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Definition and Meaning:

“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 just unplanned financial 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.

Purpose of Federal Budget:

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.

Types of Federal Budget:

There are following three types of federal budget:

(1) Surplus budget.

(2) Deficit budget.

(3) Balanced budget.

(1) 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) 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.

(3) Balanced Budget:

When the expenditure of the government is equal to its revenue, it is called a balanced budget.