Note on Government Borrowing and Budget

  • Note
  • Things to remember

GOVERNMENT BORROWING / PUBLIC DEBT

soruce:blog.ganderson.us
source:blog.ganderson.us

Government borrowing refers to the borrowing by a government from within the country or from aboard. In other words, the loan taken by the government is known as government borrowing. So, government borrowing is the total amount of money that a country's central government has borrowed to fund its spending on public services and benefits.

According to Philip E. Taylor, “Government debt arises out of borrowing by the treasury from banks, business organizations and individuals.”

According to Findlay Shirras, “A national debt is a debt which a state owes to its subjects to the nationals of other countries.”

OBJECTIVES OF GOVERNMENT BORROWING

The government raises the debts for the different purposes. The main purposes for the public debts are as follow:

  • To maintain the balance between revenue and expenditure: Maintaining the balance between the revenue and expenditure is the main objective of the government. To maintain such balance, the government raises the temporary loans.
  • To finance public welfare program: Government raises the public loans to ensure economic stability, to provide employment opportunity and the government launches the public welfare program.
  • To curb inflation: When inflation flourishes the government issue public loan to bring down the prices. Thus, the purchasing power of the people will reduce and helps to control inflation.
  • To meet unexpected expenses: Sometimes government has to face an unpredicted situation like earthquake, landslide, etc. In such situation, the government cannot afford the budget. So, the government raises the public loans.
  • To finance economic development: For the economic development, the huge amount of investment is needed. But, in poor countries, they do not have sufficient balance. So. they raise the public loan.
  • To finance public sectors: All the government tries to provide the different public sector utilities. For this, the government needs to borrow.

CONCEPTOF INTERNAL AND EXTERNAL BORROWING

source:slideplayer.com
source:slideplayer.com

INTERNAL BORROWING

When the debt is raised within the country it is called internal debt. This concept of internal borrowing was started in the 1930s to fight against the depression as recommended by J.M. Keynes. It is taken by the government with the central bank, commercial bank, financial institute, private and government organization.

The major sources of government internal borrowing are as follows:

  • Central Bank

The Central bank is the banker of the government. When the government needs money and issue bonds, the central bank purchase them. The Central bank also deposits the amount in the government account.

  • Commercial Bank

The basic function of the central bank is to accept deposit and provide loans. A commercial bank does also provide loans to the government. They purchase securities issued by the government.

  • Non-Banking Financial Institution

The government also raises the borrowing from the non-banking financial institution by selling their securities to them.

  • Individuals

Individuals also purchase the securities issued by the government. Thus, the purchasing power is shifted from the general people to the government.

EXTERNAL BORROWING

The government can also borrow the loan from the external sources. It is taken at the time of war, famines, earthquake, and natural disasters. The main sources of the external sources are foreign government and international government. It can be explained more as:

  • Foreign government

The government can borrow loans from other governments. Such received loan is called the bilateral loan. Usually, developed country provides such type of loan called soft loan with low-interest rate to the developing countries for the development of infrastructure of the country.

  • International Financial Institutions

International Financial Institutions like World Bank provides funds to different countries. The member countries can borrow from these institutions for a short term and long term for the development projects.

GOVERNMENT BUDGET

source:www.shutterstock.com
source:www.shutterstock.com

A budget generally is a list of all expenses and revenues. It is an annual financial plan of the government revenue and expenditure. It is also known as the statement of the financial plan of the government. Budget is the instrument through which the government controls the entire economy.

According to Bastable, “The term budget has come to mean the financial arrangement of a given period, with the usual implication that they have been submitted to the legislature for approval.”

According to World Bank, “The annual budget is usually the authority for the public spending. It is ideally one year’s slice of a medium-term expenditure plan.”

In brief, a budget is a detailed plan of operations for some specific future period.

QUALITIESOF GOOD BUDGET

The qualities of a good budget are as follow:

  • Responsibility: To prepare the budget one should responsible and well-defined authority.
  • Comprehensiveness: Budget should show the entire financial position of the government in broad details.
  • Flexibility: A good should have certain flexibility so its implementations can be made easy.
  • Reliability: The information of budget which estimates should be reliable as much as possible.
  • Integrity: A good budget should involve the assurance that the fiscal program as enacted and as intended.

PROCESSOFBUDGET FORMULATION

Budgeting for the government is an enormously complex process. The process of a budget formulation may vary from the government to government and country to country. Some of the common steps of the budget formulation are as follow:

  1. Estimate of overall income expenditure

In the first stage, the planning authority collects the estimated of expenditure and possible income from concerned ministries, departments and local offices of the government and then, discuss with the concern ministries.

  1. Determination of priorities

It is the second step of budget formulation. After determining the amount expenditure for the next year planning authorities determines the different priorities area on the basis of available resources and needs.

  1. Project preparation and Selection

It is the third stage of the budget formulation. The planning authorities after making a review of the project, it selects the projects to include in coming budget. Planning authorities review the financial cost of the project and submission to the budget department.

  1. Proposal of new taxes

In the fourth stage, new tax policies are proposed by the finance minister of the government with discussing the experts and stakeholders.

  1. Final Document

In the fifth stage, the budget office gives the final shape of the budget. It is completed before fiscal year commences. It is presented to parliament by the finance minister and discussed in parliament by its member only after approval from the parliament budget get final shape, otherwise, it needs amendment.

  1. Authorization

The final step of the budget formulation is the authorization of the budget by the legislature. After a long discussion on a budget, it is passed and authorized by the head of the state. After the authorization, it is distributed under the heading and development expenditure.

(Jha, Bhusal and Bista)(Karna, Khanal and Chaulagain)(Khanal, Khatiwada and Thapa)

Bibliography

Jha, P.K., et al. Economics II. Kalimati, Kathmandu: Dreamland Publication, 2011.

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.

Khanal, Dr. Rajesh Keshar, et al. Economics II. Kathmandu: Januka Publication Pvt. Ltd., 2013.

The major sources of government borrowing are as follow:

  1. Central Bank
  2. Commercial Bank
  3. Non-Banking Financial Institution
  4. Individuals

The sources of external borrowing are:

  1. Foreign government
  2. International Financial Institutions

The qualities of a good budget are as follow:

  1. Responsibility
  2. Comprehensiveness
  3. Flexibility
  4. Reliabilit
  5. Integrity

Process of Government Borrowing

  1. Estimate of overall income expenditure
  2. Determination of priorities
  3. Project preparation and Selection
  4. Proposal of new taxes
  5. Final Document
  6. Authorization
.

Very Short Questions

0%

DISCUSSIONS ABOUT THIS NOTE

No discussion on this note yet. Be first to comment on this note