For years, Greece understated its deficit figures and continued to lavishly borrow and spend all that money in paying back loans until it got to a point where the country was reduced to flirting with bankruptcy, even after receiving hundreds of billions in bailout packages.
This is something that Finance Minister Arun Jaitley would like to avoid at all costs. In his Monday’s budget speech, Jaitley pointed out that it is important to not only track expenditure better but also to spend smart.
The finance minister in his budget speech claimed that the government is finally giving up on the age old system of bifurcating expenditure into Plan and Non-Plan heads – a practice that’s no longer relevant since the Planning Commission has been disbanded and replaced with NITI Aayog by the Bharatiya Janata Party government.
Which is why income and expenses from the next budget onwards will be classified simply under the heads Revenue and Capital to give a clearer snapshot of the government’s financial position. Jaitley said that many committees in the past had recommended doing away with the earlier practice. He added that this practice often resulted in “skewed allocations” in the budget.
“A broad understanding over the years has been that Plan expenditures are good and Non-Plan expenditures are bad. This results in skewed allocations in the Budget,” he said. “We need to correct this and give greater focus to Revenue and Capital classification of government expenditure.”
Revenue expenditure comprises of salaries, interest payments, recurring expenditures for operation of existing schemes and programmes while capital expenditure is used to obtain assets which have financial or social value like infrastructure and equipment.
Meanwhile, the economic survey released two days before the budget claimed that the quality of public spending on key sectors such as education and health has improved due to revenue sharing with the states. The survey said that even the last year’s budget set in motion the government’s objective of spending more under the head of capital expenditure.
“The budget envisaged an improvement in quality by shifting expenditures away from current to capital expenditures,” the economic survey stated. It added that aggregate public investment increased by about 0.6% of the gross domestic product or GDP in the 8 months upto December, 2015.
This, the survey claims, has also resulted in marginal increase in real expenditure growth in areas such as agriculture, rural development, education and health.
Budgeted vs actuals
Even as the government has proposed to spend more on capital formation in the budget by allowing states to share part of the expenditure burden, the outlay for the next financial year announced on Monday is being questioned on its intent.
Despite Jaitley’s claims that the government needs to incur more capital expenditure, it’s the revenue expenditure that was given a massive bump in the plan and non-plan outlay in his budget. While the total budget is going to increase by 11% in the year 2016-17, much of it is going to revenue expenditure.
While total revenue expenditure is going to rise 12% over last year’s revised estimates, total capital expenditure will see a mere 4% jump. This could mean that the real expenditure might turn out to be even less for capital spending if one factors in inflation at a modest rate of 5%.
As the chart above shows, both plan and non-plan expenditures in the coming year are set to rise by 15.3% and 9% respectively, obscuring the details on whether this money will be spent on recurring expenses such as salaries or for buying new assets. This becomes clear only when one looks at the capital and revenue heads separately to realise that there is still some time to go for the capital expenses to get the importance that Arun Jaitley claims they deserve.