Components of The Budget:

The Constitution of India demands that the budget must distinguish expenditure on revenue account from the expenditure on capital account.

Accordingly, budget is necessarily presented in two parts:

1. Revenue Budget

2. Capital Budget

1. Revenue Budget :

Revenue account covers those items which are recurring in nature. Therefore, this budget shows the current receipts of the Government and expenditure that can be met from these receipts.

A revenue budget is a statement of estimated revenue receipts and expenditure met from revenue receipts during a fiscal year.

It describes how the revenue is generated (collected) by the government and how it is distributed among various heads of expenditure.

a. Revenue Receipts:

Revenue receipts are all those estimated receipts of the Government during the fiscal year which are non redeemable.

These receipts do not affect the assets or the liabilities status of the government.

They create no liability (i.e., which involve no repayment obligations) or involve no sale or reduction in the assets of the government.

Revenue receipts comprise tax revenue like income tax, excise duty, and non tax revenues like interest receipts, dividends and profits of public sector enterprises and receipts from various services rendered by the government.

b. Revenue Expenditure:

Revenue expenditures are those estimated expenditures of the government during the fiscal year which are incurred by the government on day – to – day normal functioning of the government and interest payment on government debts.

These expenditures do not affect the assets or liabilities status of the government.

They neither create any physical or financial assets nor reduce any livability of the government.

The items of revenue expenditure are expenditure incurred on law and order, defence, interest payments, subsidies etc.

2. Capital Budget:

Capital account covers those items which are of the nature of creating or reducing the capital assets.

It is an account of assets and liabilities of the Central Government, which considers changes in capital.

Capital budget shows the capital receipts of the government and the expenditure that can be met from these receipts.

A capital budget is a statement of estimated capital receipts and capital expenditure during the fiscal year.

The capital budget can be further classified into two parts: a. Capital receipts b. Capital Expenditures

a. Capital Receipts:

Capital receipts are those estimated receipts of the government during the fiscal year which reduce financial assets and create financial liabilities of the government.

The main components of such receipts are borrowing of all kinds (loans raised from the public, borrowing from RBI, foreign loans) and repayment of loans and advances to the central government by state governments and public sector enterprises, disinvestment proceeds from the sale of public enterprises etc.

b. Capital Expenditures :

Capital expenditures are those estimated expenditures of the government during the fiscal year which lead to creation of physical financial assets or reduction of financial liabilities.

Such expenditures are incurred on creation of physical and financial assets like land, buildings, machinery, equipments, shares and in granting loans and advances to the state government and public sector enterprises etc.

Question : Distinguish between Revenue Budget and Capital Budget.

Answer:

Basis	Revenue Budget	Capital Budget
Inclusion	Revenue Budget includes : 1.Revenue Receipt 2. Revenue Expenditure	Capital Budget includes : 1. Capital Receipt 2. Capital Expenditure
Meaning of Types	1. Revenue receipt – Govt. receipts that -Neither creates liabilities for the govt. nor cause any reduction in asset of the govt. are called revenue receipts. 2.Revenue Expenditure – A expenditure that – – Neither creates any asset nor cause any reduction in liability.	1. Capital Receipt – Govt. receipt that – -Either creates liabilities (of payments of loans) or reduce assets ( on disinvestment)are called as Capital Receipts. 2. Capital Expenditure – Capital expenditure are that – – either creates assets for the govt. or causes reduction in liabilities of the govt.
Example	Examples of Revenue receipts are – Income tax, Sales tax, Gift tax, Fees and Penalties etc. Examples of Revenue Expenditures are – Old age pension, Salaries and Scholarships, Expenditure on the repayment of loas, Defence, health etc.	Example of Capital Receipts are – Loans by Govt., Recovery of Loans etc. Example of Capital Expenditure are – Equity (shares) of domestic or multinational corporation purchased by the govt., repayment of loans reduces liability of the govt.

Question: Distinguish between Revenue Receipts and Capital Receipts.

Answer :

Basis	Revenue Receipts	Capital Receipts
Meaning	The receipts which neither creates liability nor cause any reduction in the govt.’s assets.	The receipts during a fiscal year that either creates liability or cause a reduction in the govt.’s assets.
Appears in	Revenue Receipts appear in Trading and Profit and Loss Accounts.	Capital Receipts appear in Balance Sheet.
Nature	Revenue receipts are recurring and regular in nature.	Capital receipts are irregular and non- recurring in nature.
Source	Revenue receipts are come from operational sources.	Capital receipts come from non -operational sources.
Reserve Funds	The govt. can save revenue receipts by creating reserve funds.	The govt. can not save capital receipts by creating reserve funds.
Future Obligations	There is no future obligation to return the amount of revenue receipts.	There is a future obligation to return the amount with interest in case of some capital receipts.
Distributions	Revenue receipts are available for distribution of profits.	Capital receipts are not available for distribution of profits.
Examples	Tax revenue like GST, Income tax etc. and Non tax revenue like Fees and interest etc.	Capital receipts are – disinvestments, Loan recovery and borrowing etc.

Components of the Government Budget : Economics Notes Class 12 – Macroeconomics