There are various types of budgets that are currently in use across the world. A broad classification of all such budgets can be done using broadly two principles:
- Classification based on the agency that formulates the budget.
- Classification of budgets based on the technical principle behind budgeting.
Classification based on the Formulating Agency
Based on his principle, the budgets can be classified into following three types:
- Legislative Budget. When the budget is prepared by a committee of the Legislative on the request of the Executive, it is known as a legislative type budget. But is considered very doubtful whether the Legislature is competent enough to prepare the budget because the requirements of the various departments are known only to the Executive.
- Executive Budget. In this system, as it prevails in India, Britain, USA etc. The budget is prepared by the Executive, and after it has been approved by the Legislature, responsibility of the execution lies with the executive. This is the most common principle of budget preparation throughout the world.
- Board or Commission Type. In this type, budget is formulated by a Board or a Commission which may consist of wholly administrative officers or of administrative and legislative officers jointly. This system is in use in some states of America and in some Municipal Governments. The purpose of this arrangement is generally to associate the more important, experienced and talented administration with the Chief Executive to improve budget making. At times, such a system is adopted to surround the Chief Executive with a Board so constituted as to restrict his influence on financial planning.
Classification based on the Technical Principles.
Based on the technical principle behind the budget formulation, the budget can be classified into following five types –
(a) Annual or Long Term Budget
The principle behind the formulation of such budgets is the period covered. Generally the Government budgets are annual, i. e. they are prepared for one year for the simple reason that neither one-year period is too large to predict about the economy nor it is too small to plan. In India, England and most of the other commonwealth countries, the financial year begins on 1st April and ends on the 31st March, which in USA, Australia, Sweden and Italy, the dates are 1st July and 30th June. In France, these dates are 1st January and 31st December.
Some of the countries, however, have adopted the policy of planning the economy and to meet the needs of the long-term planning. They have resorted to long-term budgets because what is provided for, is financial planning over a period of years to finance the plan. These countries spread the estimates plan expenditure over a number of years. Five Year Plans in India are an example of this type of budget.
(b) Single or Plural Budget
This classification is based on the number of budgets introduced in a year. When the estimates of all the Government undertakings find place in one budget, it is known as a single budget. The advantage of having a single budget is that it reveals the overall financial position of the Government, as a whole. However, if there are separate department-wise budgets which are passed separately by the legislature, it is called plural budgeting. India, technically follows plural budgeting, since a separate budget for Railways is passed in India since 1921, while another budget dealing with rest of the departments is also passed.
(c) Surplus, Deficit or Balanced Budget
The overall financial position depicted in the budget decides whether a budget is surplus budget, deficit budget or a balanced budget. If the estimated revenues are in excess of the estimated expenditure, then the budget is a surplus budget. Similarly, if the revenues fall short of anticipated expenditure then the budget is a deficit budget. However, if both are almost equal then the budget is a balanced one. Practically most of the budgets made by the World Governments are generally deficit budgets. A deficit budget, according to the economists indicates that a country is progressing. A surplus budget is generally not preferred because it gives the signal to the public that the money collected from them through taxation will be lying unused with the Government, which indicates financial mismanagement on the part of the Government. Because had the surplus money been invested by the Government somewhere, it would have fetched returns to the Government which could have been used for the further welfare of the public and for capital formation.
(d) Cash or Revenue Budget
A cash budget is one wherein the estimates of the various items of income and expenditure include the amounts actually to be received or spent in one year. In revenue budget, the revenue and expenditure, accrue in one financial year irrespective of the fact whether the revenues are realised or the expenditure is incurred in that financial year. In India, Britain and USA, there is cash budgeting while in France and other continental countries there is revenue budgeting. The main advantage of cash budgeting is that the final preparation of accounts of a year can be done soon after its close. Though such an account may not reveal the true financial picture for that year, it is advantageous for control purposes.
(e) The Departmental Budget and Performance Budget
The technical principle involved in the difference between these two kinds of budget is the classification of the receipts and expenditure in the budget. The present practice, prevailing in most of the countries, is to have departmental budgets i. e. revenues and expenditure of one department are grouped under one head. It does not give any information as to the activity or performance for which the money is budgeted and hence is also known as line-item budget. The performance budget is one where the budget is prepared in terms of functions, programs, activities and projects etc. and the total expenditure of a particular programme, though actually spread under various departments, is grouped under the head of the particular programme. The detailed discussion on this topic can be found in the later sections of this topic.