Assignment of

Accounting Financial Management:

Subject:- why do government budget deficit grow during recession?

· What is budget?

A budget (from old French baguette, purse) is a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending^. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms.

In summary, the purpose of budgeting is to:

1. Provide a forecast of revenues and expenditures, that is, construct a model of how our business might perform financially if certain strategies, events and plans are carried out.

2. Enable the actual financial operation of the business to be measured against the forecast.

· Definition of budget: An estimate of costs, revenues, and resources over a specified period, reflecting a reading of future financial conditions and goals.

One of the most important administrative tools, a budget serves also as a (1) plan of action for achieving quantified objectives, (2) standard for measuring performance, and (3) device for coping with foreseeable adverse situations.

· What is deficit budget?

When the government expenditure exceeds revenues, the government is having a budget deficit. Thus the budget deficit is the excess of government expenditures over government receipts (income). When the government is running a deficit, it is spending more than its receipts. The government finances its deficit mainly by borrowing from the public, through selling bonds; it is also financed by borrowing from the Central Bank.

· Types of Budgetary Deficit ↓

The different types of budgetary deficit are explained in following points:-

1. Revenue Deficit

Revenue Deficit takes place when the revenue expenditure is more than revenue receipts. The revenue receipts come from direct & indirect taxes and also by way of non-tax revenue

2. Budgetary Deficit:-

Budgetary Deficit is the difference between all receipts and expenditure of the government, both revenue and capital. This difference is met by the net addition of the treasury bills issued by the RBI and drawing down of cash balances kept with the RBI. The budgetary deficit was called deficit financing by the government of India.

3. Fiscal Deficit:-

Fiscal Deficit is a difference between total expenditure (both revenue and capital) and revenue receipts plus certain non-debt capital receipts like recovery of loans, proceeds from disinvestment.

In other words, fiscal deficit is equal to budgetary deficit plus government’s market borrowings and liabilities

4. Primary Deficit:-

The fiscal deficit may be decomposed into primary deficit and interest payment. The primary deficit is obtained by deducting interest payments from the fiscal deficit. Thus, primary deficit is equal to fiscal deficit less interest payments. It indicates the real position of government.

5. Monetised Deficit:-

Monetised Deficit is the sum of the net increase in holdings of treasury bills of the RBI and its contributions to the market borrowing of the government. It shows the increase in net RBI credit to the government.

· Conclusion ↓

All these budgetary deficit reveal fiscal imbalance. Fiscal imbalance & budget deficit result in harmful consequences like mounting inflation, deficit in balance of payment, etc. It has also adversely affect the growth of the economy.

· What is recession?

A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.

Now we come to our question that is,

· Why do government budget deficit grow during recession?

There is a relationship between budget deficits and the health of the economy, but is certainly not a perfect one. There can be massive budget deficits when the economy is doing quite well - the past few years of the United States being a prime example.

That being said, government budgets tend to go from surplus to deficit (or existing deficits become larger) as the economy goes sour. This typically happens as follows:

1. The economy goes into recession, costing many workers their jobs, and at the same time causing corporate profits to decline. This causes less income tax revenue to flow to the government, along with less corporate income tax revenue. Occasionally the flow of income to the government will still grow, but at a slower rate than inflation, meaning that flow of tax revenue has fallen in real terms.

2. Because many workers have lost their jobs, there is increased use of government programs, such as unemployment insurance. Government spending rises as more individuals are calling on government services to help them out through tough times.

3. To help push the economy out of recession and to help those who have lost their jobs, governments often create new social programs during times of recession and depression. FDR's "New Deal" of the 1930s is a prime example of this. Government spending then rises, not just because of increased use of existing programs, but through the creation of new programs.

· Conclusion:-

Because of factor one, the government receives less money from taxpayers, while factors two and three, the government spends more money. Money starts flowing out of the government faster than it comes in, causing the government's budget to go into deficit.

By: Vaishali rathi

(MBA 1)

Sec-A

Submitted to:

Mr.Gurdeepak Singh