A government budget may be defined as a statement of government’s estimated incomes and expenditures for a period of one financial year. 

Following are two components of the government budget: 

1. Revenue Budget 

2. Capital Budget 

Revenue Budget – Revenue budget is a statement of the government’s estimated revenue receipts and revenue expenditure for a period of one financial year. Revenue budget covers revenue items which are of recurring nature and are nonredeemable. Revenue budget contains the following : 

(i) Revenue Receipts 

(ii) Revenue Expenditure.

Revenue receipts neither create a liability nor lead to reduction in assets. Revenue receipts include tax revenue and non-tax revenue. 

Following are examples of tax revenue :

• Income Tax 

• Goods and Service Tax 

• Corporation Tax 

• Gift Tax 

Following are examples of non-tax revenue : 

• Price 

• Gifts

• Grants 

• Escheat 

• Fines. 

Revenue expenditure does not lead to any creation of assets or reduction in liabilities. It includes plan expenditure and non-plan expenditure.

Capital Budget – Capital budget is a statement of the government’s estimated capital receipts and capital expenditure. Capital budget covers capital items which are of non-recurring nature. 

Following are two components of capital budget:

1. Capital receipts 

2. Capital expenditure 

Capital receipts either create a liability or lead to reduction in assets.

• Loan from public 

• Foreign debt 

• Grants. 

Capital expenditures leads to creation of assets or reduction in liabilities. 

Following are examples of capital expenditure : 

• Expenditure on roads 

• Construction of school buildings 

• Repayment of loans.

Following are examples of capital receipts :

• Expenditure on roads 

• Construction of school buildings 

• Repayment of loans.

(A) Allocation of Resources – One of the objectives of a government budget is to secure reallocation of resources in line with economic and social priorities of the country. For this purpose, the budget of the government may have a liberal expenditure policy in favour of public goods such as national defence, roads, government administration etc., to promote social welfare. The government can use its taxation policy to mobilise resources for investment. The government can also give subsidies to encourage production in some sectors and small scale industries. The government may discourage the production of undesirable goods through heavy taxation. 

(B) Economic Stability – One of the objectives of government is to ensure stability in the economy. The government budget prevents business fluctuations and maintains price stability. If the aggregate demand falls short of aggregate supply, the government will have to take some measures in its budget to discourage savings and to encourage investments. For this, the government would decrease taxes but increase public expenditure. If the aggregate demand exceeds aggregate supply, the government would encourage savings and discourage investments by increasing taxes and reducing public expenditure.