Sources of income vary substantially between countries. They usually include direct taxes, which are levied on income or capital, for example income tax. Such taxes are called direct because it is normally assumed that the real burden of payment falls directly on the person or firm that is immediately responsible for paying them. By contrast, indirect taxes such as sales taxes or excise taxes on alcohol and tobacco are so called because it is assumed that the real burden of paying the tax will not fall on the firm immediately responsible for paying it but rather that it will be passed on to the customer. Other sources of government income might consist of user charges for certain services, foreign aid, and income from investments or commercial activities.

In considering its revenue raising options, the government has to weigh advantages and disadvantages. For example, boosting reliance on sales taxes makes taxation more regressive. This means that a poor person will pay as much tax as a rich person when purchasing an item of clothing or food, as sales tax does not take account of income differentials. On the other hand, income taxes are progressive when they apply higher rates to individuals with a higher level of income. But where the formal economy is small, excessive taxation of a few high income individuals can undercut investment, which hampers growth and employment creation. Over time, this might erode the tax base and reduce the ability of government to raise revenues. Raising an adequate amount of revenues, while at the same time preserving equity and stimulating economic growth, can be a difficult balancing act.

On the expenditure side of the budget, government allocates funds to various functions such as health care, education, agriculture, justice, defense and so on. This is called the functional classification of expenditures. The share of total expenditures allocated to each sector is a key indicator of spending priorities for a given year and of shifts in priorities over a period of time. In terms of the economic classification of expenditures a distinction can be made between current and capital expenditures. Current expenditures are on goods and services that are consumed immediately, for example wages of civil servants or supplies of learning material for schools. Capital expenditures comprise money spent on the purchase of goods that can be used to produce other goods, for example machinery or infrastructure. The balance between current and capital spending is important. When a clinic is built and equipped to service a community (a capital expenditure), then government has to make sure that it sets aside sufficient funds to run the clinic on a day to day basis, which requires budgeting for wages, medicines and the like (current expenditures)