Changing Legal and Political Environment in Altering Budgetary Decisions - Essay Example

CATEGORY A Q.No Why do many budget projections end up being less than accurate Explain the role of changing legal and political environment in altering budgetary decisions. When changes to the budget are necessary, three options are possible: 1) increase funds; 2) decrease funds; or 3) reallocate funds. Discuss each option and the budgetary tools associated with the strategy. A budget is an itemized summary of probable expenses and income for a given period. In a lay man's language, it may also be expressed as a way to keep from running out of money before running out of month! No matter how one refer to it, it's a tool to help him/her to prioritize spending and manage money-no matter how much or how little he/she has. A fiscal deficit is regarded by some as a positive economic event. For example, economist John Maynard Keynes believed that deficits help countries climb out of economic recession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favor of a balanced budget policy. Fiscal deficit is an economic phenomenon, where the Government's total expenditure surpasses the revenue generated. It is the difference between the government's total receipts (excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government about the total borrowing requirements from all sources. The fiscal deficit is the difference between the government's total expenditure and its total receipts (excluding borrowing). The elements of the fiscal deficit are (a) the revenue deficit, which is the difference between the government's current (or revenue) expenditure and total current receipts (that is, excluding borrowing) and (b) capital expenditure. The fiscal deficit can be financed by borrowing from the Reserve Bank of UK (which is also called deficit financing or money creation) and market borrowing (from the money market that is mainly from banks). Components of fiscal deficit The primary component of fiscal deficit includes revenue deficit and capital expenditure. Revenue deficit: It is an economic phenomenon, where the net amount received fails to meet the predicted net amount to be received. Capital expenditure: It is the fund used by an establishment to produce physical assets like property, equipments or industrial buildings. Capital expenditure is made by the establishment to consistently maintain the operational activities. Arguments: Fiscal deficit lead to inflation According to the view of renowned economist John Maynard Keynes, fiscal deficits facilitate nations to escape from economic recession. From another point of view, it is believed that government needs to avoid deficits to maintain a balanced budget policy. In order to relate high fiscal deficit to inflation, some economists believe that the portion of fiscal deficit. Expert recommendation Financial advisors recommend that the Government should not promote disinvestment to reduce fiscal deficits. Fiscal deficit can be reduced by bringing up revenues or by lowering expenditure. Logically, there are two ways in which the fiscal deficit can be reduced - by raising revenues or by reducing expenditure. However given the character of our State and the constraints of a liberalized economy, the government has not increased revenues. In fact, in budget after budget the government has actually given away tax cuts to the rich. Even when it has tried to raise revenues, it has been through counterproductive means like disinvestment. The main impact of the policy of reduced fiscal deficits has therefore been on the government's expenditure. This has had a number of effects. First, government investment in sectors such as agriculture has been cut. Secondly, expenditure on social sectors like education, health and poverty alleviation has been reduced leading to greater hardship for the poor already bearing the brunt of liberalization. Perhaps most importantly, in an economy going through a recession the government is not allowed to play any role in boosting demand. CATEGORY B Q. No. 1 Why is it so difficult to reform the budget process Why do people always complain about the budget Will citizens always want more from government than they are willing to pay for How if so, are governments at different levels doomed to continuous deficit spending. The following Principles are applied to reform the budget process Overall Spending Should Be Capped at a Set Level Families understand spending caps. Every year, millions of families sit down at their kitchen tables and evaluate how much they can afford to spend. A family's wish list almost always exceeds what it can afford; therefore, the family must prioritize in order to remain underneath the cap. Setting limits is never easy: However, responsible budgeting keeps these families solvent in the long run. The federal government does not cap spending. Lawmakers can simply add up the cost of their preferred programs and pass legislation to fund them. Mandatory programs--which now comprise two-thirds of all federal spending--grow each year without any cap or oversight. Discretionary programs grow with only slight constraints imposed by the annual budget resolutions. Without real federal spending caps, lawmakers often avoid difficult trade-offs and spending grows beyond what taxpayers can afford. Not surprisingly, mandatory spending is growing 7 percent annually. Abandoning enforced caps on discretionary spending has resulted in double-digit growth in annual discretionary spending. There are several options available to cap spending. Multi-year caps on discretionary spending succeeded in the 1990s, when they were enforced and considered politically realistic. Lawmakers could set annual spending cap levels every few years or determine them by a formula, such as inflation plus population growth. Linking spending increases to budget deficits or to the gross domestic product is more difficult because economic growth and tax revenues can fluctuate rapidly. Additionally, those limits would require the deepest spending cuts during recessions and allow large spending hikes during booms. Caps could work for mandatory programs as well. In the 1990s, these programs were subjected to PAYGO rules that limited only the creation of new entitlements--and did nothing to limit the calamitous spending increases projected in the current Social Security and Medicare baselines. With mandatory spending projected to double in 10 years and overwhelm the rest of the budget, current mandatory programs can no longer be left off the table. Effective caps should apply to all federal spending--whether mandatory or discretionary, current or proposed. Lawmakers could create separate levels for mandatory and discretionary spending, utilizing distinct levels or growth formulas.1 Alternatively, they could set a single "Omni cap" that applies to all federal spending. An Omni cap would have the advantage of allowing trade-offs between mandatory and discretionary spending--thus promoting flexibility and simplicity. The Annual Budget Should Present a Full Picture of Future Obligations Families also understand the costs of long-term financial commitments. They can quickly calculate how much they owe on their mortgage, car, and other long-term obligations, and when those obligations will be fully paid. Importantly, families cannot commit to new financial obligations without demonstrating that they can pay for them. For example, potential homeowners must make a substantial down payment and show that they can afford the monthly payments. Businesses operate under similar fiscal constraints. A business is required to disclose the size and scope of its obligations on financial statements so that shareholders, oversight entities, and potential investors can understand the true nature of its financial condition and can make informed decisions. It must report all long-term obligations, including liabilities associated with pension and retirement health care plans--similar in nature to Social Security and Medicare--while a measure of their growth is counted against the business's bottom line. The President Should Be Involved Throughout the Budget Process If two parties are expected to negotiate a detailed agreement on a complex subject within a nine-month period, separating them until the end of the ninth month makes little sense. It makes even less sense for one side to spend a great deal of time working out the smallest details of its offer without first having forged the basic structure of an agreement with the other side. Yet, Congress and the President currently use this method to write the federal budget. Without any agreed-upon budgetary framework; these last-minute negotiations over the details of hundreds of programs become extremely difficult. The inevitable results are rushed compromises that are completed well past the fiscal year deadline. In fact, the past two federal budgets were completed four months late--one-third into the year that they were designed to fund. Budget Decisions Should Include Strong Enforcement. Budget restraints without strong enforcement are paper tigers. Restraints are intended to force Congress to make some uncomfortable trade-offs in order to preserve the nation's long-term economic health. However, Members of Congress typically take the easy path of seeking loopholes that bypass restraints, thus avoiding difficult choices. Consequently, rules are only strong as their weakest link. References Budget Deficit (2008). Is the Deficit a threat to a future recovery Retrieved on 17 December, 2008http://economistsview.typepad.com/economistsview/budget_deficit/ Management Tool Kit. Budget Reform: A Multi -Functional or Dysfunctional Phenomenon. Retrieved 17 December, 2008 http://whitepapers.zdnet.co.uk/0,1000000651,260137041p,00.htm Prasad Devi P.R. (2008) Presentation Scheme: Ministry of Finance: Press Information Bureau, New Delhi. Retrieved 17 December, 2008 http://72.14.235.132/searchq=cache:BgqwQLf-b_UJ:pib.nic.in/archieve/others/2008/feb/prs_bdt.pps+budget+process&hl=en&ct=clnk&cd=3&gl=in Read More