Capital and Revenue Budget

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In this article we will try to understand terms like Capital Budget, Revenue Budget, and various deficits of the government .

Budget of the government can also be seen as an accounting exercise. The Government of India presents its accounts details of an accounting period  to the people of India through parliament just like any company presents its accounts to their shareholders in an accounting year.

The Government budget includes its estimated receipts and its expenditure ,its borrowings and  its deficits in an accounting period also called as financial year (1April to 31 March ).

The Budget is divided into the Capital Budget and Revenue Budget. Further, the Revenue budget is divided into Revenue receipts and Revenue expenditure and the Capital budget  is divided into Capital receipts and Capital expenditure .

Revenue Budget

The revenue budget  includes revenue receipts and revenue expenditure 

What is Revenue Receipts 

Revenue receipts can be defined as those receipts which neither create any liability nor cause any reduction in the assets of the government. They are regular, short term in nature which is usually upto one year and recurring in nature and the government receives them in the normal course of activities.

The revenue receipts of the government are divided into two according to the source of the receipts . Tax Receipts and Non Tax receipts .

Tax Receipts

Tax receipts include both Direct tax and Indirect tax . 

• Some of the important direct taxes imposed by the government of India are  Income tax, Corporate tax ,Gift tax ,Capital tax gain etc 
• Some of the important Indirect taxes levied by the Government of India are  Goods and Service Tax (GST),Custom duty. Securities Transaction Tax etc .

Non Tax receipts 

•  Interest  received by the government on loans provided by it to the state government, foreign governments ,companies etc .
• Dividend received from companies, 
• Fee received by the government for various services provided by it like  tolls collected by it on roads built by central government agencies, fees it receives from students for studying in its schools, fines imposed by the Supreme Courts on persons or institutions etc.

Both the tax and non tax receipts are revenue receipts . Taxes have to be paid on income earned in a year and it has to be paid every year unless the government abolishes the taxes. So tax receipts are short term in nature (upto one year), recurring in nature and the money received by the government in the form of taxes is not a debt or liability for the government . The same is in the case of non tax receipts .

Revenue Expenditure 

Revenue Expenditure is that part of government expenditure that does not result in the creation of assets. Payment of salaries, wages, pensions, subsidies and interest fall in this category as revenue expenditure examples. Also, note that revenue expenses are incurred by the government for its operational needs.

Now let us see what comes under revenue expenditure 

• The salaries and pension paid by the Government of India to its employees ;
• The expenditure incurred by the government on the maintenance of its office and buildings; 
• Subsidy provided by the government on foods, fertilizers etc.
• The grant which is provided by the Government of India to the state government or foreign government . 

The government has to spend money on its employees salaries, subsidies, maintenance etc . every month and the government gets no return on these expenditures hence it is recurring in nature  and it does not create any assets for the government . That is why they come under revenue expenditure .

Note : Loans  means the person who has taken a loan will return the principal amount with interest. In the case of grants ,the person who has received the money is not going to return back the money .

Here interest on the loan will be considered as an income, hence the loan is included in capital expenditure . In the case of the grants the government is not going to receive any money hence the government is having no income so it will be revenue expenditure for the government .

Capital Budget 

It includes capital receipts and capital expenditure 

Capital Receipts 

Capital receipts are receipts that create liabilities or reduce financial assets. They also refer to incoming cash flows. Capital receipts can be both non-debt and debt receipts. Loans from the general public, foreign governments and the Reserve Bank of India (RBI) form a crucial part of capital receipts.

Non -Debt creating capital receipts 

The money received by the government through the  sale of its shares in the public sector enterprises or popularly called disinvestment . Because the government will get money  only once by selling its share, hence it is non recurring in nature .

So the money received by the government by  selling off government assets like buildings ,companies land etc will be included in  Non -Debt creating capital receipts.

Debt creating capital receipts 

The loan taken by the government from various sources like  World  Banks,RBI etc will be included in  debt creating capital receipts  , because it creates liabilities for the government .

Capital Expenditure 

Capital expenditure is the money spent by the government on the development of machinery, equipment, building, health facilities, education, etc. It also includes the expenditure incurred on acquiring fixed assets like land and investment by the government that gives profits or dividends in future. The key points to remember is that it includes one time expenditure and it creates  long-term assets .

• Investment by the government in its companies by buying its  shares etc.;
• Building of  ports, railways etc by the government ;
• Investment in plant and machinery by the government; 
• Loans provided by the government to companies ;
• Loans provided by the government to state governments ,foreign governments.

When the government  sets up a new company like NTPC, it buys the shares of the company  and  invests in it  . It is a one time investment and the government hopes that the NTPC will become profitable and its share value will increase over a period of time plus it will receive a regular dividend . Thus it is a  one time investment and it will create long term assets for the government . 

Long term loans given by the Central  government to the state government will be included in capital receipts as the state government  will return the principal amount with interest. Hence it is an asset for the government of India.

Types of Budget 

A Budget could be either Balanced, Surplus or Deficit budget 

Balanced budget : The budget where the expenditure(revenue +capital ) is equal to the receipts(revenue +capital  ) .

It hardly happens in India.

Surplus Budget : When the receipts (revenue +capital )   of the government are more than its expenditure(revenue +capital )   . In modern days hardly any government has a surplus budget.

Deficit : When the expenditure(revenue +capital )  of the government is more than its receipts (revenue +capital ) .

Because India is a developing economy the government budget is always a Deficit budget as the prime responsibility of development and welfare of its population is with the government.

Types of Deficits 

Gross Revenue Deficits or Revenue Deficit 

It is an excess of Revenue expenditure over Revenue receipts . The importance of revenue deficit is that it tracks the financial position of the government for a particular financial year.

Revenue Deficit = revenue expenditure -revenue receipts

Gross Fiscal Deficit or Fiscal deficit 

Fiscal Deficits : (revenue expenditure +  capital expenditure + all the loans of the government net of repayments) - Revenue receipts + non debt creating capital receipts 

Fiscal deficit is considered important as it gives a true picture of government finance and all its liabilities.

Primary Deficit :  Fiscal Deficit - Interest payment