Introduction: Surplus, Deficit and Balanced Budget 

A balanced budget occurs when a government’s revenue equals its expenditures, resulting in no deficit or surplus. A surplus budget happens when revenue exceeds spending, allowing for savings or debt reduction. Conversely, a deficit budget occurs when expenditures surpass revenue, leading to the need for borrowing or debt accumulation.

The types of budgets are defined based on the relationship between the government’s revenue collections and expenditures.

• Balanced Budget: It occurs when the government’s expenditures are equal to its revenue collections. 
  • If higher expenditures are necessary, the government would need to raise the corresponding amount through taxes to maintain a balanced budget.
• Surplus Budget: It is identified when the tax collections exceed the required expenditures.
• Deficit Budget: It is a scenario where the government’s expenditures surpass its revenue, which is the most common feature among the three.

Measures of Government Deficit: Impact and Implications in a Balanced budget

• A government deficit arises when the government spends more than its revenue collections. 

Revenue Deficit and Balance budget: Formula, Significance, and 2020-21 Insights

• Definition: Revenue Deficit is the excess of the government’s revenue expenditure over revenue receipts.
• Formula: Revenue Deficit= Revenue Expenditure − Revenue Receipts
• Balanced Budget Inclusion: In the context of fiscal planning, achieving a balanced budget is a significant goal. 
• Data: In 2020-21, the revenue deficit was reported to be 2.7% of GDP. 
• Significance: It only accounts for transactions affecting the current income and expenditure of the government.
  • A revenue deficit indicates government dis-saving, utilising savings from other economic sectors to finance part of its consumption expenditure, thereby necessitating borrowing for both investment and consumption requirements.

Fiscal Deficit: Insights and Impact with a Balanced Budget

• Definition: It is the difference between total government expenditure and total receipts, excluding borrowings.
• Formula: Gross Fiscal Deficit = Total Expenditure − (Revenue Receipts+Non-debt creating capital receipts)
  • The fiscal deficit, amounting to 3.5% of GDP, indicates the total borrowing requirements from all sources. 
• Non-Debt-Creating Capital Receipts: It includes recoveries of loans and proceeds from the sale of PSUs, which do not give rise to debt.
• Formula: Gross Fiscal Deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad
  • It is a crucial indicator of the financial health of the public sector and economic stability.
• A significant share of revenue deficit in fiscal deficit implies a large portion of borrowing is used for consumption expenditure rather than investment.

What is the Focus of Primary Deficit?

• Definition: Primary Deficit focuses on current fiscal imbalances by excluding interest obligations on accumulated debt from the fiscal deficit.
• Formula: Gross Primary Deficit = Gross Fiscal Deficit – Net interest liabilities.
• Net Interest Liabilities: It includes interest payments minus interest receipts by the government on net domestic lending.

Government Deficits and the Role of a Balanced Budget:

• Significance: These deficit measures are crucial for evaluating the government’s fiscal discipline, borrowing requirements, and the impact on economic stability and growth.
• Consequences: Persistent deficits, especially revenue deficits, may lead to unsustainable borrowing, accumulation of debt, and eventual expenditure cuts, which could adversely affect growth and welfare.
• Here, the concept of a balanced budget emerges as a crucial countermeasure to mitigate these consequences, ensuring fiscal responsibility and safeguarding overall economic well-being.

Fiscal Policy’s Objectives: Role and the Crucial Balanced Budget Element

• Definition: Fiscal Policy refers to the governmental strategy that utilizes changes in taxation and government spending to stabilize output and employment levels, aiming to modulate economic fluctuations.
  • Fiscal Policy is a governmental strategy involving alterations in expenditures and taxes to stabilize the levels of output and employment, as proposed by Keynes in “The General Theory of Employment, Interest and Money.” 
• Aim: To boost output and income and stabilize economic fluctuations by creating either a surplus budget (total receipts > expenditure), a deficit budget (total expenditure > receipts), or a balanced budget (expenditure = receipts).

Fiscal Policy Mechanisms and Equilibrium Income: Including a Balanced Budget

Fiscal policy directly influences equilibrium income through two main channels:

• Government Purchases (G): Government purchases of goods and services (G) increase aggregate demand.
• Taxes and Transfers: Affect the relationship between income (Y) and disposable income (YD) – the income available for consumption and saving within households.

1. Taxation: Boosting Income

• The government imposes lump-sum taxes (T), not dependent on income, along with a constant amount of transfers (TR).
  • Taxes reduce disposable income and consumption, impacting aggregate demand.

• Changes in Taxes: A reduction in taxes boosts disposable income (Y−T) at every income level, propelling the aggregate expenditure schedule upwards by a fraction c of the tax decrease.
• The inclusion of a balanced budget complicates fiscal policy mechanisms, shaping their overall impact on equilibrium income.

Balancing Stability: Proportional Income Tax and the Role of a Balanced Budget in GDP Swings

• When GDP Increases: disposable income also rises, but by a smaller margin due to the portion taken as taxes. 
  • This mechanism curtails extreme upward swings in consumption spending.
• When GDP Declines: When GDP falls (During Recession), the fall in disposable income is cushioned, preventing a drastic reduction in consumption that would otherwise occur with fixed tax liabilities. 
  • This, in turn, helps to mitigate the decline in aggregate demand, contributing to economic stability.
  • The consideration of a balanced budget further influences the dynamics, highlighting the interconnectedness of fiscal policies and their impact on overall economic equilibrium.

2. Discretionary Fiscal Policy

• Discretionary fiscal policy can be employed to counterbalance undesirable shifts in investment demand. 
• For instance, a decrease in investment can be offset by an increase in government spending, keeping autonomous expenditure and equilibrium income constant.
• This deliberate action distinguishes discretionary fiscal policy from the inherent automatic stabilising features of the fiscal system.

3. Role of Welfare Transfers

• Welfare transfers play a role in stabilising income across different phases of economic cycles. 
  • In boom years with high employment, tax collections for financing such expenditures escalate, applying a stabilising pressure on high consumption spending.
  • During economic downturns, welfare payments help to maintain consumption levels, acting as a shock absorber for the economy.

4. Private Sector Stabilisers

• The private sector also houses built-in stabilisers. 
• Example:
  • Corporations tend to maintain their dividends in the short term despite income changes,
  • Households strive to uphold their previous living standards.
• These stabilizers operate automatically without necessitating action from decision-makers, thus acting as shock absorbers for economic fluctuations.

5. Transfers and Economic Output

• If the government opts to increase transfer payments instead of direct spending on goods and services, autonomous spending rises by a fraction of the transfer payment increase.
• However, the resultant rise in output is less compared to a scenario where government expenditure is increased, as a portion of the transfer payments is saved.