"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
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
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.