There are three types of government budget:
(1) Balanced Budget,
(2) Surplus Budget and
(3) Deficit Budget.
(1) Balanced Budget : Balanced budget is a situation in which estimated revenue of the government during the year is equal to its anticipated expenditure.
For individuals and families, it is always advisable to have a balanced budget, s Classical economist advocated Balanced Budget, which was based on the policy of “live-with-in means”. According to them i government’s revenue should not fall short of expenditure.
They favoured balanced budget because they believed that government should not interfere in economic activities and should just concentrate on the maintenance of internal and external security and provision of basic economic and social overheads.
Till 1930 generally accepted norm was that of ‘Sound Finance’ which implied that public authority should balance its budget. But the great depression of 1930’s proved that Balanced Budget was not a guarantee of stability and full employment. It was then realised that the government can play an effective role in recovery of the economy. This is because if governments expenditure exceeds its revenue, it will generate additional demand which will accelerate the pace of economic growth. It was Keynes who gave a new approach to the budgetary policy, he replaced the norm of Balanced Budget with the norm of functional finance.
(2) Surplus Budget: A surplus budget implies when the expected government revenue is greater than proposed government expenditure.
Surplus budget shows the financial soundness of the government. When there is too much inflation, the government can adopt the policy of surplus budget as it reduces aggregate demand by spending less than its income.
In periods of inflation, although there is greater employment, there is also a tendency for prices to rise rapidly. This can be checked. The inflationary gap can be corrected by lowering the level of effective demand in the economy. It can be corrected by increasing taxes. This will reduce the purchasing power of the people but increase the revenue of the government. Thus aggregate demand will fall. The inflationary gap can be corrected by lowering the level of public expenditure.
When Government reduces its expenditure the revenue with government is in excess of its expenditure.
In modern times, governments responsibilities have increased. Surplus budget will mean that the government instead of spending for the welfare of the people is busy earning and accumulating wealth. Hence, surplus budget practically is non-existing.
3. Deficit Budget: Deficit budget is one where the estimated government expenditure is more than expected revenue. Today almost all the countries of the world follow deficit budget instead of surplus or balanced budget. Deficit Budget solves the problem of recession and depression which occurs mainly due to lack of effective demand. Increase in total expenditure of the government, increases employment and income of the people. As a result, the aggregate demand for consumer goods increases. Increase in total expenditure tends to expand aggregate economic activity in the economy.
