After reading this article you will learn about:- 1. Meaning and Definition of Budget 2. Features of a Budget 3. Canons 4. Classification.

Meaning and Definition of Budget:

The word “Budget” as applied to public finance was traced by Cannan to an anonymous pamphlet, enlilled. The Budget Opened, attacking the policy of Walpole while Chancellor of the Exchequer and likening him to a clown opening his bag of tricks and deceptions.

Opening the budged is now the most official parliamentary language. The budget may be balanced, unbalanced or a sur­plus one. The common conception of a balanced budget is that, over a period of time, revenue equals or at least doesn’t fall short of ex­penditure.

If expenditure exceeds, revenue, the budget is said to be unbalanced. But it would be more logical that the budget is balanced only when expenditure exactly equaled revenue and unbalanced when both are unequal.


The budget is the master financial plan of the government. It brings together estimates of anticipated revenues and proposed ex­penditures for budget period and from these estimates the activities to be undertaken and the means of their financing can be inferred.

The budget resembles a unified view of the scope and character of governmental activity. A closer examination of the budget gives an insight into the financial direction which government is planning to achieve.

Ideally, the budget is a statement of careful estimates and honest intentions. A closer examination of the budget document helps an average citizen to realize the integrated form of fiscal policy in an economy but as far as the legislator is concerned this fiscal device is a complex procedure to legislate.

Budget happens to be one of the most important ways in which the economy is sought to be regulated and various social and political ends desired to be achieved.


In this sphere the action of the executive is important. In a sense budget is an annual statement of the expenditure and revenue of the government proposed by the fis­cal authority covering the current year, the year preceding, as well as the year following.

It contains proposal for mobilization of revenue and also the allocation of realized revenue among the various heads of expenditure. Budged defines the object on which public money is to be prudently spent.

In the modem world economies, budget is much more than a statement of income and expenditure of public authorities. It reflects the real functioning of the financial system. As Prof. Gladstone remarks “budgets are not merely matters of arithmetic’s, but in thousand ways go to the root of prosperity of individuals and relation of classes and the strength of kingdom”.

According to Bastable budget means the financial arrangement of a given period, with the usual implications that they have been submit­ted to the legislature for approval.


The word budget is defined to mean many things. In household economies it usually means an accounting record of expenditures made during a specified period. In macroeconomic policy, budget refers of the whole fiscal structure of the government,-the combination of receipts and expenditures.

In positive sense, budget is best un­derstood as a program or plan for government activity over a desig­nated fiscal period. It includes the various activities upon which pub­lic authorities propose to spend revenues.

It also includes a listing of the various tax forces from which revenues are to be secured during the period. In a narrow sense, budget provides a record of expendi­tures actually made and tax revenues actually collected.

The term budget owes its origin from the old French Word ‘Bougette’ which means a ‘Small leather bag’, which is used to carry financial bills to be presented in the parliament by the chancellor of Exchequer. In this sense it is a document detailing the programs and planes of action of government for a specified period.


According to Dimock and Dimock a budget is a balanced estimate of expendi­ture and receipts for a given period of time.

Under Article 112 of the Indian Constitution, a statement of estimated receipts and expendi­ture of the government of Indian has to be laid before parliament in respect of every financial year which runs from 1st April to 31st March. This annual financial statement is titled as the budget of the central government.

Features of a Budget:

Prof. A.E. Buck point out that, as a financial plan, the budget should possess certain essential features. We call it as the requi­site of a good budget.

1. Comprehensiveness:


This quality insists that budget must exhibit all revenue and expendi­ture relating to government transactions. This feature is called “the rule of unity”. This principle insists that there must be a single fund and all money collected must be accumulated into what is called ‘Consolidated Fund’. This rule ensures simplicity and efficiency in government transactions.

2. Equilibrium or Balance:

This quality is emphasized by the earlier writers. The balancing of revenue and expenditure is rightly deemed to be the essence of a good budget. However today there is a radical departure from this classical concept. A writer like Jacob Viner strongly opposes this concept.

3. Annuality:

This principle insists that budget should be voted at regular intervals generally a year is regarded as the proper span of time to which budget should relate.


Later writers on public finance added some more features as essential qualities of a good budget.

They are:

(4) the budget should possess certain degree of flexibility regarding allocation of resources and implementation of proposals.

(5) Accuracy is another characteristic of budget. It means that estimates given in the budget should as far as possible be accurate based on reliable information and data.


(6) Objectively is another prerequisite of a good budget. At all times and in all places, budget is prepared with certain well defined objectives.

Cannons or Principles of Budgeting:

Budget is a technique to achieve administrative efficiency in fi­nancial resource management. It is an instrument to execute the varied financial and economic programmes of the government in a phased manner.

The preparation and execution of the budget re­quires the adoption of creation principles in line with the objective set. Prof. Harrod. D. Smith set out certain canons or rules which are called as the basic principles of budgeting.

They are listed below:

1. Executive Programming:

Being the programme of the chief executive, the budget should re­flect all government responsibilities and activities. The social, eco­nomic and political programmes of the government should be clearly unveiled in the budget programme. Then only it becomes a work programme for onward execution. Therefore it should be under the direct supervision of the executive.

2. Executive Responsibility:

Chief Executive should ensure that the departmental programmes planned are capable of fulfilling the desire and intention of legislature. Moreover economy must be observed to the possible extend in the execution of the budget programmes.

3. Reporting:


All budgetary procedures like preparation, enactment and execution of programmes, must be based upon authentic data and information gathered from various administrative units of the government.

Information regarding the progress of the work, programmes executed, revenue mobilized and expenditures made should be furnished to the executive periodically. This is a fundamental requirement for a good budget.

4. Flexibility in Budgeting:

Budget should be flexible enough to meet the government’s financial policies according to the changing socio-economic conditions in the society.

5. Adequate Tools:

The chief executive should be armed with sufficient and adequate administrative tools to fulfill its budgetary responsibilities. A well-equipped budget office must be there under the direct control and supervision of the executive, to carry out the budgetary programmes.

6. Multiple Procedures:

Modern governments have to perform varied functions of different nature, which requires an altogether different technique of manage­ment. Sometimes even with in the same administrative unit different projects require different management procedure, skill and techniques. However in a government budget this multiple procedure will be re­flected in a unified form or manner.

7. Executive Directions:

All possible details of each project should be spelt out in the budget document in-order to make the budgeting more effective. The appro­priation of funds, if possible should be made to broadly defined func­tions of the department. The details contained in the budget should be transparent and there should be no chance for apprehension for the legislature.

8. Active Co-Operation:

Efficient budgeting depends upon the active co-operation of all de­partments and their sub-divisions. It is a basic requirement for the successful implementation of the programmes in the budget. There­fore, in each department there must be a budget office.

Above all the budget document should be comprehensive enough to include explanatory statements regarding the entire financial po­sition of the government. It should be lucid, clear and understand­able to the common man.

Classification of Budget:

The technique of budget framing has undergone drastic changes over the years. In earlier days budget was more or less a mere statement of the financial plans of the government. But now day’s government’s financial activities contribute a major portion to the flow of fund in the economy. Moreover the government fiscal policy to­gether with the financial flow exerts a wider impact on the working of an economy.

Accordingly various budget estimates are done to indi­cate the manner in which the budget would affect the economy. The system of classification of budget provides information on the work­ing of the budgetary process.

Budget can be classified, based on the objective, by Organisation, by function by economic character and by programmes.

As Taylor observes “only in the budget, a uni­fied view of the scope and character of government activity can be seen and only here can the financial direction which government is planning to take be discerned”. Government budget affect the economy differently. Hence various types of budget are framed.

The important type of classification is listed below:

1. Legislative and Executive Budgets:

Taylor observes that the traditional practice in the United States is to follow the executive budget. Executive budget in prepared by the chief executive with the help of the budget department or bureau.

The budget prepared by the executive branch is presented to the legislative branch of government for translation into legislation. This type of budget is more commonly used by the larger governmental units. In England the executive budget is presented by Chancellor of Exchequer as the representative of the prime minister.

On the other hand the legislative budget is prepared by the legis­lative committee for adoption by the legislature. The legislative bud­get puts a prescription of the maximum amount to be appropriated for in the year.

The executive budget is considered to be superior to legislative budget on certain specified grounds.

Firstly the chief ex­ecutive will be held largely accountable by the public for the results of fiscal operations during the fiscal period.

Secondly if the budget is prepared by the legislature and executive is asked to achieve the purpose of the budget, the executive will get frustrated and the effi­ciency in execution will decline.

Thirdly the largest share of expendi­tures will almost certainly be spent by agencies of the executive department of government. The executive department is equipped with expertise needed to frame and operationalize the budget. Therefore preparation of the budget by the executive is more desirable in the interest of the public.

2. Conventional and Cash Budgets:

The distinction between conventional and cash budget is a prac­tice followed in USA. Conventional budgeting is a set of accounts established with in framework of those programmes which are fi­nanced in a conventional manner.

It is a traditional way of showing estimates of receipts and expenditures item wise and classified in detail. The levy of taxes and payments relating to conventional bud­get excludes receipts and payments managed through trust funds.

In these trust funds certain receipts are earmarked for special pur­poses and therefore are not regarded as general funds of the trea­sury. Therefore in conventional budget accounts are incomplete and it does not reflect the total financial activity of the government and its agencies.

Cash budget is designed to rectify the major omissions and defects of the conventional budget. Cash budget in otherwise termed as ‘Cash Receipts From and Payments to the public’.

In cash bud­get, the different types of revenues earned by the government irre­spective of source are treated as budgetary receipts and different fur s spent by the government are considered as budgetary expenditure.

Cash budget shows the actual picture of the role of govern­ment in the flow of funds in the economy. It portrays the actual finan­cial transaction of the government in terms of revenue and expendi­ture.

3. Multiple and Unified Budget:

Multiple and Unified Budget is an instrument to make fiscal control and planning possible. A number of specialized functions are sought to be performed during the budget period. So in USA some fiscal theorists suggested the framing of more than one budget presenting in each the recommendations concerning the financing of specialized functions.

For example during periods of war depression etc., when budgetary expenditure and receipts pattern are altered, the govern­ment should prepare two budgets.

That is an ordinary budget deal­ing with general function and an emergency budget dealing with short terms functions of ordinary nature. However modern writes on public finance point out the difficulties associated with the multiple budget processing.

Since under multiple budgeting, the effect of budgetary action will be spread all over the economy, a comprehensive and consolidated evaluation of the budget operation is difficult. There­fore modern fiscal theorists advocate unified budget.

In this context Prof. Taylor observes “the function of the budget is to make fiscal control and planning possible. This being the case, the more com­prehensive the budget, the more it bring into one unified picture past fiscal performance and future fiscal plans, the better it will perform its functions of control”.

4. Revenue and Capital Budget:

In many countries, the budget consists of revenue and capital ac­counts. Revenue account covers those items which are of recurring nature; whereas capital account covers those items which are in the nature of acquiring and disposing of capital assets. In the rev­enue budget, the current expenditure is met out of domestic taxa­tion.

Revenue budget consist of revenue receipts of the government and expenditure met out of revenue receipts. Revenue receipts in­clude both tax and non-tax revenue. Non-tax revenue includes rev­enue from currency and coinage, mint, interest receipts, profit from general service, social and economic services etc.

Revenue expen­diture includes the development expenditure financed out of revenue receipts, non-development expenditure and interest on public debt. All grants given to state government and other parties are also located as revenue expenditure.

Whereas capital budget consist of capital receipts and pay­ments. Capital receipts include loans raised by government from the public such as market loans, borrowing from central banks, loans raised from foreign government and institutions.

Capital expenditure includes expenditure on acquisition of assets like machinery, land, building and investment in shares. Loans advanced to state govern­ments and other institutions are also included in capital expendi­ture. Capital expenditure mainly goes for development purpose.

5. Balanced and Unbalanced Budget:

The government budget may be either balanced or unbalanced. Un­balanced budget assumes the form of surplus or deficit budget. Prof. Dalton points out that “the common conception of balanced budget is that over a period of time, revenue exceeds, or at least does not fall short of expenditure. If the expenditure exceeds revenue, the budget is said to be unbalanced”.

He further point out that it would be more logical to call the balanced budget when expenditure ex­actly equaled revenue. Prof. Erik Lindall point out that “a demand for a balance budget must mean that the sum of certain kinds of rev­enue must equal the sum of certain kinds of expenditure”.

Prof. P. E. Taylor explains the nature of budget balance in the following term:

(a) A budget is balanced if during the budget period, revenue re­ceipts are exactly equal to cost payments.

(b) If revenue receipts for the budget period are greater than cost payments, the difference is budget surplus.

(c) If revenue receipts for the budget period are less than cost pay­ments, the difference is budget deficit.

Therefore when government income and expenditure are not equal it is a case of unbalanced budget. The imbalance in the budget may be either due to excess of income over expenditure or an excess of expenditure over income. In the former case it is called surplus bud­get and in the latter case defect budget.

According to Dalton “if over a period of time, expenditure exceeds revenue, the budget is said to be unbalanced”.

Balanced and unbalanced budget possess merits and demer­its. In developed economies, usually balanced budget is pursued when the economy is free from inflation and deflation, and price sta­bility is achieved.

When the economy suffers from inflation, a sur­plus budget is operated and during period of deflation and unemploy­ment, deficit budget is followed. In developing economies, because of the presence of large stock of idle and unutilized resources, and because of implementation of development plans, usually the bud­get is made deficit, by making additional expenditure on develop­ment activities

6. Incremental Budget:

Periodical review of work programmes implemented as per provi­sions made in the budget, is necessary at both administrative and legislative levels. The occasional appraisal of the utilization of funds and devices of request for grant of fresh fund will help to ensure efficiency in the functioning of budget.

However very often, the exer­cise of serutinity is confined only in areas where changes are pro­posed for particular budget items rather than the whole programme structure as such. Incremental budgeting is a process in which past level of expenditure are taken as given and only new additions to or reductions from the past outlay are examined.

In incremental budgeting existing and old programmes are unexamined, since no sub­stantial changes are called for in the budget. Only additions and reductions in outlay are subject to scrutiny and examination. This deficiency of incremental budgeting is rectified with the adoption of zero based budgeting.

7. Zero Based Budget:

In Zero Based budgeting organizations preparing their budgets should not take earlier years expenditure for granted, as in the case of conventional budget, but should state everything afresh. It means that while framing its budget for the coming year an Organisation should start from zero point, instead of treating the current budget as the starting point or base for next year’s budgetary exercise.

In the broader sense, zero base budget concepts involve a complete reexamination of ongoing programmes to assess their continued utility instead of following the method of incremental approach to budgeting.

It involves fresh evaluation of every item of expenditure as if it were a new item. According to Peter A. Phyrr “the concept of zero base budgeting is an operating planning and budgeting process that requires each manager to justify a budget request in detail from Scratch”.

Prof. Richard A. Musgrave Observes “the idea of zero based budgeting is to consider the budget as a whole rather than to exam­ine incremental changes only”. Therefore in zero based budgeting, all the financial requirements of a budget unit are analyzed, and evaluated annually.

Under zero based budgeting each department ministry is re­quired to justify its budget request from the bottom up, evaluating alternative programme proposal and prioritizing them so as to select the best alternative on need base.

Zero based budgetary focus the budget process on a comprehensive analysis of priorities objectives and needs. It helps to eliminate those programmes which have out­lived their utility. It also helps to stimulate and redirect the resources formless productive to more productive activities.

Zero Based Budgeting in India:

A system of zero based budgeting was first introduced in the United States department of agriculture in its 1964 budget. But it proved unsuccessful. The Zero based budgeting approach has been adopted by the departments of the central government from April 1st 1987.

Moreover, zero based budgeting has been recommended by the seventh plan as one of the steps to control public expenditure. The government of India gave direction to various ministers and de­partments through a letter addressed by Ministry of Finance in July, 1986 to get this system of budgeting introduced from 1987 – 88 budget onwards.

The letter also emphasized the need for public sector understanding to adopt this methodology of budgeting. How­ever very few departments took it seriously.

Modern Classification of Budget:

Modern governments perform multi-various transactions. Accordingly the expenditure requirements are property planned in the budget. There­fore a proper analysis of the budgeting is necessary to find out the different implications of budget frame. Modern budgeting recognizes this requirements and attempts to classify the budget from different angels.

1. Organizational Classification:

In this type of budgeting, expenditure is classified on the basis of organizational or administrative units such as departments or minis­ter responsible for implementation of the budget programme.

In this budgeting the political and legal control of department wise public expenditure is ensured by the legislators through the appropriation process. One drawback of this classification is that it compartmentalizes the departmental financial responsibility.

As a result there is the lack of proper co-ordination of different organizations, which may adversely affect the proper implementa­tion of development programmes. This classification is not suitable to a modern government, where it has to perform multi various activi­ties and programmes. Moreover under this classification it is very difficult to ascertain the efficiency norms to be attained in public expenditure.

2. Functional Classification:

Functional classification implies an attempt to present the alloca­tion of total government expenditure or proposed expenditure among a limited number of functions performed or services rendered by the government.

The functions may include defence, education, health, transport etc. The classification applies only to the expenditure and does not apply to receipts. Expenditure includes only capital expen­diture.

Under this functional classification each broad heading must, of course, include many subsidiary functions performed by the gov­ernment. Expenditures are broken down by functions in the com­bined budget.

According to functional classification, expenditures are divided into the following categories:

1. National Defence,

2. Inter­national Affairs and Finance,

3. Education and manpower,

4. Health 5. Income security,

6. Agriculture and rural development,

7. Natural resource and environment,

8. Commerce and transportation,

9. Com­munity development and housing,

10. General revenue sharing,

11. Space research and technology,

12. Veterans benefits and services, and

13. Interest.

This can again be grouped into five major categories such as:

1. General Service (defence, justice, police and general administration),

2. Community services (Road, bridges, sanitation etc.),

3. Social services (education, health, social security etc.),

4. Economic services (agriculture, energy, industrial and mineral, trans­port and communication etc.), and

5. Unallowable category (includes such items as cannot be included in the above categories like pen­sion, interest payment, subsidy etc.). The allocation of public ex­penditure among different functions may be based on criterions such as future needs, present set up or past performance in the con­cerned area of development etc.

3. Economic Classification:

Economic classification attempts to categories government receipts and expenditure into different classes of economic significance. By definition economic classification is a “Classification of government expenditure and receipt by economic categories that are of signifi­cance for analyzing the short run effects of government transactions in the working of the economy”.

It is a process of breaking down government expenditure and its mode of finance in terms of certain economic or income categories. Such a classification provides vital information regarding consumption, investment, generation of sav­ing, creation of financial assets and liabilities etc.

Economic classification broadly categories public expenditure into two classes. That is current expenditure and capital expendi­ture.

Current expenditure is divided into three classes viz.:

(a) Con­sumption expenditure.

(b) Transfer payment.

(c) Total current expen­diture.

Likewise capital expenditure is divided into five classes viz.:

(a) Gross capital formation,

(b) Capital transfers,

(c) Investment in shares,

(d) Loans and advances, and

(e) Repayment of public debt.

For Convenience, each class is again subdivided into different. The economic classification of the central government budget in India was started with the budget for 1957 – 58.

The economic clas­sification of the budget of governmental of India is presented in six accounts:

Account 1:

Transaction in Commodities and services and trans­fers: Current account of government Administra­tion.

Account 2:

Transaction in Commodities and services and trans­fers: current account of departmental commercial undertaking.

Account 3:

Transaction in Commodities and services and trans­fers: Capital account of government Administration and departmental commercial undertakings.

Account 4:

Changes in Financial Assets: capital Account of government Administration and Departmental com­mercial undertakings.

Account 5:

Changes in Financial Liabilities: Capital Account of government Administration and Departmental Commercial undertakings.

Account 6:

Cash and capital reconciliation Account of govern­ment Administration and Departmental Commercial undertakings.

Economic classification system has been designed to create a better link between national income accounting and expenditure ac­counts. This classification provides a breakdown of public expendi­ture into consumption and capital formation.

This classification pro­vides an insight into the financial assets and liabilities of the govern­ment. It is of much help and assistance in the formulation of long term plans.

4. Programme Budgeting:

In the usual budgetary parlance, the terms programmes and ‘perfor­mance budgeting’, have been used more or less interchangeably.

However in recent literature, programme budgeting is meant to de­note a system of classification in terms of functions missions, programmes with a view to integrate planning and programming with budgeting.

The second Hoover Commission in the USA in 1952 in­troduced the term programme classification to rationalize the whole budget making exercise. The aim was to establish a systematic relation between the objectives of government economic policy and resource allocation by government.

In a sense programme budgeting emphasizes the need for overall programme management in terms of long term objectives set out, and attempts to relate the exercise of planning and programming with budgeting.

This system highlights the need for clearly defined objectives, choice between alternative programmes based on their cost benefit aspect. In programme budgeting, budget would frame a programme structure to realize a particular objective and specify the expenditure need to attain it.

In this budget exercise, expenditures will be allo­cated to carry out a set of programmes under particular objectives. Suppose the long term objectives set is poverty alleviation.

Based on this objective the spending agency with the help of planners will design specific objectives and workable programmes to be carried out towards achieving the long-term goal of properly alleviation. In this case the expenditures constitute the poverty removal programmes.

5. Performance Budgeting:

Performance budgeting “is a technique of presenting government operations in terms of functions, programmes activities and projects”. Performance budgeting involves the development of scientific man­agement tools, such as work measurement, performance standards unit, costs etc.

In this classifications government activities are iden­tified in physical and financial terms. This helps to establish a ratio­nal relationship between inputs and outputs and performance as­sessed in terms of cost.

The actual performance results are esti­mated and compared with target results, so as to measure the effi­ciency or inefficiency of a particular project, in this type of budget­ing.

I. Burkhead defines performance budgeting “as one which pre­sents the purposes and objectives for which funds are requested the costs for programmes proposed for achieving these objectives and quantitative data measuring the accomplishments and work perfor­mance under each programme”.

In performance budgeting, the gov­ernment budget decisions are divided into major functions based on the objective of the government, and then sub-divided into specific programmes activities and projects.

Then funds are allocated ac­cording to the achievements expected from a department/ministry over a specific period, from the proposed expenditure. Therefore in performance budgeting, emphasis is placed on the size of the project the cost involved and the expected return from the project. Thus the budgeting procedure is focused towards the efficient and economic use of scarce public resources.

Performance budgeting is ineffective, without proper measures of programmes implemented. However there is no single yardstick, for determining and measuring the performance standards.

The implementation of performance budgeting involves the fol­lowing steps:

1. Establishing a meaningful functional programme and activity and classification of government operations (for example education is a classification and elementary education is a programme, training of elementary teachers is an activity and the construction of a school to impart educational service is a project).

2. Bringing the system of accounting and financial management in accordance with the classification made

3. Estimating the quality of physical resources like personnel materials, services etc.

4. Developing standard norms for work units of performance and unit costs.

The success of performance budgeting is conditioned by a num­ber of factors like:

(a) Development of suitable yardsticks, for an objective measurement of work and performance,

(b) The setting up of a system of reporting on the progress of each activity or programme. Such a system should be established in each government depart­ment to monitor the work performance,

(c) The development of an appropriate and scientific accounting system is another prerequisite for the successful functioning of performance budget. For this there should be a proper integration of budgeting and accounting classifi­cation.

(d) Another requirement for the success of performance bud­geting is the proper classification of public expenditure of each ma­jor activity or project,

(e) Above all an efficient organisation for programme management is also needed to take full advantage of the benefit of performance budgeting.

Performance budgeting is a tool, which ensures, efficiency in government financial operation. In modern times performance bud­geting is recognized as an efficient tool of fiscal management.

The administrator is able to design their budget based on the professed economic policy of the government. Performance budgeting is rather a fiscal tool to review the efficiency of existing operations and pro­vides vital information for planning future operations. It provides a sense of accountability and transparency in government expendi­ture programmes.

However this technique suffers from certain drawbacks. This type of budgeting provides only a quantitative and financial evaluation of programmes. It does not facilitate qualitative evaluation. Programmes and activities the benefits of which are not capable of measurement is beyond the scope of performance budgeting.

The best examples are national defense, law and order, foreign policy etc. The success of performance budgeting is conditioned by the existence of an effi­cient organisation capable of scientific management of the programmes. Some fiscal theorists argue that performance budget­ing leads to centralisation in decision making in government and dis-coverage innovation and dynamism.