Two classes of government spending: revenue expenditure is recurring spending that neither creates assets nor reduces liabilities, while capital expenditure either creates physical or financial assets or reduces liabilities.
- Revenue expenditure covers day-to-day running of government: salaries, pensions, interest payments, subsidies, grants for current use.
- Capital expenditure covers asset creation: roads, buildings, machinery, loans to states, and repayment of borrowings (which reduces a liability).
- A grant given to a state for building an asset is still revenue expenditure for the Centre (it does not create an asset for the Centre); this is a classic trap.
- Higher capital expenditure (capex) is generally seen as growth-friendly because it builds productive capacity; the Union Budget reports a "capital expenditure" head and an "effective capital expenditure" figure (capex plus grants-in-aid for capital assets).
- The split feeds the deficit measures: revenue expenditure minus revenue receipts gives the revenue deficit.
The recurring-versus-asset-creating distinction, and the trap that a capital grant to states is revenue spending for the Centre, are standard budget classification facts.
Revenue expenditure (recurring, no asset) versus capital expenditure (asset creation or liability reduction); interest payment is revenue expenditure but loan repayment of principal is capital expenditure.
Revenue spending is recurring with no asset; capital spending creates assets or repays debt.