The budgeting process can begin with preparing a sales budget. Based on expected sales volume, merchandisers can budget purchases, selling expenses, and administrative expenses. Next, the capital expenditures budget is prepared, which includes all budgeted purchases and direct labor. There are three type of budget, that is balance, surplus and deficit. 2. 0 BUDGET BALANCE Budget balance is situation in financial planning or the budgeting process where total revenue is equal or greater than total expenses.
In other words, a budget can be considered balanced in hindsight, after a full year’s worth of revenue and expenses have been incurred and record. For instance, a company’s operating budget for an upcoming year can also be called balanced based on predictions on estimates. A balanced budget occurs when the total sum of money government collects in a year is equal to the amount it spends on goods, services and debt interest. The budget balance is usually reported as percent of GDP. 2. 1 Balanced-Budget Multiplier
Balanced-budget multiplier is a measure of the change in aggregate production caused by equal to one, meaning that the multiplier effect of a change in taxes offsets all but the initial production triggered by the change in government purchases. This multiplier is the combination of the expenditures multiplier, which measures the change in aggregate production caused by changes in an aggregate production caused by changes in taxes.
The logic behind this multiplier comes from the government’s budget, which includes both spending and taxes. In general, a balanced budget has equality etween spending and taxes. As such, the balanced-budget multiplier analyze what happens when there is equality between changes in government purchases and taxes, that is, actions that keep the budget ‘balanced’ The balanced-budget multiplier is equal to one. The positive impact on aggregate production made by a change in government purchases is largely, but completely, offset by the negative impact of the changes in taxes. The only part of the impact of the change in government purchases not offset by the change in taxes is the purchase of aggregate production made by the initial injection.
Hence, the change in aggregate production is equal to the initial change in government purchases. Formula; m [bb]=1MPS+-MPCMPS=1-MPCMPS=MPSMPS=1 m[bb]= Balanced- budget multiplier MPS= Marginal propensity to save MPC= Marginal propensity to consume 3. 0 BUDGET DEFICIT A government budget deficit is the amount by which some measure of government revenues falls short of some measure of government spending. If a government is running a positive budget deficit, it is also said to be running a negative budget surplus (and conversely, a positive budget surplus is a negative budget deficit). 3. 1 Primary deficit, total deficit, and debt
The meaning of ‘deficit’ differs from that of ‘debt’, which is an accumulation of yearly deficits. Deficits occur when a government’s expenditures exceed the revenue that it generates. The deficit can be measured with or without including the interest payments on the debt as expenditures. The primary deficit is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments. The total deficit (which is often called the fiscal deficit or just the ‘deficit’) is the primary deficit plus interest payments on the debt..
A government deficit can be thought of as consisting of two elements, cyclical and structure. a) Cyclical deficits At the lowest point in the business cycle, there is a high level of unemployment. This mean that tax revenues are low and expenditure (e. g. on social security) are high. Conversely, at the peak of the cycle, unemployment is low, increasing tax revenue and decreasing social security spending. The additional borrowing required at the low point of the cycle is the cyclical deficit.
By definition, the cyclical deficit will be entirely repaid by a cyclical surplus at the peak of the cycle. b) Structural deficits The structural deficit is the deficit that remains across the business cycle, because the general level of government spending exceeds prevailing tax levels. The observed total budget deficit is equal to the sum of the structural deficit with the cyclical deficit or surplus. Some economists have criticized the distinction between cyclical and structural deficits, contending that the business cycle is too difficult to measure to make cyclical analysis worthwhile.
The fiscal gap is a measure proposed by economists Alan Auerbach and Laurence Kotlikoff. It measures the difference between government spending and revenues over the very long term, typically as a percentage of Gross Domestic Product (GDP). The fiscal gap can be interpreted as the percentage increase in revenues or reduction of expenditures necessary to balance spending and revenues in the long run. For example, a fiscal gap of 5% could be eliminated by an immediate and permanent 5% increase in taxes or cut in spending or some combination of both.
It includes not only the structural deficit at a given point in time, but also the difference between promised future government commitments, such as health and retirement spending, and planned future tax revenues. Since the elderly population is growing much faster than the young population in many countries, many economists argue that these countries have important fiscal gaps, beyond what can be seen from their deficits alone. 3. 3 How to solve budget deficits? There are two steps that have been made by the government to solve the budget deficit that happen in Malaysia.
For example, the Malaysia government has made several proposals of policy changes to solve this problem. The Malaysian government has introduced a goods and services tax (GST) which is an important step because Malaysia is the last Asian countries have not implemented a comprehensive consumption tax. Beside that, the Economic Transformation Plan (ETP) and government initiatives to attract foreign investment are also expected to boost economic growth and reduce the impact of the uncertainties of the global economy.
For the less income, many activities will continue to help people such as financial assistance, subsidies and incentives, assistance and skills training, health services and housing. Through this effort, Gross Domestic Product (GDP) declined by 0. 2% from 5. 6% in 2010 to 5. 4 % in 2011. 4. 0 Budget Surplus The definition of budget surplus is which the amount of revenue exceed expenditures. This budget is important to covering the budget deficit. The another fact of budget surplus is amount by which a government’s, company’s, or individual’s income exceeds its spending over a particular period of time.
Generally, a government does not need to maintain a budget surplus. However, a government has to be careful about running a budget deficit to make sure that the means of financing the deficit do not cause too much of an interest burden. Furthermore as in the case of the government, individuals and corporations do not have to ensure that their budgets are in surplus or balanced, but they have to be mindful of interest costs as a proportion of their income.
If the budget surplus is arise, there is some way to handle it such if household suddenly loss their work or unexpected arise expenses, the household can use the extra money to overcome the problem. 4. 1 Benefits of budgets surplus They are several types of budget surplus. The first benefit is increase national saving. According to Harvard economist Gregory Mankiw, the budget surplus will increase national saving which consists of government, households and firms saving. The government collects more money than it spends, it retires outstanding debt.
The second benefit is the government could choose to refund the surplus funds to taxpayers, giving individuals and business additional money, which they could spend or invest as they choose. This perspective sees a budget surplus as a reflection of excessive taxation and thus, a need to refund the overpayment to taxpayers. The last benefit is the government would be to direct the surplus funds toward other spending, such as improved infrastructure, new domestic programs or additional defense spending.
The economic effect of additional government spending depends greatly on how policy maker allocate the fund. 5. 0 THEORY RICARDIAN EQUVALENCE The theory of Ricardian Equivalence is introduced by David Ricardo and re-introduced into economics by Robert Barro. The theory is about the fiscal policies that worsen the long-run budget position and require government to issue more bonds to not stimulate the economy very much. The Ricardian Equivalence also means that future budget situations can have macroeconomic impacts today.
According to the theory of Ricardian Equivalence , when high public sector spending is done through loans, household aware that tax will be increased in the future to coer the cost of government debt to be paid back. To deal with circumstances, household will reduce consumption and increase their savings. Reduction in household consumption of public sector expenditure increase will reduce the net impact on aggregate demand. In extreme circumstances, additional effects of public sector expenditure can be canceled by the effect of reducing total household expenditure.
Economists have presented several counter-arguments to this Ricardian analysis including consumer myopia, borrowing constraints and the timing of the expected future tax increase: may be on a future generation. 5. 1 Assumption on Ricardian Theory There are two assumptions on Ricardian Equivalence. The first is that the government faced an inter-temporal budget constraint similar to that faced by a consumer. In other words, recall that the consumer faced a lifetime budget constraint and ignoring interest rates that was of the form. We can derive a similar budget constraint for the government of the form.
According to this budget constraint, the government could not run a deficit forever, therefore an increase in expenditure or a tax cut today that raises spending above revenues will have to be financed through a future tax increase or a future decrease in spending that raises revenue above spending. The second key assumption is that consumers, being rational, forward looking creatures will not increase consumption in response to a debt financed tax cut and will cut back consumption in response to debt financed increase in government spending in anticipation of future tax hikes.
These two assumptions have powerful macroeconomic implications. In particular, they imply collectively that tax cuts and spending increases. 6. 0 CONCLUSION Budgeting is important for managing cash so an organization can avoid deficits. Because deficits are often detrimental in any environment, budgeting is necessary in all types of businesses and not just in the for-profit arena, but also in non-profit organizations, higher education, the health-care industry, and any type of organization that must manage expenses and revenues.
Budgets often result in the financial plans of the government revenues, expenditures and government spending. They should be comprehensive and transparent and ensure funding predictable for government departments. Public resources are limited and inevitably fall short of meeting all the needs of the community. For this reason, the budget process is used to evaluate the competitive demands on the budget and facilitate the difficult tradeoffs. Meeting this challenge successfully required that budgeting achieves and maintains fiscal discipline, the strategic prioritization of public funds, as well as strong operational management.