tax revenue (direct + indirect) and non-tax revenue (interest, dividends, fees) | Borrowings, recovery of loans, disinvestment |
| Expenditure | Does NOT create assets — salaries, subsidies, interest payments, pensions | Creates assets — infrastructure, loans to states, equity in PSUs |
| Effect on assets/liabilities | Neither creates a liability nor reduces an asset | Creates a liability (borrowing) or reduces an asset (disinvestment) |
The Three Government Funds
Tap to reveal each fund's purpose.
Types of fiscal policy
Expansionary fiscal policy (higher spending / lower taxes) boosts demand during a slowdown — but widens the deficit. Contractionary policy (lower spending / higher taxes) cools an overheating economy. Capital expenditure has a higher fiscal multiplier than revenue expenditure, so 'capex-led' budgets are favoured for growth.
Current affairs linkage
Recent budgets have emphasised a capex push for infrastructure and fiscal consolidation. The Plan/Non-Plan distinction was scrapped (2017); the railway budget was merged with the general budget. (Add the latest budget's headline capex, fiscal-deficit target, or a major scheme.)
Prelims trap zones
- Disinvestment and borrowings are CAPITAL receipts; tax revenue is a REVENUE receipt.
- Grants and subsidies are revenue expenditure even if given for building assets (except grants for creation of capital assets, tracked via the 'effective revenue deficit').
- Contingency Fund is at the President's disposal; the Consolidated Fund requires parliamentary sanction to withdraw.
Knowledge Check
2 questions · check your understanding
1. Which of the following is a capital receipt of the government?
2. Withdrawals from which fund require the authorisation of Parliament?
Prelims Pointers
- Revenue receipts do not create liabilities or reduce assets; capital receipts do (e.g., borrowing, disinvestment).
- Capital expenditure creates assets (infrastructure); revenue expenditure does not (salaries, subsidies, interest).
- The Consolidated Fund of India (Art 266), Contingency Fund (Art 267) and Public Account (Art 266(2)) are the three funds.
- Withdrawals from the Consolidated Fund need Parliament's authorisation; the Contingency Fund is at the President's disposal.
Mains Angle
- 'Capital expenditure has a higher multiplier than revenue expenditure.' Discuss its significance for the budget.
- Examine the role of fiscal policy in reviving demand during an economic slowdown.
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