The Context of Financial Management

Question 1

What is a Budget?

Answer 1

A budget is a quantitative plan for a forthcoming accounting period. Its purpose is multi-faceted and is intended to:

• define an envelope of total public spending for the year ahead
• help with planning and making choices among priorities
• co-ordinate activities of an organisation or of the state
• communicate objectives to the relevant people or organisations
• monitor the performance against the plan
• control activities.

A budget may also be used to:

• evaluate performance of departments and agencies.

Question 2

Deficits

Answer 2

In recent decades, governments across the developed world have run deficits more often than they have enjoyed fiscal surpluses. As a result, the stock of debt has risen in most countries.

In a growing economy, governments can run overall deficits consistently. But unless growth is high relative to the interest rate on debt, on average, primary surpluses are needed.

Budget deficits are not something to avoid. Matching spending to revenue in each period will generate too many sudden changes in spending and in tax rates. But deficits need to be either temporary or balanced by investment that generates higher future taxes.

Question 3

Intertemporal budget constraint

Answer 3

The intertemporal budget constraint means that the current stock of debt should equal the present value of future primary surpluses. If that is not true, default will occur at some point.

The intertemporal budget constraint has different implications for different economies, depending on the purposes for which they run deficits and their future prospects for growth.

Question 4

Optimal budget deficits

Answer 4

Budget deficits are not something to avoid. Matching spending to revenue in each period will generate too many sudden changes in spending and in tax rates. But deficits need to be either temporary or balanced by investment that generates higher future taxes.

1. The finance investment—it will be self-financing if investment boosts GDP and increases tax revenues
2. To address temporary shocks, e.g. wars
3. Tax smoothing—Governments should avoid changing taxes frequently, e.g. during recessions

Question 5

Fiscal balances

Answer 5

Primary balance=difference between receipts (tax and other revenues) and spending (excluding debt interest)

Overall balance=difference between receipts (tax and other revenues) and spending (including debt interest)

Question 6

New Public Management

Answer 6

New Public Management (NPM) is based on controlling inputs and outputs
but allowing managers to be entrepreneurial in how they undertake the
processes to achieve those outputs.

• A strategic approach—longer-term budget horizons
• Management not administration: a focus on results
• Improved financial management—move towards programme budgeting and accruals accounting
• Flexibility in staffing and organisation
• Competition and markets
• ‘Contractualism’ and the separation of purchaser and provider
• Private sector management practice
• Relationships with politicians—Very explicit and measurable targets for public organisations put politicians in a vulnerable position: their promises can later be
  checked against achievement
• What government does