What Are The Three Types of Union Budgets ?

31 January, 2024

The Government of India’s Finance Ministry, spearheaded by the Finance Minister, revises the national budget every year. The FM announces new financial policies, tax laws, and most importantly, the plan to enhance the country’s GDP. Essentially, the budget is an annual financial statement outlining the estimated government expenses and the revenue the government expects to accumulate in the upcoming financial year. Based on how feasible the estimated income and expenses are, the government categorises the budget into three types.

Let’s understand the 3 types of budgets in this article.

What Are The 3 Types Of Budgets?

Budgets can be categorised into the following three types:

1. Balanced Budget

A budget is deemed a balanced one if the expected government expenses equal the estimated government receipts during a given financial year. Most classical economists back this type of budget as it is based on the virtue of “living within one’s means”. To put it simply, a balanced budget emphasises the idea that a government’s expenditure should never exceed its collected revenue. While the approach for a balanced budget seems ideal in helping to achieve economic balance and maintain financial discipline, such a budget does not ascertain financial stability. This is especially true during times of deflation, recession, and economic depression. Thus, while it may be easy to balance the anticipated expenses and revenues, it is quite challenging to practically implement such a balance.

Here are some reasons why a government would choose to strive for a balanced budget:

• Economic stability: A balanced budget contributes to overall economic stability by aligning government revenues with expenditures. It helps prevent excessive borrowing, inflation, and other economic imbalances to foster a more resilient and predictable economic environment.

• Debt management: Maintaining a balanced budget is crucial for effective debt management. Avoiding persistent budget deficits helps prevent the accumulation of excessive public debt. It helps in reducing the burden on future generations and ensuring fiscal sustainability.

• Interest rates: A government with a balanced budget may benefit from lower interest rates. By demonstrating fiscal responsibility, it instils confidence among investors and lenders, leading to favourable borrowing terms and reduced interest costs on government debt.

• Long-term economic growth: A balanced budget tends to support long-term economic growth by promoting responsible fiscal policies. It allows for strategic investments in infrastructure, education, and healthcare without compromising the financial stability of the government.
  
  

2. Surplus Budget

The second of the three types of budgets is the surplus budget. The budget presented by the government is considered a surplus budget in case the revenue expected by the government exceeds the expenditure the government makes during a given financial year. It essentially means that the government’s gains or revenue from the taxes paid by citizens are higher than the amount spent by the government on public welfare and development. A surplus budget thus indicates that a country is financially affluent. The government typically implements a surplus budget during periods of inflation as this type of budget helps reduce the aggregate demand in the country.

A surplus budget has its advantages:

• Debt reduction and prevention: Surplus budgets provide an opportunity to reduce existing debts and prevent the accumulation of new ones. Allocating surplus funds toward debt repayment may enhances the government's financial standing.

• Creation of reserve funds: Surplus budgets can allow for the establishment and augmentation of reserve funds. These funds can act as buffers to safeguard against future economic uncertainties, natural disasters, or other emergencies.

• Lower taxation pressure: Surplus budgets can also reduce the need for frequent tax increases. With ample revenues exceeding expenditures, governments may refrain from imposing additional or increased taxes. Reduced tax fosters a positive economic environment and encourages consumer spending and business investments.

• Strategic investments: Governments can use surplus funds for strategic investments in infrastructure, education, healthcare, and other critical sectors. These investments can stimulate economic growth and thereby create employment opportunities.
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3. Deficit Budget

The third category among the three types of budgets is the deficit budget. A budget is deemed a deficit one when the expected government expense exceeds the revenue the government expects to accumulate in a given financial year. A deficit budget is the ideal fit for developing economies – India, for instance. Such a budget is especially beneficial during recession as it helps to generate additional demand while boosting the economic growth rate of the nation.

In a deficit budget, the government plays a vital role in incurring the excessive expenditure to enhance the employment rate. As a result, the demand for goods and services increases, which further helps revive the economy. The government covers the cost via public borrowing, such as issuing government bonds or by withdrawing funds from the reserved surplus accumulated.

While deficit budgets may have their concerns, they can serve specific purposes:

• Stimulating economic growth: During economic downturns or recessions, the government may intentionally run deficit budgets to inject funds into the economy. Increased public spending stimulates demand, encourages investment, and helps revitalise economic activity.

• Infrastructure development: Deficit budgets allow the government to fund critical infrastructure projects, such as roads, bridges, and public facilities. These investments contribute to long-term economic development, job creation, and improved quality of life for citizens.

• Social welfare programs: The government use deficit spending to finance social welfare programs, including healthcare, education, and poverty alleviation initiatives. Also the government may offer subsidies to reduce the debt burden among the underprivileged sections of society.

As a taxpayers, it helps us to understand the three types of budgets and the other vital aspects of it. Knowledge about the budget helps us understand the Union Budget better when the FM announces it in February. Note that all three types of budgets have distinct advantages and demerits. Thus, the government takes great care to strike the right balance while creating the budget plan.

Continue reading more about Fiscal Deficit: Its Meaning and Impact on Economy. Click Here!

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