The Budget: Tools For Economic Analysis By Iftikhar Ahmad

In almost every country in the world, budgetary policy is a well-recognised major tool for the development and stabilisation of the economy. This recognition is both explicit and implicit. Where the recognition is explicit and the role of the government is that of conscious leadership and planning for economic growth and stability, policy decisions which are ‘sound’ can be made only on an informational base, which is adequate. Budgetary policy cannot be effective in these circumstances unless information is available for appraising the impact of governmental activities.
An improved budgetary classification for purposes of economic analysis should provide relevant data to help fill gaps in statistics. Other analytical techniques have been developed by economist who can be expected to assist in the improvement of public decision-making. Input-output analysis has made and will continue to make important contributions, particularly in the scheduling and programming of civil and military requirements.
The analysis of money flows for the economy may eventually throw light on a number of questions affecting the role of government. The expertise of economists must be merged with understandings of other social science experts who have developed approaches useful in exploring the explicit factors which limit the achievement of a society’s implicit economic goals.
The historical development of modern budgeting suggests two significant generalisations concerning the distribution of budgetary responsibility. First, the budget system developed as an instrument for democratic control over the executive. The power of the purse came to reside in the legislature in order to prevent the exercise from imposing wilful and arbitrary taxes on the people.
The budget is an expression of ultimate legislative authority. Second, the budget system requires the development of two-way pattern of responsibility, centering and focusing on the executive. One line of responsibility runs from the executive to the administrative agencies. The executive must be charged with general supervision of administration affairs; executive authority must be able to control administration. Only then is possible for the executive to prepare a financial plan; only then is it possible to execute the plan as adopted by the legislature.
The second line of responsibility in a budget system runs from the executive to the legislature. In the exercise of its authority the legislature must be able to hold the executive accountable — both for the execution of last year’s financial plan and for the comprehensiveness of this year’s programme.
The budget will and should necessarily reflect the relative distribution of economic power within the nation. It is reasonably good generalisation that in most countries there is adequate recognition of the economic influence of the government’s budget.
The budget is properly regarded as a tool of fiscal policy, that is, as an instrument for consciously influencing the economic life of a nation. Fiscal policy has a broader and different meaning, associated with governmental efforts to stabilise or stimulate levels of economic activity. Distinction between public finance and fiscal policy is a direct product of the anti-depression experience of governments in the 1930’s and the writings and influence of John Maynard Keynes.
The budget will and should necessarily reflect the relative distribution of economic power within the country
In the United States, the widespread academic and popular use of term was greatly stimulated by the publication of Fiscal policy and Business cycles by Professor Alvin H Hansen. During World War-II the term fiscal policy came to mean the utilisation of revenue, expenditure, and debt programmes for achieving higher levels of total output and for preventing inflation. Defined in operational terms, fiscal policy means the utilisation of certain governmental activities and actions in the development and stabilisation of the economy.
Emergence of the term ‘fiscal policy’ is generally attributed to the relative and absolute growth of public sector. Tools of fiscal policy are taxation, expenditures and debt management. They must be coordinated and integrated with monetary and credit control. The appreciation of the fiscal policy significance of debt management is very largely a product of World War-II, and may be illustrated by the experience of the United States Treasury Department in the sale of war bonds. The idea of selling war bonds was to minimise the inflationary effect of government expenditures. Furthermore, the idea was to discourage private expenditure by individuals on goods and services in short supply.
Fiscal policy attempts to regulate economic activity by controlling the aggregates of spending. The allocation of resources is very largely left to the private sector. The price system continues to serve in its traditional role as a guide to resource allocation among alternative employments.
Decisions about effectiveness of governmental operations will always be continued by such things as the attitudes of the persons and groups who are served by programmes, by the success of programmes in improving the material conditions of such persons and groups, by the attitudes of influential but non-affected persons, and by the attitudes of persons and groups who are adverse affected. Because problems of measurement are be elusive and difficult.
J Wilner Sundelson, after a careful review of British and continental writings on budgeting, set forth outline of principles intended to encourage greater attention to budgetary theory. His principles were the following:
Relation between the budgetary system and the fiscal activities of the political unit.
(a) Comprehensiveness
(b) Exclusiveness
Treatment by the budgetary mechanism of the factors included in the system.
a) Unity
b) Specification
c) Annuality
d) Accuracy
iii. Farms and techniques for presentation of the budget contents.
a) Clarity
b) Publicity
Annuality requires that budgets be presented each year and that they cover only one fiscal year. A three-month budget makes no sense at all.
Objectives of a system for budget execution include:
a Preserving Legislative Intent
b Observing Financial Limitations
c Maintaining Flexibility
Further attention was required on: Control by appropriation; and
Central Executive Control of Expenditures.
The rigidities in budget execution, like the rigidities in budget classification, will be relaxed as and if there is a further development of responsible administration in the public service.
The writer is a former Director, National Institute of Public Administration (NIPA) Government of Pakistan, a ‘political analyst, a public policy expert and an author. His book Post 9/11 Pakistan was published in the United States
Published in Daily Times, May 1st 2018.
Source: https://dailytimes.com.pk/234404/the-budget-tools-for-economic-analysis/
 

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