Coordination of Fiscal Functions

Coordination of Fiscal Functions:

Prof. Musgrave pointed out that the three basic functions of fiscal policy- allocation, distribution, and stabilization should be performed in a coordinated way. Coordination of the function of budget policy is important since conflicts are found in the achievement of their respective objectives. Let us now explain, how the functions of budget policy can be coordinated in actual practice.

Coordination: Prof. Musgrave pointed out three objectives of the budget policy-

  • Provision of social goods.
  • Adjustments in the distribution.
  • Stabilization.

He also pointed out that these three objectives be achieved by three separate fiscal instruments. Let us think of them as three separate sub-budgets or fiscal branches, each designed for the implementation of its particular objective. However, it is assumed that each manager is to plan his job on the assumption that the other two branches will perform their respective function properly.

The manager of the distribution branch budget should design a tax-transfer plan to secure the desired adjustment in the distribution. For this purpose, it is assumed that a full-employment level of income is available for distribution. The manager of the distribution branch also assumes that the allocation branch provides for the public services financed by taxes imposed in line with consumer evaluation thereof. The sub-budget of the distribution branch should be balanced.

The manager of the allocation branch in turn will provide for social goods and finance them by taxes imposed in line with consumer evaluation thereof. The manager of the allocation branch will also assume that the distribution branch has secured the ‘proper’ state of income distribution and the stabilization branch has secured full employment. Again, the sub-budget of the allocation branch should be balanced.

The manager of the stabilization branch, finally, will provide for necessary adjustments in aggregate demand to maintain or to achieve the required stability. In doing so, the manager of this branch will assume that the other two branches have met their task. By its very nature this final budget will consist of either taxes or transfers and, thus, usually be in imbalance. Taxes and transfers used to accomplish the stabilization task may be designed so as not to interfere with ‘proper’ distribution as provided by the distribution branch, i.e., they should be proportional to the proper pattern of income distribution.

In this way, budget policy is determined as the result of these interdependent plans, each of which involves different objectives and principles of action. Here, a question arises, how each branch can perform its function efficiently in isolation when they are interdependent? However, Prof. Musgrave while answering this question said that each branch will perform its function efficiently if they simultaneously determine their sub-budget plan and consolidate them into a net budget involving but a single set of tax and expenditure measures. To put it in the words of Prof. Musgrave, “The answer is that the system may be solved by simultaneous determination.”

When the three budgets have been determined in this fashion, it would then be cumbersome for administrative purposes to carry out each budget separately. Rather, it would be convenient to clear the taxes imposed by the allocation branch, the taxes and transfer of the distribution branch, and the taxes and transfer of the stabilization branch against each other, and to implement only the resulting net transfers and taxes with regard to each consumer. In addition to these net taxes and transfers, the government must undertake the purchases of products or resources needed to provide for the service of the allocation branch.

The combined or net budget may thus be viewed as a composite of the three sub-budgets. It will have a deficit or a surplus, depending upon the position of the stabilization branch. Whether the net payment system will be progressive, proportional, or regressive is not obvious. The distribution branch component would tend to make it progressive, but it is not clear, how the allocation branch will look it. However allocative effects cannot be regressive but more generally they are also progressive.

It is, thus, obvious how the various objectives could be coordinated and pursued without interference from one another.

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