How Budgetary items are classified?

The government budget has large number of expenditure items and receipt items. To overcome the complexity of dealing with large number of items, there should be a classification system for both expenditure and revenue items. In India, the major classification system adopted is to divide the budget into revenue budget and capital budget.

Expenditure and Receipts

          Expenditure and receipts are the two important components of the budget. Total expenditure and total receipts in any budget will be equal. The total expenditure and total receipts also shows the size (amount) of the budget. 

In the budget, instead of revenue to refer to the accruals to the government, the term receipts are used.  This is needed because; all the accrued funds to the government are not revenue in the pure sense. Borrowing is one of the major item of fund for the government. We can’t describe borrowing as revenue. Hence, on the matching side of expenditure, the term receipts is used. Receipts include- tax revenues, non-tax revenues as well as borrowing made by the government to finance the budget. So in the budget, all items are entered as either expenditure or receipts.

Revenue budget and Capital budget

Budget is basically divided into Revenue budget and capital budget. Receipts and expenditure are divided among these two.

Hence the terms revenue budget and capital budget indicates different types of expenditure and receipts for the government. This means that in the revenue budget there will be the revenue receipts and revenue expenditure. Similarly, in the capital budget, there will be capital receipts and capital expenditure.

The Revenue Budget

Revenue budget doesn’t mean budget about government revenue, rather it describes the current (day to day function related expenditure and receipts) activities of the government.

Revenue budget involves revenue receipts and revenue expenditure. These expenditures and receipts are related to the day to day functioning of the government. Expenditure is needed to finance government functions like defense, social services, administration et. These are the main revenue expenditures.

Similarly, when the government is performing its day today functions, lot of revenue will be accrued to it. Tax revenues and non-tax revenues are the two types of revenue receipts.

Really, revenue expenditure is considered as unproductive expenditure because it is mainly used for the running of the government machinery. Unlike in the case of capital expenditure, revenue expenditure will not give any revenue to the government in future. 

Important revenue expenditure are: interest payments (for the borrowing that the government has made in the past), defence (almost 70% of the defence expenditure are revenue expenditure), subsidies (subsidy is not a productive item for the government as there is no return from it for the government), salaries etc.

Important revenue receipts are: tax revenues including corporate income tax, personal income tax, customs duties, service taxes etc, and non-tax revenues including revenue from mint, profits from Public Sector Enterprises etc.

In India, there is revenue deficit since 1978. This situation means government’s revenue receipts including tax revenues are not enough to meet its revenue expenditure. Hence the government is borrowing to finance its revenue deficit. 

Revenue budget involves those receipts and expenditure coming out of the day to day activities of the government. Don’t misunderstand that the Revenue budget is solely aimed at describing revenues of the government. The revenue budget, on the other hand, is actually related to the day to day functioning of the government. Revenue budget is recurring or current in nature and is often termed as unproductive expenditure.

The Capital Budget

The word capital means productive investment. This meaning is quite applicable to capital budget as well. Capital budget involves both capital receipts and capital expenditure.

Capital Expenditure: Capital expenditure denotes future revenue yielding type of expenditure by the government. Capital expenditure consists of expenditure made by the government to acquire assets-buildings, machineries etc. Loans to the states and other entities are also capital expenditure. When the government gives loans to the states it gets interest and principal in future. (On the other hand, grants to the states are revenue expenditure for the government because grants will not be repaid). Similarly, the centre subscribes shares of public sector enterprises under capital expenditure. Capital expenditure is treated as a productive activity by the government. 

Capital receipts: Capital Receipts means either loans or receipts from past productive activities. Major capital receipts are: internal and external borrowings of the government proceeds from the sale of PSU or disinvestments and recovery of loans.

Usually, borrowing constitutes to the bulk of the receipts under capital budget (constitute nearly 90% of the total capital receipts). These are loans raised by the government in the form of market borrowing, loans from its own institutions and a negligible amount of loans from foreign sources. Recovery of loans from the state governments is also comes under capital receipts.

Budget at 2016-17 at Glance