Lesson 1, Topic 1
In Progress

Types of Budget


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The public budgets are different from other forms of budgets in many ways; here the voters delegate the power of spending their money to the politicians or the elected representatives. Now having understood the concept of budget in the last article, let us understand the different kinds of budget that are there in the public financial management:

  1. Balanced Budget: As suggested by the name a balanced budget is that which hasno deficit or surplus. The revenues coming are equal to theexpenditures.
  2. Revenue Budget: It is just the details of the revenue received by the governmentthrough taxes and other sources and the expenditure that is met throughit.
  3. Performance Budget: This type of budget is mostly used by the organizations and ministries involved in the developmental activities. This process of budgeting, takes into account the end result or the performance of the developmental program thus insuring cost effective and efficient planning. With the increasing developmental challenges and awareness regarding the usage of tax payer’s money, new methods of budgeting are required of which the performance based budgeting has emerged as a transparent and accountablemethod.

It relies on three aspects of understanding of the final outcome, the strategies formulated to reach those final outcomes and the specific activities that were carried out to achieve those outcomes. With a very detailed and objective analysis, this budgeting process is very result oriented in its approach.

  • Zero based budget: Zero based budgeting has its clear advantage when the limited resources are to be allotted carefully and objectively. It is quite flexible in nature and relies on rational methods, systematic evaluation to reallocate resources and justify the usage of funds. It starts from a zero base unlike traditional budgets where incremental approach is used. Here, the needs and costs of every function of the organization are taken into consideration for the next year’s budget. So the budget is futuristic and mayor may not be equal or more from the last year’s budget as traditionallycalculated.

The budgets in the parliamentary kind of system similar to what exists in a country like India become a tool of political negotiations where the budgeting powers are delegated to the Finance Minister of the country.

In a single party government, the entire party shares the same views regarding the spending of the resources however; the disagreement arises when individual members may differ on the cost of the distributive policies and would want the government funds to be diverted to their respective electoral constituencies.

In a coalition government, the differing opinions are tackled through compromise andcontracts approach where the coalition parties keeps the check on the budget process ensuring that it lies within the boundaries of the agreedcontract.

In the presidential kind of system too, the executive plays a somewhat similar process. A significant change that happened in US regarding the budget process was the Budget Enforcement Act passed in 1990s under the Bush administration, which protected the budgetary parameters against later modifications once cleared in the budget summit between the president and the legislature.

The budget process in different systems of government may vary but they are all aligned to achieve the relevant economic and social goals of that country. With increasing globalization and interdependent economies, several external considerations also come into play when the budgets are designed.

BALANCED AND UNBLANCED BUDGETS
  1. BalancedBudgeting

1. A Balanced Budget is that budget in which Government receipts are equal to Government expenditure.

Merits of the Balanced Budget
  1. The Government does not indulge in wastefulexpenditure.
  2. Interference in economic functioning of the system is totally avoided by thegovernment generally.
  3. Financial stability is ensured with balancedbudget.
  4. However, balanced budget is not an achievement of the government when economy is ina state of depression for at that time, government is expected to increase its expenditure with a view to increasing aggregatedemand.
Demerits of a Balanced Budget
  1. Balanced budget does not offer any solution to the problem of unemploymentduring depression.
  2. Balanced budget is not helpful to the growth and development programmes of the less developedcountries.
B.   UnbalancedBudgeting
  1. An unbalanced budget is that budget in which receipts and expenditure of the governmentare

not equal.

  • In this, two cases concerning surplus Budget and Deficit Budgetarise.
    • In Surplus Budget, Government receipts are greater than Government expenditures. While in the case of Deficit Budget, Government expenditures are greater than Governmentreceipts.
Merits of a Deficit Budget
  • It helps in addressing the problem of unemployment duringdepressions.
  • It is conducive for growth and development in less developedcountries
  • It works towards social welfare of thepeople.
Demerits of Deficit Budget
  • It shows wasteful expenditure by the government.
  • It shows less revenue realization in comparison with the expenditure.
  • It increases debt burden of the government.

ACTIVITY

  1. What do you understand by public finance?
  2. State the types of budget.
  3. Distinguish between balanced and unbalanced budgets.