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Home National Debt and Income Determination What is Federal Budget

 

What is Federal Budget?

 

Definition of Federal Budget:

 

"The federal budget is the annual statement of the expenditures and revenues of the government".

 

Until the Great Depression years of the 1930's, the federal budget had no clear purpose but to finance the unplanned activities of the federal government. After the Great Depression years of 1930's and the Keynesian thinking, the federal budget has clear cut objectives to achieve macro economic objectives which vary with the economic conditions prevailing in the country.

 

In developed countries of the world, the federal budget aims at ensuring stability and full employment without inflation and achieving steady economic growth without fluctuations.

 

In developing countries, the purposes of federal budget are tackling the problems of poverty and unemployment, promoting economic growth with price stability.

 

Surplus or Deficit Federal Budget:

 

A country may have a surplus or deficit federal budget. If the total revenues of the government exceed its total expenditures, the government has a surplus budget. In case the total expenditures exceed total tax revenues, the government has a deficit budget. When the expenditure of the government is equal to its revenue, it is called a balanced budget.

Should the government project a surplus or deficit budget?

 

(1) Definition and Explanation of Surplus Budget:

 

When the revenue raised by the government through various taxes exceeds the expenditure, the government is said to have a surplus budget.

 

The surplus budget is created and is used to fight an inflationary gap. When the government finds that the price level is increasing in the country and the real GDP is decreasing, it reduces its expenditures on highway construction, public housing, defense spending etc., for reducing aggregate demand and lowering the price level in the economy. Another option to reduce the aggregate demand in the economy is to raise the taxes. The rise in taxes causes a reduction in aggregate demand for three reasons:

 

(i) It reduces consumption, (ii) It reduces investment and (iii) It reduces net exports.

 

(2) Definition and Explanation of Deficit Budget:

 

Deficit budget (total expenditure exceeding total revenue) is recommended for raising the aggregate demand in the economy.

 

Deficit budgeting is recommended for tackling the problems of depression, removing cyclical unemployment and closing the recessionary gap.

 

During the last over five decades, the development and non-development expenditures of the governments is fast increasing all over the world. The expenditures on defense, urbanization, debt servicing, subsidies, anti poverty schemes, provision of public utility services, administration etc., have considerably increased by all the governments.

 

On the other hand, the revenues raised by the governments through taxes, fees, custom duties etc.. are hardly able to meet their mounting expenditures. As a result thereof, the governments are mostly facing deficits in budgets. The deficits in budget are being met through domestic borrowing and external borrowing.

Relevant Articles:

What is Federal Budget
What is National Debt
Classification/Types/Categories of National Debt
Short Term Loans
Long Term Loans
Methods of State Borrowing
Methods of Paying Public Debt
Burden of National Debt
National Debt and Economic Stability
 

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Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
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Elasticity of Demand
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Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
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Fiscal Policy
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Determination of National Income
Theories of Employment
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Balance of Payments
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Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
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History of Money
 

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