Question

Answer in detail:
1. Explain the concept of Balanced Budget.
2. Explain capital receipts and capital expenditure as a part of Capital Budget.

Answer 1

1. A balanced budget refers to the budget when the total budget expenditure is equal to the total budget receipts.

Balanced budget = Total budget revenue – Total budget expenditure = 0

Adam Smith and other classical economists advocated the concept of balanced budget. They said that a balanced budget is the best since it has a neutral effect on the economy. However, it was argued by the modern economists that a balanced budget is not always suitable for the economy. For instance, during depression, the output and economic activities are low, causing unemployment in the country. In order to solve the problem of unemployment, the government must step in. The government can borrow money and use it for generating employment opportunities, thereby increasing demand and lowering unemployment. Thus, during depression, only a deficit budget is useful, while the balanced budget fails to correct the situation.

2. Capital budget is a financial proposal of the government which contains items that either lead to a change in the assets or liabilities of the government. Capital budget of the government can be decomposed into the following two categories:

i. Capital receipts - It refers to those receipts of the government which either create a liability or causes a reduction in the assets of the government. These receipts can be classified into the following three categories:
a. Borrowings - Borrowing of funds by the government creates a liability on it. Therefore, the receipts from the borrowing activities of the government are treated as capital receipts.
b. Recovery of loans - The central government often offers loans to the state government and union territories for various purposes. The recovery of such loans forms a part of the receipts for the government.
c. Other receipts - These include disinvestment and small savings. Disinvestment refers to selling a part or whole of the shares of the enterprises that are owned by the government. As disinvestment results in the reduction of government assets, it is treated as capital receipts. Similarly, small savings lead to an increase in the government liabilities as they include the money of the public deposited in post offices, national savings certificates etc.
ii. Capital expenditure - It refers to that government expenditure, which causes a reduction in the government liabilities as well as creates assets for the government. These receipts can be classified into the following three categories:
a. Expenditure on purchasing shares or bonds.
b. Expenditure on buying buildings or machinery.
c. Loans granted to the state government, union territories or the public companies.