Union Budget

The Union Budget for a given year gives details of expenditures planned by the government and expected revenues from the government's tax machinery to finance them.

The Union Budget uses the term "receipts" for incomes. Both receipts and expenditures are classified under two heads: Revenue Account and Capital Account. While Revenue Receipts and Revenue Expenditures are expected to occur in a given financial year, Capital Acccount Receipts and Expenditures can happen over a longer time interval.

Government's revenue incomes or receipts originate from two sources: taxes, and returns on capital invested in public sector enterprises. The government's tax income includes the income tax; service tax; the excise levied on products and the customs duties charged on imports. Additional income comes from taxes charged on company profits, besides taxes on capital gains made while selling off assets like shares and houses

Capital receipts could come from within India or from foreign governments and multilateral organisations like the International Monetary Fund (IMF). When you buy an Indira Vikas Patra or open a PPF account in the post office, you boost the government's capital receipts. Repayment of loans by the government, say, to a PSU, also come under the head of capital receipts.

Government's revenue expenditure includes money spent on normal running of government departments and various services, interest charges on government debt, subsidies. Grants to State governments and other parties are also treated as revenue expenditure.

Capital expenditure includes payments made for acquisition of efforts like land, buildings and machinery, as also investments in shares. Loans and advances extended by the Centre to State governments and Union Territories, PSU's and other parties also fall under this category.

Government expenditure is also classified into plan and non-plan expenditure. Plan expenditure is money spent on new projects such as new power plants or bridges, expected to commence in the financial year. Non-plan expenditures emanate from projects that have already been completed. For instance, maintenance and salaries of staff of primary schools set up by the government would be classified under this category.

The Budget also has policy announcements. The Budget indicates the government's economic thinking and determines activities such as exports and foreign direct investment, which indirectly impact our finances.

The Budget has both short-term and long-term effects on finances. Short-term effects take place via taxes and prices. Tax rates determine disposable income. Income tax rates laid down in the budget make a big difference to salaried people, who have fixed incomes. The indirect taxes like excise and customs duties laid down in the Budget impact product prices, and hence spending decisions.

In the long run, the direction inflation takes in response to the budget influences money. Suppose, to balance the budget, the government borrows heavily. It may then be forced to print more money. This increases demand for goods and services without a commensurate increase in supply, since higher supply requires new plants and greater manpower, which take time. So there will be an inflationary price rise.

Inflation's greatest impact is on older people, especially those retired or close to retirement. People in this category usually seek stable returns and invest their savings accordingly. Rising inflation erodes the benefits of fixed-return instruments.