Chapter

9
Government Finance
Government Budget

 Government Budget is defined as the estimated income and

expenditure by the government for the coming fiscal year.
 The word of “Budget” has been derived from the French word
“Bougette” Which refers a small leather bag or wallet.
 In a18th Century, while Walpole ,Chancellor of exchanger of
England ; used to Carry a bag to the House of Common's’
keeping the financial Proposals inside the Leather bag.
 So, the leather bag itself was Called as the financial Proposals
of the government.
 In this way, the meaning of the English word is not leather
bag but the financial proposal kept the bag.
 Government Budget is defined as the statement of
financial plan for a given period relating to the
income and expenditure of the Government.
 In, other Words, government budget is the
statement pof expected revenue and proposed
expenditure of the government for the coming
fiscal year.
 It is also Known as the public Budget.
 It is Formulated by finance Ministry.
Contains of Government Finance

1. Actual income and expenditure of the

Previous fiscal year.
2. Revised income and expenditure of
current fiscal year.
3. Estimated of Income and expenditure for
the coming fiscal year.
4. New tax proposals and rates.
Components of Government Finance

1. Government Revenue
2. Government Expenditure
3. Sources of Deficit Financing
Classification of Government
Budget
1. General Classification
 Revenue and Capital Budget
 Conventional and Cashe budget
 Deficit, surplus and Balanced Budget
2.Economic Classification
3.Functional Classification
4.Organizational Classification
1. General Classification

 The General Classification of Budget Consist of following

headings.
 Revenue and Capital Budget
 Conventional and Cashe budget
 Deficit, surplus and Balanced Budget
Revenue And Capital budget

 The Revenue Budget is related with current Financial

transactions of the government which are of the recurring
nature.
 It is also known as the current budget.
 On the other hands, Capital budget is related to the
Acquisition and Disposition of capital assets.
Conventional and Cash Budget

 The Conventional budget is Also Known as the administrative

budget.
 It Represents the set of accounts established within the
framework manner overthought the levy of taxes.
 On the Other Hand, The Cash Budget consists of all the cash
receipts from and payments to the government.
Deficit, surplus and Balanced
Budget
 The government Budget in which total revenue is less than
total expenditure is Called a deficit budget and the
government budget in which total revenue is more than total
expenditure is Called Surplus Budget.
 On the other hand, when total government revenue is to total
government expenditure , the Budget is called balanced
Budget.
Economic Classification

 Economic Classification of the Budget is the classification of

the Government Expenditure and Receipt by economic
Categories that are Significant for analyzing the short-run
effects of the government transactions of working of the
economy.
 It shows the economic character of the government
expenditure.
 The Components of the government budget according to
economic classification are current expenditure on goods and
services, interests Payments Subsidies and other current
transfers, capital expenditure and net lending including net
acquisition of equities.
Functional Classification

 While presenting the Budget before the legislature for

approval, the finance minister has to satisfy himself that the
Allocated government expenditure helps to achieve
objective or intension of the government.
 This is expenditure side of the Budget.
 On the revenue Side, he must see that the burden of taxation
is Distributed in accordance with the Accepted principle of
the social justice.
 The Components of Government Budget According to
functional classification are general Public services, defense,
education, economic Service agriculture etc.
Organizational Classification

 Organizational Classification is a Classification of the budget

According to the Organizational units of the government like
department of ministers.
 These units of the Government makes plans and Execute
budget Programs.
Components of Government Budget

 The Components of Government Budget are:

 Government Revenue(Sources of financing)
 Tax Revenue
 Non-tax Revenue
 Foreign Grant
 Government Expenditure
• Regular Expenditure
• Development Expenditure
 Sources Deficit Financing
Government Revenue(Sources Of
Financing
 The Various Sources from Which the revenue Will be collected for
the coming Fiscal year are mentioned in the government revenue or
sources of financing.
 The Government Revenue is dividing into following three types:
 Tax Revenue
 Non-tax Revenue
 Foreign Grant
Tax Revenue

 A tax is a compulsory payment to the government irrespective of

benefit derived from the state.
 Tax Revenue is the most important sources of government revenue.
 Tax are Divided into two types: direct taxes and indirect taxes .
 Direct taxes are such that their burden cannot be shifted to others
and that person pay to whom tax is imposed. For Example, income
tax, house tax, profit tax etc.
 On the other hand, indirect Taxes are those Whose burden can be
Shifted From one person to another. For example, VAT, excise duty
etc. are indirect taxes.
 In almost all, countries of the world , tax revenue is major sources of
government revenue or financing government budget.
Non-Tax Revenue

 Non-tax revenue is another source of financing government expenditure.

 Non-Tax revenue includes items like grants and gift to the government, fees
collected from different sources such as services of education, health, license etc.,
income from public properties and enterprises ,property without successor etc.
 It includes the following items.
1. Grants And gifts to the government
2. Fee Collected From Different sources Such as service of education , health, license
etc.
3. Fines and penalties Charged on those persons who violate rules and regulations of
the State.
4. Income from the Public properties and enterprises.
5. Property without Successor or escheats.
6. Interest income given to the public enterprises etc.
Foreign Grants

 The government of developing country can receive funds from the

foreign countries.
 Sucha grants carry neither rate of interest nor have to paid back .
Government Expenditure

 Government Expenditure is another important component of

government Budget.
 It is related to the expenses of public authorities.
 The main objective of government expenditure is to maintain peace
and Security in the country and promote social and economic welfare
of the people.
 The Government expenditure is divided into two types:
 Regular Expenditure
Regular expenditure of government is related to the
expenditure made on the regular activities like payment of salaries,
pensions, interest on internal and external loans etc.
 Development Expenditure
 Development expenditure refers to the expenditure
Deficit Financing

 Deficit Financing is defined as the method used by the government to finance its budget deficit.
 In other words, it is the practice in which a government spends more than it receives as receives.
 Nowadays, deficit financing has emerged as an important tool of financing government expenditure
 The Objectives of Deficit Financing are as follows:

1. To meet the financial needs of Crisis Period.

2. To-mobilize Domestic resources

3. To Achieve the Desired output and the employment

4. Promoting rapid Economic growth.

5. Financing Development Plans

6. To Divert Resources

7. Political Objective

8. Raise effective Demand and stimulate private investment

Objectives of Deficit Financing

 To meet the Financial need of crisis Period

The Deficit financing is a method of meeting the
financial need of the government during the crisis period Such as war,
natural disaster etc. During the such periods, government needs quick
command over resources to meet the growing expenses .

 To mobilize domestic resources

In the backward countries like Nepal, borrowing from
internal sources is insufficient and inadequate. Therefore, Deficit
financing is recoginized as a tool to the low income spread among the
vast masses to mobilize domestic resources on the massive scale.