The purpose of this chapter is to understand what a government budget is and how the government budget interacts with and affects the economy. The budget is the most important
information document of the government. One part of the budget is similar to a company’s annual report. This part presents the overall picture of the financial performance of the
government during the period since its last budget. The second part of the budget presents the government’s financial plans for the period up to its next budget, in order to inform the country, and seek legislative approval. As a consequence of Keynesian economics, budgetary policies are considered significant in the stabilisation of the economy.

Budget and its Objectives

The budget is an annual statement of the estimated receipts and expenditures of the government over the fiscal year, which runs from April 1 to March 31. The government has several policies it wishes to implement in the overall task of performing its functions.

Implementation of these policies requires expenditure by the government, and some source of
funding for that expenditure. The budget, is thereby a fiscal tool for the government to implement its various policies.

The objectives that are pursued by the government through the budget are as follows:

1. Activities to secure a reallocation of resources: The government has to reallocate resources in line with social and economic considerations in case the market fails to do so, or does so inefficiently.

2. Redistributive Activities: The government redistributes income and wealth to reduce inequalities, by expenditures on social security, subsidies, public works etc.

3. Stabilising Activities: The government tries to prevent business fluctuations and maintain economic stability through expanding public expenditure during recession and contracting the former during inflation. (Keynesian economics).

4. Management of Public Enterprises: Government undertakes commercial activities that are of the nature of natural monopolies, heavy manufacturing, etc. through its public enterprises. A natural monopoly is a situation where there
are economies of scale over a large range of output; then one firm can produce at a lower average cost than could more than one firm. Industries which are potential natural monopolies are railways, electricity etc. These usually come under state regulation because if left unregulated, there will be a tendency of the monopolist to curtail output in pursuit of profit
maximising behaviour, thereby lowering social welfare.

For more details please download below document.

Gevernment Budget and the economy.pdf