Public Management and Administration - Owen E.hughes

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Financial Management 167 Through the budget government tries to determine the level of public activity in the economy, a reasonable distribution of income and wealth, and to provide some control over the overall level of economic activity. These are usually described as policies for allocation, distribution and stabilization. Allocation Allocation policy is concerned with the relative size of the public and private sectors. In other words, the budget sets out both the overall level of government activity and specifies which activities are to be carried out publicly rather than privately. Both government expenditure and taxation policies influence the allocation and distribution of resources in the private sector. For example, a decision to raise public expenditure on road construction will have widespread effects on the private sector by directing benefits to contractors, concrete manufacturers and their employees. Arguments about the size of government are really about the system of allocation. The view that government spending and taxing consume too high a proportion of economic activity, suggests there may be a distribution between sectors which is better than the present one. When a government controls a large proportion of economic activity, shifts in its spending have a substantial effect on the private economy. However, allocational decisions cannot be made precisely. There is really no a priori or explicitly rational level of government spending and taxing that all citizens accept as fair and reasonable. All a government can do is intuitively compare the electoral costs of imposing particular levels of taxation, with the electoral benefits of expenditure. Distribution Distribution policy represents the government’s attempt to redress to some degree the inequalities in wealth and income between citizens. The major part of distribution policy is the provision of social welfare, including transfer payments to certain classes of citizens, but all other budgetary decisions have some distributional consequences. A tax benefit given to a particular group, such as farmers, is distributional in exactly the same way as are direct payments for social security. As with allocational decisions, the level of transfer payments and the effects on particular groups cannot be determined technically. Musgrave and Musgrave (1989, p. 10) argue: ‘the answer to the question of fair distribution involves considerations of social philosophy and value judgment’. Some on the Right even argue that a fairer distribution necessarily leads to a poorer economy by reducing profitability and investment. In practice, as there is no agreement on what a desirable distribution between sectors or income groups should be, arguments about ‘fairness’ in distribution are inherently controversial. Stabilization Stabilization policy is where the government aims to improve the overall economy through budgetary policy. This is probably the most difficult economic function. All government spending and taxing decisions have marked effects on the private sector as well, so by varying these policies and
168 Public Management and Administration their aggregate levels, an attempt can be made indirectly to influence the entire economy. With the advent of Keynesian economics, governments explicitly accepted responsibility for promoting full employment, price stability, economic growth and a stable balance of payments. Fiscal policy is important for providing stability for the economy. Although spending and taxing have economic effects of their own, the net balance between them – the deficit or surplus – is of major importance. Keynesian economic theory argues that if the budget is in deficit – expenditure greater than revenue – the overall effects are multiplied so that the whole economy can be stimulated. If the economy is overheated, then the government can, in theory, budget for a surplus to slow the economy. The budget balance can also have effects on the net debt position of the government, and can cause reactions in the private sector, especially in financial markets. However, from the 1970s there was a change in the intellectual respectability of the Keynesian model. Relying on the government budget to manage the economy originally represented an economic revolution in that budgets did not have to be balanced every year. By varying its budget balance a government could, in theory, ameliorate the damaging affects of the boom and bust business cycle. The Keynesian model promised much and was successful for some time, but the coincidence of high inflation and high unemployment in the mid-1970s produced a reassessment. The orthodoxy is now that of ‘neoclassicism’, with the emphasis placed on reducing government, balancing the budget and letting market forces find a desirable economic equilibrium. Financial functions of the budget The financial functions of the budget are analogous to accounting. Balance sheets need to be drawn up for the whole of government activity, in the same way as in the private sector. The financial functions of the budget are: first, an evaluation of total government and public authority expenditures within the budget sector; and, secondly, to act as the legislature’s instrument of accountability and control over the government in its handling of financial matters. The first of these is a pure accounting function to set out estimates of receipts and expenditures. The second is an important part of the system of accountability. In the earliest days of the English Parliament the financial role was the most important role of the legislature, and one that continues today. Magna Carta was concerned in part with financial matters, with the Crown agreeing to consult the nobles when taxation was contemplated. A long struggle between the Crown and Parliament gradually led to the latter’s approval being necessary when taxation was raised, and spending of it was in turn reported back to Parliament. Even now, budget day is traditionally the most important day of the parliamentary calendar. Other countries, particularly those with a British heritage, have a similar financial reliance on the legislature. A United States
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Public Management and Administratio
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Also by Owen E. Hughes AUSTRALIAN P
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© Owen E. Hughes 1994, 1998, 2003
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Preface Over the past 20 years the
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viii Preface the Colorado link such
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5 Public Enterprise Introduction Pu
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12 Public Management in Developing
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13 Accountability Introduction The
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14 Conclusion: A New Paradigm for P
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284 References Borins, Sandford (19
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286 References Glor, Eleanor D. (20
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288 References Jordan, Grant (1997)
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290 References Monroe, Kristen Renw
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292 References Putt, Allen C. and S
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294 References Wilson, Graham K. (1
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296 Index bureaucracy 1-5, 9, 15-43
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298 Index information and communica
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300 Index ‘one best way’ thinki
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302 Index Ritter, G. 85, 86 role of
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