Understanding Government Budgets in a Mixed Economy:

In a mixed economy, both the government and private sector play pivotal roles. This chapter explores the government’s financial activities through its budget, stating the sources of government revenue and avenues of spending.  It gives us the notions of balanced, surplus, and deficit budgets, their implications, and measures to manage them. Fiscal policy and the multiplier effect are introduced, showing the government’s influence on economic activity. 

Government Budget: Annual Financial Statement 

• The Government Budget in India is essentially an Annual Financial Statement as mandated by Article 112 of the Indian Constitution. 
• This statement, presented before the Parliament, encompasses the estimated receipts and expenditures of the government for a particular financial year, running from 1 April to 31 March. 

Classification of Government Budget Accounts: Revenue and Capital Budgets

The Government budget is bifurcated into two main accounts: (Refer to Figure )

• Revenue Account (or Revenue Budget): It includes items related only to the current financial year.
• Capital Account (or Capital Budget): It encompasses concerns regarding the assets and liabilities of the government.

Objectives of Government Budget:

The government plays a very important role in increasing the welfare of the people. In order to do that, the government intervenes in the economy in the following ways.

What Role does Government Budget Allocation play in providing Public Goods?

• Government provides certain goods and services which cannot be provided by the market mechanism i.e. by exchange between individual consumers and producers. 
• Classification of Goods: Goods are categorized into Public Goods and Private Goods based on their nature and the extent to which individuals can be excluded from their consumption.
• • Examples of Public Goods: National defense, roads, government administration etc.
  • Examples of Private Goods: Clothes, cars, food items etc.

• Distinctive Features: Public Goods and Private Goods exhibit two major differences
• Non-Rivalry: Public goods are characterised by non-rivalry, i.e. one person’s consumption does not reduce the availability for others such as public parks or measures to reduce air pollution, unlike private goods, where consumption is rivalrous.
• Non-Excludability: Public goods are non-excludable I.e. individuals cannot be feasibly excluded from enjoying their benefits even if they do not pay for them. 
  • On the other hand, individuals can be excluded from consuming private goods if they do not pay for them.
• Challenges and Government Intervention
• Free riders: The consumption of public goods leads to a phenomenon known as ‘free-riders’, where some users enjoy the benefits without paying, as there is no exclusive title to the property being enjoyed.
• • The broken link between producers and consumers, due to the absence of a payment process, necessitates government intervention to provide such goods.
• Public Provision vs. Public Production
• • Public Provision: It involves the allocation of funds from the government budget to finance public goods, enabling their use without requiring direct payment.
  • Public Production: It refers to when the government directly produces the goods. 
    • Public goods can be produced either by the government or the private sector, showcasing a clear distinction between public provision and public production.

Government Redistribution: Impact on National Income and Household Finances through the Government Budget

• Definition: It is defined as the government’s role in altering the distribution of income to achieve a distribution considered ‘fair’ by society. 
• • This is achieved through the government’s interventions like transfers and tax collections, which affect the personal disposable income of households through the Government budget.
• Flow of National Income
• • National income is the total monetary value of all goods and services produced by a country during a financial year.
  • The total national income of a country is distributed between:
    • Private Sector: Consisting of firms and households, known as private income.
    • Government Sector: Known as public income.
• Types of Private Income
  • Private income is the total income received by the private sector from all sources.
    • Personal Income: The portion of private income that reaches households.
    • Personal Disposable Income: The amount from personal income that can be spent by households.
• Government’s Impact on Income Distribution
  • The government influences personal disposable income by Making Transfers (such as subsidies or social benefits) and Collecting Taxes (from households and firms).
  • Through these actions, the government operating within the framework of the government budget, actively shapes the distribution of income, aligning it with societal notions of fairness.

How does the Government’s Stabilization Function Counter Economic Fluctuations within the Government Budget Framework?

• Definition: It refers to the government’s intervention to correct fluctuations in income, employment, and overall economic stability by either expanding or reducing aggregate demand, based on the prevailing economic conditions.
• Economic Fluctuations and Aggregate Demand: Economic stability is largely dependent on the level of aggregate demand, which in turn is influenced by the spending decisions of:
  • Private Economic Agents: Millions of individuals and firms whose spending decisions are influenced by factors like income and credit availability.
  • Government: Through its spending, taxation, and monetary policies.
• Government Intervention in Case of Insufficient Demand: There may be periods where the level of demand is insufficient for the full utilisation of labour and other resources in the economy.
• • Due to the rigidity of wages and prices not falling below a certain level, employment levels may not automatically revert to optimal levels.
  • The government, in such cases, needs to intervene to raise the aggregate demand to stimulate economic activity and employment.
• Government Intervention in Case of Excessive Demand: Conversely, there might be times when demand exceeds available output under conditions of high employment, potentially leading to inflation.
  • In such scenarios, the government may need to implement restrictive measures to reduce demand, curb inflation, and maintain economic stability.
• Significance of Stabilisation Function: The significance of the stabilisation function lies in the government’s proactive intervention to either expand or reduce demand based on the economic scenario to ensure a stable economic environment with controlled inflation and optimal employment levels.