How to Plan a Budget - Case Study Example

Budget plan The first option advocates for a reduction in spending with no monetary allocation to and new programs that are either social or economic. From the facts it is clear that the expenditure of the government is high. It is also clear that is a low revenue growth. The expenditure of the government from last year to this year stands at $5000 million while the revenue of the province stands at $4400 from last year to this year. This creates a budgetary deficit in the economy. Reducing spending by a small extent may seem to the best option in the circumstances because if spending is reduced the budgetary deficit will also reduce significantly. There economy is likely to become self sufficient with less need to borrow to cater for the deficits in the economy. It is stated from the facts that the budgetary deficit will exist even if the provincial government stops spending on existing programs. This means that if spending is not reduced the budgetary deficits thus affecting the economy. However, this system seems defensive in approach. This is because the reality in ground is quite different. The unemployment levels have increased to 12.3 up from 11.5. This increases the need for social assistance. These developments need to be incorporated in the plan. This kind of approach may look good but it does not guarantee economic growth. It only ensures that budgetary deficits do not arise. Additionally, the contribution of the federal government is also shrinking. This policy on reduced cash transfers to the counties may have an effect in the total revenues of the country. This may mean that merely reducing expenditure may not be a solution to the economy. Option 2 does not seem viable. The economy is not performing well. This in essence means that measures should be adopted to ensure that the economy is robust. Reducing expenditure forecasts by reducing real spending while increasing taxations, is not adequate in creating an economically robust economy. There are other things that must be incorporated into the economy. As much as the main aim is to reduce deficits in the economy, there is also need for economic growth. This cannot be achieved by simply reducing expenses and increasing taxation. The production of the province should be increased. The service sector needs to be buttressed to improve its performance. This means that the government must increase it expenditure to meet this needs. The service sector affected the performance of foreign exports. This can only be remedied if proper steps are taken by the government to improve the performance of sectors that are lagging behind. The economy is built through increased production in various sectors and not just through reduced spending or increased taxation. There is need to expand the public sector to increase performance. This can only be realized through increased spending in the economic sector. Other issues such as increasing unemployment have a direct bearing on the economy. This must be included in the economy. I would only support this kind of plan if the province was in a crisis and its ability to borrow funds is curtailed. However, in the present case, there are so many measures that can be adopted without necessarily cutting down on the forecast expenditure or increasing taxation. The third option works towards increasing spending of the provincial government by supporting existing programs and starting new programs. This kind of plan advocates for fiscal stimulus but it fails to embrace other factors that affect economic performance. This has the effect of increasing the deficits in the economy because it eats into the revenue obtained by the government. However, the model develops a plan of increasing revenue streams by increasing taxation. Taxation to fiancé government projects has far reaching consequences on business and individuals. This kind of approach may create a burden on citizens and consequently affect personal expenditure. Personal expenditure is a great contributor to the economy. It is considered the strength of the economy. The level of unemployment at the moment and the slow growth of the economy may not allow the introduction of new programs. The need for social support due to the high level of unemployment has an effect on government expenditure. Slow economic growth has consequences on the economy and new avenues for expenditure must be avoided. Option four is similar with option I to the extent that it advocates for a small reduction in spending for the province and an increase in taxation. Reducing spending reduces the total expenditure of the government. This model does not affect existing and new programs. Reducing spending while the existing and new programs remain in place has no major contribution reducing deficit in the budget. However, increasing taxes contributes significantly towards revenue growth. Taxation is the major contributor of revenue to the province. From last year to this year the revenue raised from taxation stood at $ 2000 million. The question is the extent to which the tax can be increased to ensure that the deficits are significantly reduced or eliminated. If the deficits are reduced, there will be no need for borrowing by the government. The changing environment in borrowing may have an effect in the borrowing powers of the government. This might have a corresponding effect on the interest rate paid on the loans advanced to the government. The crux is whether merely increasing taxation and reducing spending by the government is the best way to improve the economy. This method is a quick fix to economic problems yet it may not offer the best solution to the province1. Increasing taxations seems to be simplest way of increasing revenue streams but it may not be the ideal solution to the problem. This kind of approaching may have a corresponding effect on personal expenditure. Last year, personal expenditure had increased. This can be impacted on by increasing taxes. Since all these plans do not seem satisfactory, it is desirable to come up with a model that is workable. A model that ensures economic while at the same time reducing budgetary deficits should be developed. The government should support existing economic programs especially in the service sector to spur economic growth. No new program should be initiated due to the slow economic growth and the existing budgetary deficits. In this sense the government will have reduced its expenditure without hurting economic growth. Maximum production should be obtained from the industries and other sectors of the economy. The government should also borrow to take care of its deficits and finance some of its projects. Increasing taxation may not be the solution. The province has a credit rating and it can access loans to support some of its projects. Borrowing may have an effect on the debt levels of the state but it is the best option because not all the government programs can be run by increasing taxation as proposed by the various plans discussed2. This plan appreciates that it will not be possible to fully cut down on money used on existing economic programs because that will have a corresponding effect on the economy of the state. Expenditure must be reduced to cater for slow growth and unemployment. New programs in the economic sector can be introduced but only to the extent that it the economy is not hurt. This new economic programs can be supported by the loans obtained from the capital markets. The good rating of the province at the moment will ensure that the interest rates on loans are not high. This, therefore, will not have a big effect on the costs of loans. High costs of loans have an effect on the economy. Increasing taxations to increase revenue streams to the provincial government may lead to more funds for the government but it has an effect on production and investment. It also has an effect on personal expenditure that is an economic strength of the economy3. The tax levied should, therefore, be retained while cutting down on the expenditure. The economy should be supplemented with loans because it has a borrowing ability. Taxation alone would over burden citizens and individuals thus affecting investment and personal expenditure which also has an effect on the economy4. A robust economy is not created by simply reducing expenditure or increasing taxes. These are methods that should only be used in crisis situations which is not the present case. References Romer,C (2011) “The Rock and the Hard Place on the Deficit” New York Times, Retrieved from http://www.nytimes.com/2011/07/03/business/economy/03view.html?_r=0 Freedman P(2004) “Designing loan Guarantees to spur Growth in developing countries” Retrieved from http://www.developmentfunds.org/pubs/Loan%20Guaranty%20Paper.pdf Baldacii et al (2014) Debt Reduction, Fiscal Adjustment, and Growth in Credit-Constrained Economies, Journal of applied Economics, Retrieved from http://ec.europa.eu/economy_finance/events/2015/20150120-ecfin_workshop/documents/session_22_en.pdf Read More