OBJECTIVES OF BUDGETARY POLICY Dr. V. S. Murali Associate Professor P OBJECTIVES OF BUDGETARY POLICY Dr. V.S. Murali Associate Professor P.G. AND RESEARCH DEPARTMENT OF ECONOMICS

Budgetary policy is related to management of public household Budgetary policy is related to management of public household. Concept of fiscal rationality criterion was developed by economists to explain ideal budgetary policy. There are two view on concept of fiscal rationality criteria. The classical concept of fiscal responsibility criterion emphasises fiscal neutrality. According to this concept budget must be a neutral budget. It will be a balanced budget. Such a budget will not influence level of economic activity. It will not influence the functional areas of the economy such as allocation, economic growth, stabilisation and distribution. The classical concept of fiscal rationality criteria is based on “laissez-faire” economies. In recent years the objectives of budgetary policy has undergone significant changes due to the emergence of the concept of “welfare state”. In such a state the people are protected from cradle to the grave. The government aims at protecting the people from various contingencies or risks of life. Under these conditions a modern government has to determine first the level of expenditure which would ensure the maximum wellbeing of the people. The expenditure of modern government is covered by tax and non-tax revenues, internal and external loans, small savings and deficit financing. Hence budget is unbalanced. Deficit budget has become a common fiscal practice. Therefore, modern budgetary policy is not aiming at a neutral budget but at a functional budget. Therefore, budgetary policy influences the functional areas of the economy like allocation, economic growth, stabilisation and distribution.

ALLOCATION: Budgetary policy can influence the allocation in 2 ways. To push the economy from the point of sub-optimal inter-sector allocation to optimal inter-sector allocation To move the economy from point of optimal inter-sector allocation to sub-optimal inter- sector allocation.

This can be illustrated by the following diagram with the help of social indifference curves.

E6 is not possible because it is beyond the production possibility limit of the economy ‘E’ is called the point of optimal inter-sector allocation (Prof. Galbraith calls it social balance or technical efficiency). Point E satisfies 1. convexity and 2. tangency conditions. Points E1, E2, E3, E4, E5 represent sub-optimal points of inter- sector allocation. A good budgetary policy will move the economy from sub-optimal points to optimal point E. If the budget policy is not good it will shift the economy from the optimal point to the sub-optimal points of inter-sector allocation.

B. ECONOMIC GROWTH: Budgetary policy can also influence the level of rate of economic growth as well as the production potential of the economy. A good budgetary policy will have a judicious mix of revenue and expenditure policies and push production possibility curve of the economy to the right as shown in the diagram (KL to K’L’). Similarly an unsound budgetary policy can push the PPC of the economy to the left as shown in the diagram (KL to K’’L’’).

B.ECONOMIC GROWTH:

C. STABILISATION: Budgetary policy can also bring about expansionary or contractionary effects. For ex., an increase in budget size tends to be expansionary while a decrease in budget sizes tends to be contractionary. This can be illustrated as follows: This diagram shows that budget policy may move the aggregate performance level of the society from sub-optimal point E1 to E or move the society from optimal point E to sub-optimal point E1. Thus Budgetary Policy of government can powerfully influence the level of output, employment and price level.

D. DISTRIBUTION: The Budgetary Policy can also influence the state of real income and wealth distribution in the private sector. The budgetary policy like taxation and public expenditures on social welfare programmes can redistribute the income among the members of the society. This is illustrated by the Lawrence curve approach. LORENCE CURVE APPROACH: Budgetary policy directed towards the achievement of various objectives may have to face some problems of reconciliation. For example. The goal of full employment may come into conflict with the objective of economic or price stability. The goal of economic growth may come into conflict with the goal of distribution. Further, the budgetary policy may have to reconcile vertical and horizontal imbalances. Vertical imbalances refer to the problems between the federal government and the state government. Horizontal imbalances refer to the problems of inter-governmental relations between states.

LORENCE CURVE APPROACH: