Budget | Meaning, Functions, Types, National Debt, Reasons, Effects

A budget is a financial statement outlining the estimated total revenue and proposed expenditures of a government within a specified period, typically a year.   Functions/Uses/Importance of Budgets: The national budget serves several purposes: Acts as a means of revenue generation. Controls inflation. Functions as a remedy for economic downturns or deflation. Addresses balance of […]

A budget is a financial statement outlining the estimated total revenue and proposed expenditures of a government within a specified period, typically a year.

 

Functions/Uses/Importance of Budgets:

The national budget serves several purposes:

  1. Acts as a means of revenue generation.
  2. Controls inflation.
  3. Functions as a remedy for economic downturns or deflation.
  4. Addresses balance of payments deficits.
  5. Serves as a tool for economic planning.
  6. Enhances public welfare and reduces income inequality.
  7. Allocates resources among different economic sectors.
  8. Controls the economy to foster growth and development.

 

Types of Budgets:

  1. Balance Budget: Total estimated revenue equals proposed government expenditure, leaving no reserve.
  2. Surplus Budget: Total estimated revenue exceeds proposed expenditure, creating a reserve.
  3. Deficit Budget: Proposed government expenditure surpasses total estimated revenue, requiring sources like borrowings or grants to cover the shortfall.

 

Economic Conditions Warranting Budget Types:

  1. Surplus Budget: Preferred during inflation to reduce aggregate demand and alleviate inflationary pressure.
  2. Deficit Budget: Used to:
  3. Increase aggregate demand to reduce unemployment.
  4. Finance national emergencies like war.
  5. Address deflationary trends.

 

National Debt:

National debt encompasses all debts owed by a government, both internally and externally, with or without interest.

 

Reasons for Government Borrowing:

  1. Finance deficit budgets.
  2. Fund large capital projects.
  3. Prosecute wars.
  4. Service existing loans.
  5. Manage emergency situations.
  6. Correct an unfavorable balance of payments.

 

Instruments of Government Borrowing in Nigeria:

  1. Treasury Bills (short-term).
  2. Treasury Certificates (medium-term).
  3. Development Stocks (long-term).
  4. Stabilization Securities.
  5. National Saving Scheme.
  6. Negotiation with External Financial Institutions.
  7. Municipal Revenue Bond.

 

Effects of Huge National Debt on the Economy:

  1. Reduces foreign exchange availability.
  2. Subjects the country to external creditors’ influence.
  3. Lowers the country’s credit ratings, hindering access to fresh loans.
  4. Influences income distribution.
  5. Limits government’s ability to provide welfare and social services.

 

Revenue Allocation:

Revenue allocation involves sharing a nation’s wealth among different tiers of government, namely Federal, State, and local governments.

 

Parts of Revenue Allocation:

  1. Vertical Revenue Allocation: Shares federal account revenue among Federal, State, and Local governments.
  2. Horizontal Revenue Allocation: Shares federation account revenue among units within a given government level based on principles such as population size, landmass, derivation (e.g., oil-producing areas), and ecological problems.

 

Revenue Allocation Formula:

The formula assigns weights to various principles (e.g., Federal government – 48.5%, State – 24%, Local government – 20%, special fund – 7.5%). The Revenue Mobilization Allocation and Fiscal Commission (RMFC) continually works on proposals for new revenue sharing formulas.

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Inflation | Meaning, Types, Causes, Effects, Control & Terminologies

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Money | Money Demand, Money Supply, Quantity Theory, Factors

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