Objectives of Govt. Budget

The basic objectives of govt. budget are as follows:

Allocation of Resources

Allocation of resources means distribution of productive resources to different of production. The fundamental problem in the allocation branch of the budget is to determine optimally how much resource should be allocated by the government for the provision of social goods, i.e. goods for which there no markets, i.e. defence, flood control projects, highways, provision of police, street lights, public parks, light house etc. and further what should be the principle of taxation which would distribute the cost of the provision of the goods amongst the individuals in an optimum manner. In a normative theory of public finance in a democratic setting where the principle of consumer sovereignty is accepted for optimum resource allocation for social goods and distribution of tax burdens amongst individuals, it is indispensable that the govt. should somehow or other know what are the true preferences of the individuals for such goods. But Pigou and Dalton have used the principle of maximum social welfare to determine optimum size of the budget (taxation and public expenditure) applying the marginal principle in public expenditure and taxation. According to this principle, the net social advantage will be maximum where the marginal sacrifice of taxation is equal to the marginal utility of public expenditure.

Distribution of National Income

Another important objective of the govt. budget is how to distribute national income in such a way that it leads to a maxmisation of total satisfaction of the community. In a market economy the distribution of income among different sections of the society may not be equal. Some may be very rich while some may be very poor. So the govt. through the tax and expenditure policy in the budget tries to redistribute income in favour of the poor. For this purpose taxation should be based on the principle of equal marginal sacrifice, which calls for progressive taxation. Also public expenditure should be progressive in nature so that the poor should get more benefit the rich.

Stabilisation

Next to allocation and distribution, stabilisation is the third objective of the govt. budget. In other words the budget in the stabilisation branch seeks to maintain full employment without inflationary or deflationary tendency. It has been observed that business cycle (inflation followed by deflation) affects the free market economy periodically. To insulate the economy from the vagaries of business cycle, Keynes prescribed deficit budget during deflation and surplus budget during inflation. Hence the budget need not be balanced always as was view of classical economists.

The principles to achieve stability involve three main rules as follows:

(i) If involuntary unemployment prevails increase the level of demand so as to adjust aggregate expenditure upward to the value of out-put produced at full employment.

(ii) In inflation prevails, reduce the level of demand so as to adjust aggregate expenditures downwards to the value of output produced at full employment.

(iii) If full employment and price stability prevail, maintain the aggregate level of expenditure to prevent unemployment and inflation.

The Growth Objective

In the context of underdeveloped countries, the growth objective of the govt. budget has assumed tremendous importance in recent years. To increase the level of saving and investment to accelerate the process of capital formation, promotion of human capital formation and for application of new technology, the new budget should use the public sector accordingly so that pace of economic development may increase.