Question

Explain the difference between balanced budget and unbalanced budget. Is a balanced budget an achievement of the government?

Hint:

Remember that the modern goal of a government budget is not just to balance income and expenditure, but to achieve economic objectives like growth, stability, and employment.

Answer 1

Step 1: Difference between Balanced and Unbalanced Budget:
A government budget is a statement of estimated receipts and estimated expenditures of the government for a fiscal year. \begin{itemize} \item Balanced Budget: A budget is said to be balanced when the government's estimated total receipts are exactly equal to its estimated total expenditure. \[ \text{Total Estimated Receipts} = \text{Total Estimated Expenditure} \] \item Unbalanced Budget: A budget is said to be unbalanced when the government's estimated receipts are not equal to its estimated expenditure. An unbalanced budget can be of two types: \begin{enumerate} \item Surplus Budget: This occurs when estimated receipts are greater than estimated expenditure. It is generally used during times of inflation to reduce aggregate demand. \[ \text{Total Estimated Receipts} > \text{Total Estimated Expenditure} \] \item Deficit Budget: This occurs when estimated expenditure is greater than estimated receipts. It is widely used during times of recession or for funding development activities to boost economic growth. \[ \text{Total Estimated Expenditure} > \text{Total Estimated Receipts} \] \end{enumerate} \end{itemize}

Step 2: Is a Balanced Budget an Achievement of the Government?
Whether a balanced budget is an achievement is debatable and depends on the prevailing economic conditions. \begin{itemize} \item Classical Viewpoint: Classical economists viewed a balanced budget as a sign of fiscal discipline and stability. They believed the government should not spend more than it earns, thus avoiding wasteful expenditure and public debt. From this perspective, it is an achievement. \item Modern (Keynesian) Viewpoint: Modern economists, especially following Keynes, argue that a balanced budget is not always desirable and can be harmful. \begin{itemize} \item During Recession/Depression: A balanced budget policy during a recession would mean the government has to either cut its expenditure or raise taxes, both of which would further reduce aggregate demand and worsen the economic downturn. In such situations, a deficit budget is needed to increase government spending and stimulate the economy. \item For Developing Economies: Developing countries need to undertake massive public investment in infrastructure and social welfare, which requires expenditure far exceeding their revenue. Therefore, a deficit budget is almost a necessity for their growth and development. \end{itemize} \end{itemize}

Step 3: Final Answer:
A balanced budget is one where receipts equal expenditure, while an unbalanced budget (surplus or deficit) is where they are unequal. A balanced budget is not necessarily an achievement. While it signifies fiscal prudence, it is not suitable for tackling economic problems like recession or for promoting rapid growth in developing countries. Modern governments use the budget as a tool for economic stability, often preferring a deficit or surplus budget depending on the economic situation.