Types of Government Budget - Balanced and Unbalanced

Different Types of Government Budget - Diagram ↓

A. Balanced Budget ↓

Balanced budget is a situation, in which estimated revenue of the government during the year is equal to its anticipated expenditure.

Government's estimated Revenue = Government's proposed Expenditure.

For individuals and families, it is always advisable to have a balanced budget.

Most of the classical economists advocated balanced budget, which was based on the policy of 'Live within means'. According to them, government's revenue should not fall short of expenditure. They also favoured balanced budget because they believed that government should not interfere in economic activities and should just concentrate on the maintenance of internal and external security and provision of basic economic and social overheads. To achieve this, government has to have enough fiscal discipline so that its expenditures are equal to revenue.

B. Unbalanced Budget ↓

The budget in which income & expenditure are not equal to each other is known as Unbalanced Budget.

Unbalanced budget is of two types :-

1. Surplus Budget
2. Deficit Budget

1. Surplus Budget

The budget is a surplus budget when the estimated revenues of the year are greater than anticipated expenditures.

Government expected revenue > Government proposed Expenditure.

Surplus budget shows the financial soundness of the government. When there is too much inflation, the government can adopt the policy of surplus budget as it will reduce aggregate demand.

Increase in revenue by levying taxes on people reduces their disposable incomes, which otherwise could have been spend on consumption or saved and devoted to capital formation. Since government spending will be less than its income, aggregate demand will decrease and help to reduce the price level.

However, in modern times, when governments have so many social economic & political responsibilities it is virtually impossible to have a surplus budget.

2. Deficit Budget

Deficit budget is one where the estimated government expenditure is more than expected revenue.

Government's estimated Revenue < Government's proposed Expenditure.

According to Prof. Hugh Dalton, "If over a period of time expenditure exceeds revenue, the budget is said to be unbalanced".

Such deficit amount is generally covered through public borrowings or withdrawing resources from the accumulated reserve surplus. In a way a deficit budget is a liability of the government as it creates a burden of debt or it reduces the stock of reserves of the government.

In developing countries like India, where huge resources are needed for the purpose of economic growth & development it is not possible to raise such resources through taxation, deficit budgeting is the only option.

In Underdeveloped countries deficit budget is used for financing planned development & in advanced countries it is used as stability tool to control business & economic fluctuations.

At the Point E, budget is balanced. To the left of point E the government budget is in deficit and to the right of point E, the budget is in surplus.

When the government incurs a budget deficit it is financed by borrowing. The government borrows from the public by issuing government bonds. This gives rise to government debt or public debt.