Government Budgeting and Theories of Budgeting

Government Budgeting

Concept and History of Budgeting

Governments undertake different social, economic and political activities and policy measures, which involve finance. The mechanism to manage financial resources for this can be termed as budgeting. Government budget is the nerve center of the public economy. The word budget has been derived from the French word ‘bougette' which literally means a leather bag containing financial proposals of the government.

Some definitions:

According to Bastable, “The term budget has come to mean the financial arrangements for a given period with the usual implication that they have been submitted to the legislature for approval.”

According to Due and Friedlander, “ A budget may be defined as a financial plan that serves as the basis for expenditure decision making and subsequent control of expenditure. Budget usually contains financial data for the previous year, revised estimated figures for the current year and recommended figures for the coming year, for both the expenditures and revenues.”

According to Philip Taylor, "The budget is the master financial plan of a government. It brings together the anticipated revenues and proposed expenditures for the budget period, and from these estimates the activities to be undertaken and the means of financing can be inferred."

According to World Bank, "The annual budget is usually the legal authority for public spending. It is usually one year slice of a medium term expenditure plan."

Features of a budget

  1. It is a financial plan or programme guided by the socio-economic policy of the government for coming year;
  2. It is a plan of action with the approval from the legislature;
  3. It is an annual plan being guided by and intended to achieve the socio-economic objectives of the medium plan;
  4. The budgetary process involves formulation, approval, execution, and monitoring & evaluation; and 
  5. It should be comprehensive, and include all estimated revenues and expenditures.

Objectives of budget

Different writer have pointed out the objectives of budget in different ways. 

According to Musgrave - 
  1. Adjustment of resource allocation for economic growth;
  2. Adjustment of distribution of national income and wealth; and
  3. Maintenance of economic stability.

According to Prem Chand - 
  1. Integration of expenditure decisions with the specified policy objectives and resource at present and future;
  2. Integrate the major budgetary decision with national economic situation;
  3. Make certainty in efficient and effective implementation of governmental programmes; and 
  4. Help in legislative control on different phases of budgetary process.

According to Richard Goode -
  1. Prepares policy formulation structure in the selection of competing objectives;
  2. Means of policy implementation;
  3. Means of legal control of abuse of authority and use of fund extravagantly; and
  4.  Document of public information on governmental activities in past, present and future.

History of Budgeting

History of evolution of budgeting dates back to the promulgation of the Magna Carta by King John in 1215 AD in England. This limited the discriminatory authority of the king over public property. In 1689 AD the Bill of Rights authorized the need for parliamentary approval on raising tax, debt and donations by the government. It was only in 1733 AD the first budget was presented in the parliament in England. The budget practice was introduced in different countries at different times. In Nepal, the first national budget was made public in 1952 AD (2008 BS) after the overthrowing of the Rana regime.

Theories of Budgeting

1. The Classical Approach (Balanced Budget)

The Classical economists favored balanced budget annually. Among the Classical writers there were two opinions regarding the interpretation of the balanced budget. One view relates the balanced budget with the total expenditures and total revenues, and there should be no government borrowings at all. The second view held that the balanced budget relates only with the current or regular expenditures of the government, and they must be covered up only by the current revenues. But the capital expenditures like on the self-liquidating projects, and the emergency expenditures may be financed through borrowings.

The Classical approach of balanced budget was based on the assumption that full employment is the normal condition in the economy. They were of the view that a deficit budget is to be financed only by borrowings. Government borrowings in a situation of full employment withdraw resources from more productive and efficient uses in the private sector to most likely unproductive use in the public sector. The Classical writers were against the expansion of governmental activities, They were of the view that a deficit budget leads to devaluation of the currency. So they always emphasized on the small size of the government and a balanced budget.

The Classical view did not recognize the prevention of unemployment and control of economic fluctuations through the use of budgetary actions. But the Keynesian view held that full employment is not a normal condition, and there remains some frictional or under employment in the economy. So, to ensure higher level of employment and control the economic fluctuations, a flexible budgetary policy is needed.

2. The Modern Approach (Managed Budget)

It has been accepted now that the annual balanced budget as favored by the Classical writers, is irrelevant in a situation of unemployment and other economic instabilities as well as in context of the developing countries. Economists like Keynes, Hansen, Lerner, Dalton and Beveridge argued that the budgetary policy should aim at attaining the optimum level of employment of resources and steady growth of the economy. For this, they advocate a managed approach in budgeting as per the need of the economy.

The Modern approach of budgetary theory developed with the contemporary interest in the problems of economic cycles. The modern approach held that government should not be worried to balance the budget annually. It may be balanced over the entire period of the business cycle. Thus during the period of depression or recession a deficit budget is desirable. Taxes should be decreased and expenditure be increased with mainly by borrowings to stimulate the economy by increasing effective demand. While in the situation of prosperity and boom, a moderate surplus budget is desirable. In such situation, taxes should be increased and expenditure be decreased as far as possible, and the debts are to be repaid with the surplus budget.

So far as the budgeting in the developing countries is concerned, the modern approach relates it with the development objectives. Budget in the developing countries is preferred to be deficit to a considerable extent so as to promote financial resource mobilization and increase investments on greater and productive utilization of the productive resources.

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