Budget primer: Understanding govt expenditure and its various types

Government expenditure is the central government’s spending on goods and services and other items

It has a huge influence on the nation’s economy as it reflects aggregate demand in addition to household consumption, business investment, and net exports.

Therefore, when government expenditure increases, aggregate demand increases, and the economy is expected to grow. On the other hand, when the government cuts its spending, aggregate demand declines and so does the economy of a nation.

Revenue expenditure

The expenditure that the government incurs for purposes other than the creation of physical or financial assets is known as revenue expenditure.

This is the routine expenditure that the government makes for operational and administrative activities. Revenue expenditure also embraces expenses for various services, interest payments on government debt, and grants given to state governments and other parties, even though some of the endowments might be meant for the creation of assets.

The Union Budget divides total expenditure into planned and non-planned expenditure.

Central plans such as the five-year plans and central aid for plans by states and union territory are planned revenue expenditure. Non-planned expenditure covers the broader general, economic, and social services of the government. Key items of non-planned expenditure are interest, defence, salaries, pensions and subsidies.

Capital expenditure

Expenditure that creates physical or financial assets or depletion in the government’s financial liabilities is called capital expenditure. It represents the “productive spending” of the government.

Investment in infrastructure and equipment, shares and loans, and advances to state and union territory governments, public sector undertakings (PSUs) and others, all come under capital expenditure.

Capital expenditure is essential for increasing the capital stock in a country’s economy; it creates future benefits by increasing the nation’s productive capacity, allowing it to produce more.

Capital expenditure is also classified as planned and non-planned in the budget documents.

Planned capital expenditure includes the union government’s plan and central assistance for state and union territory plans. Non-planned capital expenditure covers the government’s general, social, and economic services.

Other than operational activities and investments in public services such as defence, education, social protection and health care, the government spends on things that may not involve the exchange of goods and services, such as transfer payments.

The union government, in its medium-term fiscal policy statement, sets a three-year rolling target for specific fiscal indicators and examines whether revenue expenditure can be financed through revenue receipts–those which neither create any liability nor cause any reduction in the assets of the government, on a sustainable basis. It also examines how productively capital receipts are being consumed. This is done by exploring the extent to which they go towards creation of liabilities or reduction of financial assets.

This statement sets the preferences of the government in the fiscal sector, examining current policies and justifying any deviation in important fiscal measures.

On the other hand, the Macroeconomic Framework Statement assesses the prospects of the economy for the GDP growth rate, the fiscal balance of the central government, and the external balance.