A budget may be defined as a financial statement of the total estimated revenue and the proposed expenditure of a government within a given period of time, usually a year. The budget contains two accounts viz revenue and expenditure.

In Nigeria for example, the financial year, i.e. the period of the budget, starts on 1st of January and ends on 31st of December. A budget therefore consists of a package of proposals regarding revenue which is likely to be derived from various sources and expenditure which is likely to be met on various items.

In Nigeria, the Head of State (or President) or the Governor (of a state) prepares the budget with the assistance of the Ministry of Finance or Ministry of Budget and Planning. For a budget to be effective, it must be scrutinised and approved by the highest legislative body in the country, e.g. the National Assembly and the state assembly in the case of the state.

 



Types of budget

1) Balanced budget: There is a balanced budget if the estimated government revenue is equal to the proposed expenditure for a given financial year. In this case nothing is left as reserve from the money collected as revenue by the government.

 

2) Budget surplus: There is budget surplus if the proposed government expenditure is less than the estimated government revenue during a financial year. In other words, the government spends less than it intends to get during a financial year. One good thing about budget surplus is that it leads to an increase in government financial reserves as expenditure is less than revenue.

Uses of budget surplus

  • It is used to reduce aggregate spending (demand) thereby reducing inflationary pressures in the economy.
  • It might be used to revitalise the economy if the government has to borrow money from external sources, e.g. the International Monetary Fund (IMF).

 

3) Budget deficit: There is budget deficit if the estimated government revenue is less than proposed expenditure for a given financial year. In other words, the government spends more money than it is likely to get from various sources. There is no reserve under budget deficit, rather, it has to source for money by

  • usage of previous reserves.
  • borrowing money to finance the deficit.
  • the Central Bank may have to print more money.

Uses of budget deficit

  • It is used to increase aggregate expenditure (or demand) and reduce unemployment.
  • It is used to correct deflation.
  • It is used to finance projects which involve huge capital outlay.
  • It can also be used to finance a national emergency such as war.

 

Importance or uses of budget

  • Budget is used as a means of raising revenue.
  • It is also used to correct balance of payment deficit.
  • It is used to correct deflation.
  • It is used as a tool for economic planning.
  • It is used to control inflation.
  • Budget is equally used as a means of enhancing public welfare and reducing income inequality in the country.

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