GOVERNMENT BUDGET| CUET ECONOMICS| L-1

A government budget is a projection of the government’s revenues and expenditure for a particular period of time often referred to as a financial or fiscal year, which may or may not correspond with the calendar year. Government revenues mostly include taxes (e.g. inheritance tax, income tax, corporation tax, import taxes) while expenditures consist of government spending (e.g. healthcare, education, defense, infrastructure, social benefits). A government budget is prepared by the government or other political entity. In most parliamentary systems, the budget is presented to the legislature and often requires approval of the legislature. Through this budget, the government implements economic policy and realizes its program priorities. Once the budget is approved, the use of funds from individual chapters is in the hands of government ministries and other institutions. Revenues of the state budget consist mainly of taxes, customs duties, fees and other revenues. State budget expenditures cover the activities of the state, which are either given by law or the constitution. The budget in itself does not appropriate funds for government programs, hence need for additional legislative measures. The word budget comes from the Old French bougette (“little bag”).

What Is Fiscal Policy?

Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions. These include aggregate demand for goods and services, employment, inflation, and economic growth.

During a recession, the government may lower tax rates or increase spending to encourage demand and spur economic activity. Conversely, to combat inflation, it may raise rates or cut spending to cool down the economy.

Fiscal policy is often contrasted with monetary policy, which is enacted by central bankers and not elected government officials.

Fiscal policy refers to the use of government spending and tax policies to influence economic conditions.

Fiscal policy is largely based on ideas from British economist John Maynard Keynes.

Keynes argued that governments could stabilize the business cycle and regulate economic output rather than let markets right themselves alone.

An expansionary fiscal policy lowers tax rates or increases spending to increase aggregate demand and fuel economic growth.

A contractionary fiscal policy raises rates or cuts spending to prevent or reduce inflation.