In order to understand the
difference between the classical and modern theory, we must distinguish the two
concepts of public savings. In the classical system, the entire income received
at full employment is always respent on
either consumption or investment. Saving
is automatically converted into investment.
Hence, saving is always matched by a corresponding amount of planned
investment. In such a system, all public
revenues—taxes and borrowings—reduce private spending. This reduction will take the form of decline
in consumption or investment. Hence,
government expenditure does not add to
aggregate demand of the commodity. The concept of saving is different from the
modern theory. In this system, the private sector does not provide full
employment automatically and savings are not matched automatically by planned
investment. Hence, the operation of the budget is likely to affect aggregate
demand and a deficit in the budget may
be required to reduce unemployment.
Kinds of Budget
government budget may be of many different kinds as it serves several purposes.
To name them:
ü Executive and legislative
budget. The executive budget is one
which is prepared by the chief executive with the aid of the budget
department. It is then presented to the
legislative branch of the government for
translation into legislation. It is the
preferred type of budget, which is more commonly used by the larger government
unit. On the other hand, the legislative
budget is prepared by or for a committee of the legislative branch for adoption
by that branch.
ü Multiple and unified budget. Multiple budget is the traditional budget,
which is divided into parts and each part presented separately. A unified budget is presented as it is the
total effect of a budget which is more relevant.
ü Conventional and cash
budgets. In the conventional budget also
known as the administrative budget, revenue and expenditure are shown on
accrual basis and those flows of funds are excluded, which do not belong to the
government. It presents an inadequate picture of the governmental activities. In
the case ofa cash budget, all the flows of funds to and from the government are
shown on the actual payment basis.
ü Revenue and capital budget. Capital budget covers items which increase
assets while revenue budget covers those revenue which are of recurring nature.
Factors Influencing Local
Local budgets are extremely
sensitive to their political, economic, social and legal environment.
Politically, the proximity of local governments to citizens means that public
opinion will play a key role in shaping spending decisions.
Economically, both the revenue and expenditure sides of the
budget are sensitive to cycles of boom and
bust, as well as to completion for residents and business
investment. Local governments are
primarily concerned with using their budget decisions to stimulate economic
growth by attracting new industries or keeping a large employer from leaving
the area. Changes in inflation and
interest rates can tear apart the best-laid financial plans.
Socially, budgets are sensitive
to factors such as in-and out-migration, the age distribution of the population,
problems such as drug use, homelessness and crime.
Leagally, governments have to
work within laws that limit debt, require a balanced budget, specify legal
revenue sources, mandate particular activities, procedures or spending levels
and forbid certain activiites.
Budget decisions affect people’s
lives in many ways. As a result,
people who want to influence budgetary decisions must decide how best to exert
that influence. A number of strategies
are common in budgetary politics.
Cultivating Clientele Support. These
are the groups with a continuing and strong interest in the government
program. Having a large, organized, and
politically active clientele will make gaining the support of the President and
other lawmakers a good deal easier. A
program that lacks strong celestial support may be vulnerable to budget cuts
when funds are relatively scarce.
Gaining the Trust of Others. Building
and maintaining the trust and confidence of other participants in the budget
process is an important strategy. Being
aware , well prepared, honest of those participant’s expectations and
preferences will make things flow more smoothly.
Documenting a Need. This
involves developing and convincing evidence of the need for some course of
action or evidence that some existing course of action is beneficial. Ex. A
rising crime rate may help to persuade the city council to increase the funding
for law enforcement.
Looking for Sympathetic Decision
Making. A strategy which makes use of a
large number of participants like in the case of US.
Coping with Painful Actions. When
painful budgetary actions are threatened, officials may try to shift blame to
other decision makers. If a budget must
be cut, officials may try to cut less visible and less painful items such as
cutting back on maintenance or postponing major purchases.
The “Camel’s Nose”. People
who are seeking funds for a new program
may employ the “camel’s nose” technique, which involves asking for a small
amount of money for the first year and somewhat larger amount in each succeeding year rather
than asking the huge amount of money in
the first year. This strategy assumes
that budgeting is relatively incremental, gradual changes are likely to
generate less opposition than abrupt changes.
Making the Program Appear Self-
Supporting. An important budgetary strategy
is to present the program as at least partly self-supporting. Example: A highway may be financed in part by tolls
paid by the highway users.
Capitalizing on Contemporary
Circumstances. One budgetary strategy involves
taking advantage of favorable conditions that may temporarily improve a
program’s attractiveness. During a
crisis, a program may gain funding if it can be presented as a potential remedy
for whatever is causing the crisis. A
friendly political environment may enable a program to begin or expand its
operations, if program supporters are
prepared to take advantage of that environment when the opportunity arises.
Minimizing the Risk of Future Cuts.
It seeks to deal with
concerns that fundingmay be withdrawn after it has been committed. Ex. Equipment will be purchased as soon as money