Importance of capital outlay in the Union

Since the Union Budget is now right around the corner, it would be a good time to brush up on a few key terms. Chief among these would be capital outlay. This amount represents government investments in public services like education, healthcare, public transportation, and much more. This is the most followed section of a Union Budget and you are about to learn why.

First, let us start by understanding the various components of the Union Budget. The Union Budget is divided into two parts, the capital budget and the revenue budget.

The capital budget is made up of items related to the government’s assets, investments, borrowings, and other liabilities. If the government is planning on paying off its debt, paying the interest it owes, selling its assets, or creating new ones, you will see such details here.

On the other hand, the revenue budget comprises items that will not affect any assets or liabilities of the government. It is made up of taxes and penalties collected, and payments, grants, aids, and other forms of distributions made.

We will be focusing on the capital budget, especially the capital outlay part. The first thing to note is that capital outlay is not the same as capital expenditure. See, capital expenditure can be of two types. One is done to reduce liabilities and another is done to create assets. Capital outlay is the latter, i.e. capital expenditure that creates assets for the government.

Let us not mistakenly assume that capital expenditure to reduce liabilities is any less important. A government's liabilities are mainly its borrowings via government bonds and loans from organizations like the International Monetary Fund (IMF) or directly from other countries. These funds are used for developmental projects and to maintain law and order. If a government does not actively pay off its liabilities, its ability to borrow will fall and ultimately, it’ll become difficult to reach its development goals.

While liabilities might be easily understood by you readers, assets are a little different in the context of a government. For a company, things like ownership in other companies, loans given to other entities, and plant and machinery could be counted as assets. For a government, the list does not end here.

It also includes roads, hospitals, schools, ports, airports, and other forms of infrastructure. Why?

The infrastructure supports and boosts economic activity which connects to tax collection. So, if you think of a government as a business (which it is not), infrastructure is an asset.

Typically, increased capital outlay by a government is celebrated since it leads to increased ease of doing business and economic activity.

An exception to this would be capital outlay for buying a private sector company. This leads to a change in ownership but no new assets are created.

If we can stretch the definition of ‘exception’ a little, another exception would be the defense expenditure that forms a part of capital outlay. Such expenditure will improve national security and reduce geopolitical risk in an economy, however, it does not directly boost economic activity like infrastructure development.

Since the incumbent party’s main focus has been on improving the ease of doing business and boosting economic activity through investments, this was to be expected.

So, while you are following the Union Budget, you should note the amount of capital outlay as well as which sectors this capital outlay will go to.