Budget 2021 classroom: What is Budget and what are the types of Union Budget?

All eyes are on the upcoming Union Budget 2021 which is scheduled to be presented on February 1 as this is considered to be one of the most anticipated financial event of the year, especially in the aftermath of the COVID-19 Pandemic. Finance Minister Nirmala Sitharaman will present the Union Budget in Parliament and there are huge expectations that she would announce some of the big reforms for the ailing economy.

Let’s decode what is a budget and how many types of union budget are there:

As per Article 112 of the constitution, a union budget is basically the statement of the estimated receipts and expenditure of the government. Also known as the annual financial statement of the government, the union budget keeps the exact count of its finances from April 1 to March 31.

In terms of classification of the Union Budget, it is divided into three categories- Balanced budget, Surplus budget, and Deficit budget.

Balanced Budget: For a balanced budget, the estimated expenditure must be equal to the expected income in a particular financial year and it is based on the idea that the government’s expenditure should not exceed its revenue. However, in times of economic crisis, there is no room for a balanced budget to guarantee financial stability. While on one hand, it curbs wasteful expenditure, on the other hand, it can disturb the process of economic growth and limit the scope of the government’s welfare activities at the same time.

Surplus Budget: A surplus budget is basically where the expected income is more than the estimated expenditure in a financial year and this type of budget signifies that the government’s earnings from taxes are more than the money the government spent on public welfare. During inflation, the surplus budget can be implemented in order to cut down aggregate demand. While in deflation, this type of budget will never be the correct option for a government.

Deficit Budget: A deficit budget comes at a time when the estimated expenditure is higher compared to the expected revenue. In this kind of budget, the government’s revenue is less than its expenditure and this budget is particularly for developing economies and during the recession, this type of Budget helps generate extra demand and spur the rate of economic growth.