The loans that the government takes on the condition that its pays it back with interest is known as state borrowings.
The government borrows from local sources as well as foreign sources.
It can be shown on the following flow chart:
The borrowings of the state from the monetary market and capital market are known as market borrowing.
Factors affected budget deficit in Sri Lanka
Reduction in tax revenue due to tax relef
Increase in expenditure when paying Bank debts
Increase in transfer costs of the government
Increase in expenditure on public sections
Steps have taken to settle the budget deficit in Sri Lanka
Foreign loans
Foreign grants
Use of local financial resources
Borrowing from the market
Persistant budget deficit effects on the economy of a country
Increase in state loans
Increase in inflation
Decrease in investment by private sectors
Rise in interest rates
Declining international credibility
Reduction in foreign exchange rates/ values
Decrease in laocal savings
Advantages of having a surplus in Current account
Reduction in burden of state loans
Decreast in inflationary effects
Increase in government investments
Ability to maintain interest rates at a low level
Reduction of tax burden on people
Leading to macro – economic stability
The government budget is the document/report of proposals that contains the details of expected government expenditure and how the government is expected to collect revenue to meet expenditure for the next year that is presented to the council and approved by it.
Budget can be classified as,
Deficit budget
Surplus budget
Balanced budget
Expansionary Loans
If the loans that are obtained to settle budget deficit increases the money supply in the country, such loans are known as expansionary loans.
Expansionary loans:
Government obtaining loans from the Central Bank
Obtaining loans from the Commercial Banks
Obtaining foreign loans
Contractible Loans
If the loans taken do not affect the supply of money in the economy, they are known as contractible loans.
Contractible loans:
Obtaining loans from non-banking institutions
Taking loans from the general public
Contractible budget policies are more fovourable for an economy than expansionary budget policies.
Government expenditure is expenditure of the government spending on state affairs.
Government expenditure according to funcational classification is shown on the flow chart below:
Current Expenditure
The expenditure on carrying out of all government services is known as current expenditure.
Ex:
Salaries
Stationary
Rent
Transport costs
Charges on Electricity
Telecommunication
Capital Expenditure
The expenditure on the production of capital goods, is known as capital expenditure.
