Classification of a government expenditure

Government expenditure can be broadly classified into four categories: (i) Functional Classification or Budget Classification (ii) Economic Classification (iii) Cross Classification and (iv) Accounting Classification. As already mentioned, each classification of expenditure in government serves one objective or other i.e. financial control, economic growth, price stability etc.

Functional or Budget Classification:

 The classification indicated the nature of expenditure but not its purpose. It did not enable identification of expenditure with functions, programmes, activities and projects. It lacked management approach in accounting in as much as it did not provide the facility for monitoring and analysis of expenditure on functions, programmes, activities and projects. Classilkation of Government Expenditure Functional classification has provided the necessary facility for monitoring and analysis of expenditure on functions, programmes and activities to aid the management function.

Economic Classification: Economic classification refers to the resources allocated by government to various economic activities. It involves arranging the public expenditures and receipts by significant economic categories, distinguishing current expenditure from capital outlays, spending for goods and services from transfers to individuals and institutions, tax receipts by kind from other receipts and from borrowing and inter-governmental loans, grants etc.

Cross Classification or Economic-cum-Functional Classification: Cross classification provides the breakup of government expenditure not only-by economic categories but also by functional heads. For instance, expenditure on medical facilities (a functional head) is split between economic categories such as current expenditure,. capital expenditure, and various types of transfers and loans.

Accounting Classification: Accounting classification of government expenditure can be analysed under (i) Revenue and Capital (ii) Developmental and Non- Developmental and (iii) Plan and Non-Plan. Each classification of expenditure serves one objective or other of the government. For instance, Revenue and Capital expenditure classification indicates how much government expenditure results in creation of assets in the economy and how much expenditure is unproductive. Again, developmental and non-developmental classification indicates how much government expenditure is spent on social and community services and economic services as against general services.

Tax: essence and types

The leading role in ensuring the implementation of state functions on regulation of economic processes belongs to taxes. A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund various public expenditures. Taxes is a very complex and highly influential financial category. This is a compulsory element of the economic system of any state regardless of which model of economic development it chooses which political forces are in power. No taxes paralyze the financial system of the state as a whole, making it dysfunctional and, ultimately, is devoid of any sense.

Types of taxes:

Federal Income Tax: A tax levied by a national government on annual income.

State and/or Local Income Tax: A tax levied by a state or local government on annual income. Not all states have implemented state level income taxes.

Payroll Tax: A tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee. In most countries, including the United States, both state and federal authorities collect some form of payroll tax. In the United States, Medicare and Social Security, also called FICA, make up the payroll tax.

Unemployment Tax: A federal tax that is allocated to state unemployment agencies to fund unemployment assistance for laid-off workers.

Sales Tax: A tax imposed by the government at the point of sale on retail goods and services. It is collected by the retailer and passed on to the state. Sales tax is based on a percentage of the selling prices of the goods and services and is set by the state. Technically, consumers pay sales taxes, but effectively, business pay them since the tax increases consumers costs and causes them to buy less.

Foreign Tax: Income taxes paid to a foreign government on income earned in that country.

Value-Added Tax: A national sales tax collected at each stage of production or consumption of a good. Depending on the political climate, the taxing authority often exempts certain necessary living items, such as food and medicine from the tax.

Reasons of the government budget deficit

For many countries a rising budget deficit is the inevitable result of experiencing a recession or a sustained period of slow growth.

In a downturn, revenue flows fall from direct and indirect taxes whilst at the same time, the government is required to pay more out in welfare benefits such as the means-tested income support, unemployment benefits and other welfare handouts.

So part of a fiscal deficit may be the consequence of the automatic stabilisers at work. These are the tax and government spending changes that happen automatically at different stages of the business cycle. The governments of most developed countries are prepared to allow the automatic stabilisers to work through because, when their economy recovers, the cyclical component of a fiscal deficit will diminish, indeed in an economic boom, the government may run a budget surplus.Structural reasons, For some countries, fiscal deficits seem an almost permanent feature, rarely is the government able to find enough tax revenue to cover the annual spending budgets