1. The aim of budgetary policy of the government should not be to go in for a balanced budget for its own sake. Public budgets do not stand on the same footing as the private ones, either in terms of objectives, or in terms of design. A public budget must aim at effectively helping the economy and minimizing its own harmful effects. It should counterbalance market failures instead of being neutral in its impact (which it is not likely to be on account of its sheer growing size). In contrast, the advocates of balanced budget maintain that the budget should be neutral.
2. The inflationary impact of a deficit budget does not depend upon only the presence or absence of the deficit. The more relevant factors are the size of the deficit (in relation to the overall size of the national income) and the persistence of it. One major deficit might be more damaging than many minor ones. In a developing economy, for example, some deficit.
We shall look into the details of ‘balanced budget multiplier’ later in this chapter budgeting would be needed to provide a financial counterpart to the increasing monetization of the economy.
3. There can be situations in which a budgetary deficit would be only reflationary in character and would be only’ helping the economy in recovering from a depression. During a period of depression, if the economy has a reasonable flexibility, a budgetary deficit would boost up production and employment.
4. The change in the purchasing power of money depends upon demand for and supply of goods and services by both the public and private sectors. A surplus or a deficit budget may be partly or fully counter-balanced by the opposite behavior of the private sector.
5. Keynes maintains that the budgetary measures intended to balance the budget themselves lead to subsequent budgetary deficits and the measures intended to create deficit would help them, subsequently, to balance. Keynesian argument can be put as follows:
During a depression, there is an all-round downward pressure on revenues. Thus, because of a fall in the income, production and prices, revenue from both direct and indirect taxes falls. On the other hand, public expenditure tends to fall on account of reduced cost of government purchases though expenditure on some items (such as to help the unemployed) may increase. In these circumstances, when the government tries to balance its budget by raising more revenue through higher taxes, an additional disincentive to investment and consumption is generated leading to’ a further reduction in production, employment and national income. Thus, the taxation measures which the government takes to balance its budget themselves push the public budgets to further deficits. Just the opposite happens in the case of booms. There, with increasing employment, national income, prices and output, public revenue increases while public expenditure lags behind. Therefore, if the government reduces taxes to reduce its budgetary surplus, a further impetus to investment and employment is imparted leading to a still greater surplus. Arthur Smithies adds by saying that an attempt to balance the budget annually worsens economic fluctuations in the country.
6. The argument that a deficit budget of today restricts the budgetary flexibility of tomorrow is not exactly true. It must be argued that a policy of avoiding today’s deficit at any cost is itself a major restriction on the budgetary maneuver ability. Furthermore, there are some forces which add to future flexibility. A large debt (which would result from a number of deficits over time) certainly adds to the government’s armory the form of debt management tools and provides a means for an effective monetary policy also. And, the overall fiscal flexibility is greater when the government can add to or reduce the debt volume. However, if the debt becomes really excessive, the government may fall into a debt trap. In that case, of course, the budgetary flexibility is reduced through cost of debt servicing. There is no guarantee that a balanced budget is a means to ensure financial discipline and efficient financial management by the government. A balanced budget by itself does not imply an absence of wasteful expenditure. It is quite possible, as Arthur Smithies say, that an effort to have a balanced budget during a given period of time may rather lead to a wasteful expenditure. A project, for example, may not be completed within a given financial year so as to keep the budget balanced. Clearly, such delays raise the cost of projects in hand. Again, it is also possible that while total public expenditure remains within the revenue available to the authorities, it is spent wastefully. And furthermore, under the pretext of financial discipline, some long-term developmental schemes may not be taken up at all.
7. Any predetermined rule like the one stating that the budget ought to be balanced, will restrict the freedom of action on the part of the authorities, and thus restrict the possible use of fiscal policy. Fiscal policy is one of the many economic instruments with the authorities and restricting its use in any manner only makes it less effective.
Judiesiz answered the question on July 7, 2018 at 00:29