Budget

By:

James Knight

James is a lead editor for Invezz, where he covers topics from across the financial world, from the stock… read more.

Updated: Aug 20, 2021

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An estimate of income apd expenditure for a future period as opposed to an account which records financial transactions. Budgets are an essential element in the planning and control of the financial affairs of a nation or business, and are made necessary essentially because income and expenditure do not occur simultaheously.

In modem large-scale business the annual budget, which is normally broken down into monthly and weekly periods, is a complex document that may take several months to prepare. The starting-point will be an estimate of sales and income for the period, balanced by budgets for purchasing, administration, production, distribution and research costs. There will also be detailed budgets of cash flows and capital expenditure. These are often also made for periods of further than one year ahead, so that borrowing requirements and capacity requirements can be assessed. A fiexible budget is one based on different assumed levels of plant activity.

The national budget sets out estimates of government expenditure and revenue for the financial year, and is normally presented by the Chancellor of the Exchequer to the British Parliament early in April. In his statement the Chancellor reviews economic conditions and government expenditure for the past year, makes forecasts for the coming year and announces proposed changes in taxation. With the increasing importance of government expenditure in the economy, the annua! budget is an important instrument in government economic policy. Fiscal changes have less to do with planned expenditure and more to do with decisions to modifythe budget surplus (or more rarely deficit) in the interest of demand management.

Economic conditions sometimes req.uire interim budgets, alfhough the government normally has sufficient discretionary powers to make the necessary changes in fiscal monetary policy.

Reference: The Penguin Dictionary of Economics, 3rd edt.