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How to explain the budget to a teenager

(File photo:) Finance Minister Nirmala Sitharaman arrives to present the 2020 budget in Parliament, New Delhi. (Photo: Mint)Premium
(File photo:) Finance Minister Nirmala Sitharaman arrives to present the 2020 budget in Parliament, New Delhi. (Photo: Mint)

  • To the young, budgets can come across as a rapid-fire of numbers. But they aren’t difficult to understand either
  • To make up for the deficit, the government planned to borrow 9.7 trillion. Investments in small savings schemes—estimated at 4.8 trillion—are yet another source for expenditure

NEW DELHI : Ma, we have a problem," said the 14-year-old, as soon as her economist mother came back from her evening jog.

“What problem?" asked the mother, sipping her cucumber-bitter gourd mixed juice.

“I have to do a project on the central government’s budget," the daughter replied.

“Oh, that’s easy-peasy."

“Like, really?"

“Yes, baby. You know what a normal budget is?" the mother asked, finishing her cucumber-bitter gourd juice.

“Sort of."

“A budget is an estimate of the money you expect to spend during a particular period and where that money is going to come from."

“Okay."

“Our total expenditure for the month, including everything from your school fees, the home loan EMI, petrol bills, the food we eat and so on, comes to around 2.25 lakh. Now, how do we pay for this expenditure?" the mother asked.

“Your salary?"

“Yes. I earn around 3.5 lakh a month and that takes care of the expenditure. Just like in a family, the government spends money and in order to spend that money it has to earn it. On 1 February every year, it presents a plan on how it wants to go about achieving the same. This is the annual budget."

“Oh, but why is the budget presented on 1 February when the year starts on 1 January?" the daughter asked.

“That’s the calendar year. But the government and companies follow what is known as the financial year and that starts from 1 April and ends on 31 March, next year," the mother explained. “The last budget was presented by the finance minister, Nirmala Sitharaman, on 1 February 2021. That was the budget for the financial year starting 1 April 2021 and ending on 31 March 31 2022. The year is currently on."

“Okay."

“During the year, the government planned to spend a total of 34.8 trillion. This money will be spent on salaries and pensions of government employees, different schemes and projects being run by the government, different kinds of subsidies and so on."

“So, if the government planned to spend 34.8 trillion this year, how much did it plan to earn?" the daughter asked.

“The total expected earnings were at 19.8 trillion."

“But that is much less than the spending. How does it spend when it’s clearly not earning enough?"

The borrowing plan

You remember last year Sneha aunty had called?" the mother asked.

“Yes, Ma."

“She had lost her job and her parents both got the covid virus. She ended up spending a lot of money and was staring at a situation where her monthly spending would be much more than her income. So, she had borrowed from me to make up for the difference. Thankfully, she found a new job soon."

“So, what’s your point?" the daughter asked.

“The difference between what a government earns and what it spends is referred to as the fiscal deficit. The fiscal deficit in this case stood at around 15 trillion ( 34.8 trillion minus 19.8 trillion)."

“Okay."

“Now, Sneha aunty borrowed from me to ensure that she had the money required to make the necessary expenditure; the government does the same. Like during the current financial year, it plans to borrow a total of 9.7 trillion."

“Sneha aunty borrowed from you, and from what her daughter Shailaja told me, she also borrowed from Khyati aunty and Priyanka aunty."

“Yes, you are quite a gossip."

“Only learnt from the best!" the daughter replied.

“So, to fund the difference between its earnings and its expenditure, the government has plans to borrow a total of 9.7 trillion during this financial year. The government pays an interest on the borrowing. In fact, during this financial year, the government has budgeted 8.1 trillion for paying interest on what it had borrowed previously. This is one of the biggest expenditures in the budget every year."

“Sneha aunty borrowed from you and other aunties. Who does the government borrow from?" the daughter asked.

“From us."

“Us?"

“Us as in people. I told you that I make 3.5 lakh per month and of which we spend 2.25 lakh. So, what’s the difference?"

1.25 lakh per month."

“What do I do with that money?" the mother asked.

“You save."

“Where?"

“Well, last week, I saw you making a fixed deposit."

“Exactly. So, like me, there are many others saving money through fixed deposits and savings deposits, on which banks pay interest. Banks lend a part of this money to the government. Like banks pay an interest to us on fixed deposits, the government pays an interest to banks.

“Interesting."

“Similarly, I also invest in mutual funds and I pay a premium for an insurance policy. A part of that money is also lent to the government," the mother explained.

Small, big ways

But this doesn’t answer the question completely. See, you said that the fiscal deficit for this financial year has been projected at 15 trillion. Also, the government’s borrowing for the year is expected to be 9.7 trillion."

“Yes."

“So, there is still a gap between the government’s total expenditure and the money it needs in order to make that expenditure."

“Smart kid! Do you remember a few days back your grandfather went to the post office?" the mother asked.

“Oh yes. He came back with my favourite ice-cream."

“He had gone there to deposit a cheque for my investment in the public provident fund (PPF). PPF is a small savings scheme run by the government primarily through the post office. The government pays an interest on the investment."

“Okay."

“Every year many people invest in small savings scheme. Also, every year, investments made in these schemes in earlier years mature."

“Yes."

“When investments mature, the government has to pay back the people who had invested. This financial year, the government expects a total investment of 4.8 trillion in the small savings schemes. The investments which mature and need to be paid back stand at 91,343 crore. The government will use a part of the 4.8 trillion it expects people to invest to pay off the 91,343 crore worth of investment which is maturing this year. That will leave around 3.9 trillion with the government. It will be also used for expenditure."

“Interesting."

“And that’s how the government largely manages to spend more than what it earns," the mother explained.

Worst case scenario

But tell me one thing Ma, why can’t we do the same?" the daughter asked. “I mean, you work so hard, why don’t you just retire and we can then borrow and spend money like the government does."

“A family can’t do things that a government can."

“Meaning?"

“So, let’s say I quit my job, how will we survive?"

“Your savings Ma."

“Once we run out of savings what happens then?"

“You will borrow money from a bank. Doesn’t Joel uncle work for a bank? He will help you."

“But you do know that a bank loan will have to be repaid?"

“Yes."

“And where will that money come from?"

“But then this doesn’t make sense," said the daughter, feeling very confused. “How can the government keep borrowing without earning enough and you can’t?"

“Well. There are two things here. First, banks and insurance companies have to compulsory lend some of the money they raise from people like me, to the government."

“And?"

“The government has the right to print money. In the worst possible scenario, it can always print money and repay. If I were to try and do that, I would end up in jail."

“Guess that explains it. But that was the expenditure side. How does the government earn money?"

The revenue plan

The simplest way is by taxing us. I pay an income tax on my income. So, do many others. This financial year, the government expected to earn 5.6 trillion through income tax. Then, every time I fill petrol in my car, I pay an excise duty of 27.90 per litre to the government. You remember Nandini aunty?"

“No."

“An old friend of mine, who lives in an area where the electric supply is very poor. She needs to keep buying diesel for the generator. Every time she buys diesel, she pays 21.80 per litre to the government as excise duty. The government expected to earn 3.4 trillion from excise duties during this financial year."

“Hmmm."

“Then there is the goods and services tax (GST). Like last year when we bought the car, we paid a 28% GST to the government on the price of the car. The government hoped to earn 6.3 trillion through this tax this year. And there is also the corporation tax. Companies pay a tax to the government on the profit they make. This was expected to be at 5.5 trillion this year."

“Ah, taxes are everywhere."

“When we add these taxes and a few more, the total expected tax amounts to 22.2 trillion. Of this, the central government planned to share 6.7 trillion with the state governments, leaving 15.5 trillion for itself."

“So, that’s how it works."

“Yes. But there is more to it."

“Oh!" she replied finding it very difficult to continue concentrating as her Insta kept buzzing.

“Now, who is your favourite uncle in the building?"

“Sachin uncle," the daughter replied, looking confused.

“Where does he work?" the mother asked.

“In some company which produces electricity."

“Yes. And that company is owned by the government. So are many other companies, everything from banks to companies which produce coal and steel. These companies share a part of the profit they make as a dividend with the government."

“Hmmm."

“Then there is the Reserve Bank of India, which is the bank for the government and for all the banks in the country. The profit it makes every year is also handed over to the government."

“And what else?" she asked.

“You remember Rajesh uncle."

“Yes."

“He has been unemployed for many years. But he comes from a very rich family. And every year, he sells some land and shares that he has inherited from his father, to meet his expenses."

“So?"

“The government does the same. Every year, it sells a part of the stake that it owns in companies. This year, it has plans of selling a part of its ownership in the Life Insurance Corporation of India. This is called disinvestment. Interestingly, the government had hoped to earn 2.1 trillion through disinvestment this year. But as of 30 November, it had earned only 9,333 crore."

The gist

Are we done Ma?" the daughter asked.

“Why don’t you try summarizing the whole thing for me?"

“Okay. So, the central government had plans of spending 34.8 trillion this year. Of this, 15.5 trillion came through taxes. It also earned through dividends and profits shared by companies it owns and through the RBI. Over and above this, it had planned to earn 2.1 trillion through disinvestment. The total earnings of the government were expected to be at 19.8 trillion, meaning a fiscal deficit of 15 trillion. In order to be able to make up for this difference, the government borrowed 9.7 trillion. Also, some money came from the small savings schemes."

“Yes, that’s about it," the mother said.

“So, now can I see my phone?"

“But you need to complete the assignment first, before you forget everything I have told you."

“I won’t Ma," she replied, showing her the phone. It had been recording the conversation.

“Ah!"

“And I plan to turn this into a podcast. Pooja aunty has promised to help."

“That sounds so cool," said the mother, thanking herself that at least her next generation was turning out to be smarter than her.

(The example is hypothetical).

Vivek Kaul is the author of Bad Money

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