“Macroeconomic

s”
INSTRUCTOR:
‘Sir Muhammad Mumtaz
Khan’

STUDENT
INTRODUCTION;
NAME : SYED OWAIS ALI
ID : SP07-BB-0135

Government Budget
And it’s Role
Forecast by a government of its expenditures and revenues for a
specific period of time. In national finance, the period covered by a
budget is usually a year, known as a financial or fiscal year, which
may or may not correspond with the calendar year. The word
budget is derived from the Old French bougette (“little bag”).
When the British Chancellor of the Exchequer makes his annual
financial statement, he is said to “open” his budget, or receptacle
of documents and accounts.

Role of a Budget
Traditional functions
Government budgetary institutions in the West grew up largely as
a result of the struggle for power between the legislative and
executive branches of government. With the decline of the feudal
system, it became necessary for kings and princes to obtain
resources for their ventures from taxation rather than dues. With
the disappearance of the old feudal bonds, taxpayers demanded to
be consulted before they were taxed. In England this was written
into Magna Carta (1216), which stated:

No scutage or aid shall be imposed in our kingdom

unless by common counsel of our kingdom, except for
ransoming our person, for making our eldest son a
knight, and for once marrying our eldest daughter, and
for these only a reasonable aid shall be levied.

This related to taxes only, not expenditures. For centuries

Parliament seemed content to restrict the amounts that the
sovereign levied while letting him spend the money as he pleased.
Only after the controversies of the 17th century culminated in the
Revolution of 1688 and the Bill of Rights did Parliament extend its
concern from taxation to the question of expenditure control.
The histories of many countries have turned on financial crises. In
France, for instance, the struggle between the monarchy and the
nobility over control of tax revenues was one of the causes of the
Revolution of 1789 that led to the overthrow of both the monarchy
and the nobility.
The U.S. budget system also evolved out of controversy. In the
early days of the republic there was a dispute between Alexander
Hamilton and Thomas Jefferson as to the amount of discretion that
the executive branch should exercise in the spending of public
funds. Jefferson's victory enabled Congress to assert its authority
by making appropriations so highly specific as to hinder executive
action. Had Hamilton won, the treasury would have attained
extraordinary power in relation both to Congress and to the
president.

Modern functions
In the 20th century a high proportion of economic activity is
controlled, directly or indirectly, by various levels of government
(federal, or central, state, local, etc.). Thus the budget has taken on
a number of other functions as well as the simple monitoring of the
overall revenue and expenditure of government. Expenditure
programs are now planned in considerable detail, but the sheer
scale of public spending raises major control problems, and
varying systems of control have been tried in different countries.
Taxation is used not only to raise revenue but also to redistribute
income and to encourage or discourage certain activities.
Government borrowing, in order to finance recurring deficits or
wars, is so substantial that budgetary policy has important effects
on capital markets and on interest and credit generally. Because the
budget is now so important to national economies, a number of
different procedures for deciding on the structure of the budget
have been developed, and these vary considerably between
countries. In some, the United Kingdom, for example, most
planning is carried out in secret by ministers and civil servants, and
public and parliamentary debate is minimal; while in others, the
United States, for example, there is lengthy debate during which
the budget can be changed significantly. The different levels of
government complicate the budgetary process with differing
spheres of influence and control over particular items of
expenditure.
The budget has also come to be used to achieve specific goals of
economic policy. It was long recognized that government
borrowing could have important effects on the rest of the economy.
As the scale of government activity increased, the levels of
expenditure and taxation were seen to have substantial direct
effects on the total demand for goods and services in the economy.
This raised the possibility that by changing these levels the
government could use its fiscal policy to achieve full employment
and reduce economic fluctuations. This stabilization function has
been used by many countries, with varying degrees of success, to
expand the economy out of recession and to control inflationary
pressures. In the United Kingdom, for example, postwar policy
involved a sequence of “stop-go” moves by government for
stabilization; unfortunately these often occurred too late and had
unintended destabilizing effects.
As well as affecting the overall economy, the budget may have
significant (intended and unintended) effects in specific areas.
Taxes affect incentives to work or to consume, while taxes,
benefits, and expenditures all affect the distribution of income. In
this manner, budgets, particularly those that cause major changes,
have considerable political as well as economic impact.

The accounting functions of the

budget
Traditionally the budget is presented to allow scrutiny (by
taxpayers, voters, and the legislature) of the resources raised by
government and the uses to which these will be put. The
publication of a budget thus performs the role of generating
accountability for the actions of government at various levels.
Historically, the focus of budgets has been to ensure that
expenditures and revenues are properly authorized; more recently,
the budget has been developed as a framework within which
complex decisions on the allocation of resources can be made more
effectively.