A for Annual, B for Budget

What’s so special about the Budget? A book full of fiscal jargon. Team ET decodes the matrix to present its readers a tutorial on what’s the Budget all about. Cut through the clutter to figure out what’s behind those big Budget figures

For you the state needs to tax

Why is the Budget so important? What makes the government’s annual statement of accounts special? In olden times, the norm used to be that the good lord giveth and he taketh away. In modern times, the lord presumably continues with his work but the obtrusively visible giving and taking away are done by the state. The Budget describes the state’s give and take

Taxes make the budget interesting. This was especially the case in the past when there could be special rates specific to individual commodities and these changed from Budget to Budget. Similarly, taxes on income also used to vary sharply. Such chopping and changing of tax rates could determine the fate of a business or of its competition. The level of disposable incomes with the tax-paying public (the stinking rich never paid taxes and still don’t) depended on tax rates presented in the Budget.

Things have changed. Taxes are moving towards uniform structures and stable rates. An exemption here or there is still possible and will keep the Budget a continuing source of interest.

Expenditure also makes for excitement. How much the government spends on defence, internal security, administration, pensions, subsidies, building infrastructure, maintaining past construction, promoting education and healthcare, etc affects the lives of the citizenry, mars and makes businesses.

Significant as individual items of taxation and expenditure are, their cumulative effect is even more significant. Aggregate government expenditure can boost the economy in a downturn or, alternatively, overheat it.

Higher effective taxes can slow down economic activity. Even more important is how the government’s aggregate expenditure is financed - whether it’s forced to borrow from the public or from abroad. Yes, we’re talking about the fiscal deficit. The gross fiscal deficit is the excess of expenditure over non-borrowed receipts, financed out of borrowing.

The golden rule in budget-making is that current revenues should cover at least current expenditure, so that borrowing is not used to finance expenditure that does not generate a future return. Borrowing money to meet current expenditure lays the ground for an increasing cycle of debt. This is the importance of wiping out the revenue deficit.

Borrowing to finance capital expenditure is different. Depending on how wisely the borrowed money is spent, it will add to or take away from the economy’s productive capacity.

Borrowing is the means through which the government lays its hands on the public’s savings. If the government’s demand for the public’s savings is in excess of what is left over from the non-government sector’s investment plans, it leads to macro-economics stress.

This stress manifests itself as inflation, higher interest rates and a wider current account deficit in the external balance of payments. This is the importance of maintaining a low fiscal deficit.

The Budget is additionally important because governments use it as the occasion for announcing crucial economic policy as well.