According to the government, the budget is of three types:

1. Balanced budget.
2. Surplus budget.
3. Deficit budget.

1. Balance budget – A government budget is said to be balanced when it is estimated revenues and anticipated expenditure are equal. i.e. government receipts and government expenditure.

Well, it implies that the government raises funds in the means of taxes and other means a balanced budget was considered an effective check on extravagant expenditure of the government.

The government must exercise financial discipline and should keep its expenditure within the available income.

The concept of a balanced budget has been evocated by classical economists like Adam smith . a balanced budget was considered by them as neutral in its effects on the working of the economy and hence they are regarded it as the best.

However , modern economists believe that the policy of balance budget may not always be suitable for the economy . for instance during the period of depression , when economic activities are at low level , resulting in unemployment.

The government may come to the rescue of the people . it can borrow money and spend it on public works . this will increase employment and total demand for goods and services and encourage investment.

2. Surplus budget – when estimated government receipts are more than the estimated government expenditure it is termed as surplus budget. When the government spends less than the receipts the budget becomes surplus that is.

Estimated government receipts > anticipated government expenditure .

A surplus budget is used either to reduce government public debt or increase its savings .

A surplus budget may prove useful during the period of inflation . in periods of inflation , although there is greater employment there is also a tendency for prices to rise rapidly.

This has to be checked particularly in the interest of those who have more or less fixed income. This inflationary gap can be corrected by lowering the level of effective demand in the economy . it can be corrected by increasing taxes. This would increase the revenue of the government but reduce the purchasing power of the people. As a result, the aggregate demand will fall. This inflation gap can be corrected by lowering the level of public expenditure.

The surplus budget should not be used in a situation other than the inflationary gap as it may lead to unemployment and low levels of output as an economy.

3. Deficit budget – when estimate government receipts are less than the government expenditure. In modern economies, most of the budget are of this nature . that the estimate government receipts < anticipated government expenditure.

A deficit budget increases the liability of the government or decreases its reserves.

A deficit budget may prove useful during the period of depression , economics activities are at a low level . it results in unemployment , business loss and even bankruptcy and inflation etc. the government can borrow money and increase the expenditure on public works through deficit financing . this will increase employment and total effective demand for the goods and also the services which would then encourage investment . thus, a deficit budget is useful for removing depression and unemployment.

Any country in the world is aiming to avoid deficit budget although the surplus budget is difficult for a country to achieve and that is the reason countries strive for a balanced budget in order to avoid inflation, unemployment , loss or another consequence .