Budget Glossary: Key Terms and Definitions You Must Know
The Union Budget is an annual event that is well-tracked as it impacts the lives of ordinary citizens. The Budget document has various terms like fiscal deficit, capital expenditure, GDP growth etc. which many people might need to learn. To help you understand the Budget better, we have compiled a list of the common terminologies:
Key Budget terms and meaning:
Here's a look at key Budget terms that you should know:
Union Budget
Under Article 112 of the Constitution, a statement of estimated receipts and expenditures of the central government has to be laid before Parliament for the financial year (April 1 to March 31). This statement, called the “Annual Financial Statement” is the main Budget document. In simpler words, a Budget gives details of the government's revenue sources and where the money will be spent.
The main objective of the Union Budget is to ensure swift and equitable economic growth while promoting social justice and equality. The government generally announces tax changes, which is its major revenue source, in the Budget. It also announces investment plans and sectors it will allocate money to in the Budget which is useful for investors.
Interim Budget
An interim budget is usually presented in the year when the general elections are due. Through the interim budget, the government seeks approval to meet the expenses for the next few months remaining in its term. The interim budget details the income and expenditure estimates for the entire year, which the incoming government can and does modify while presenting the Budget. While no provisions stop the government from introducing tax changes in the Interim Budget, such adjustments are generally avoided.
Gross Domestic Product (GDP)
GDP is one of the key indicators of a country's economic progress. A rising GDP indicates that the economy is getting stronger while the reverse also holds. It is the value of all the goods and services produced within a country in a year. There are two types of GDP:
- Nominal GDP
Nominal GDP is the value of goods and services produced at the current market prices. It does not consider inflation, and may not give a true picture of economic growth. For example, if there is a 7% annual inflation in an economy, then nominal GDP will also increase by 7% even if the goods and services produced stay the same.
- Real GDP
Real GDP is the value of the goods and services produced taking inflation into consideration. It shows a truer economic picture.
Direct and Indirect Taxes
Taxes form a major source of revenue for the government. They are used for meeting expenses like the construction of roads and highways, providing for social welfare schemes, healthcare, defence etc.
There are two types of taxes - direct and indirect. Direct taxes, as the name suggests, are paid by an individual or a corporation to the government directly. Meanwhile, indirect taxes are levied on goods and services rather than directly on a person's income. The onus to deposit the tax with the government lies with the seller. GST and customs duty are some of the examples of indirect taxes.
Goods & Service Tax
Goods & Services Tax (GST) is an indirect tax, introduced on July 1, 2017. It is levied on most goods and services sold. It was introduced to achieve the idea of ‘One Nation, One Tax’ and has replaced multiple indirect taxes such as VAT, excise duty etc. Some items are, however, exempted from GST like essential commodities (milk, fruits, and vegetables), alcohol, and crude oil. GST is also not levied on exports.
Fiscal Deficit
Fiscal deficit is the difference between the government’s expenditure and revenue (excluding borrowings). This shortfall is met through additional borrowing from the central bank or the issuance of government bonds. Fiscal deficit is generally represented as a percentage of GDP. A higher fiscal deficit is not a good sign for the economy.
Capital Budget
The capital budget comprises capital revenue and capital expenditures.
Capital receipts create liabilities or reduce financial assets. Some examples of capital receipts are disinvestment, loans raised by the government from the public, and borrowings from the RBI, or other financial institutions.
Capital expenditure is spending by the government that creates financial assets. Expenditure on infrastructure, land, machinery or loans granted by the government are examples of capital expenditure.
Revenue Budget
Revenue Budget comprises revenue receipts of the government and the expenditure met from the revenues generated.
Revenue receipts include taxes and duties levied by the government, interest and dividends earned on investments made, fees, and any other income from services rendered.
Revenue expenditure consists of the spending done for the normal functioning of the government. It consists of expenses that do not result in the creation of assets. Interest paid on loans, salaries and pensions, spending on different ministries and departments are some examples of revenue expenditure.
Excess Grant
Under Article 15 of the constitution, the government has the provision to demand excess grants. It is the additional money that is given to the government when allocated money falls short of the expenditure. The demand for excess grants is made after the expenditure is incurred. It is made to the Parliament at the end of the financial year. They are to be approved by the Public Accounts Committee of Parliament and then voted on by the Lok Sabha.
Fiscal Policy
Fiscal policy is the policy under which the government uses instruments like taxation, public spending or public borrowing to meet its economic goals. For example, to control inflation, the government might raise taxes as it reduces disposable income.
Finance Bill
A Finance Bill contains information about the country’s finances, such as taxes, government expenditure and borrowing, revenue etc. It is a key part of the Union Budget. Once enacted, the bill transforms into the Finance Act. The drafting of the Finance Bill adheres to the guidelines outlined in Article 117 of the Constitution of India.
Vote On Account
According to Article 116 of the Constitution, through vote on account the government can seek a grant from the Consolidated Fund of India to cover short-term expenses.
At the beginning of each financial year on April 1, sometimes there isn't enough time to get Parliament's approval for the Budget to kick in and make sure its plans are put into action. When this happens, the finance ministry introduces a 'Vote on Account'. This is to get Parliament's go-ahead so the government can keep running smoothly and cover its essential expenses like salaries and pensions for the first few months of the year.
Budget Estimates
Every year in the Budget, the finance minister allocates funds to various ministries, sectors, departments, and tasks. This is known as Budget Estimates. These estimates represent how much the government is willing to spend. These are subject to change over the year.
Revised Estimates
The government plans its spending based on its estimates at the start of the financial year. However, as the year progresses, some ministries or tasks may require more funds than originally planned due to changing circumstances. To accommodate these needs, the government may announce changes in allocations, which are known as Revised Estimates. The number for the revised estimates in a given financial year is captured in the next fiscal’s Budget.
Economic Survey
The Economic Survey reviews the financial developments and gives an overview of key economic indicators in a given financial year. It is presented ahead of the Union Budget. It is prepared by the Chief Economic Advisor.
Disinvestment
When the government sells a stake in public companies to generate revenue, it is known as disinvestment. The government is the owner of all public sector companies.