FISCAL ADJUSTMENTS

The Political Economy of Fiscal Adjustments

The Political Economy of Fiscal Adjustments

Introduction

The way budgets are used may reflect the requirements of particular institutional and organisational contexts, rather than a ubiquitous need to plan and control technical operations. This research will examine the budgetary processes in a particular institutional and organisational setting that of a public sector commercial organisation in a developing country (Bangladesh).

Purpose of the Study

The purpose of this study is to provide a description and explication of the budgetary process in an institutional setting different from that of the birth place of such techniques, advanced western societies.

Aim of the Study

The aim of this paper is to explicate and provide empirical support for the wider perspective that the budgetary process can be moderated by the characteristics of the social environment in which the organisation is located (Osborne and Hutchinson, 2004). Some evidence is already available from various studies of the budgetary process in its social and cultural settings, but most of the research from this perspective demonstrates the influence of western values on the budgetary process. Even though such studies usefully highlight the intricate ways in which budgetary practices are embedded in wider organisational processes, the value is nevertheless constrained by the fact that they are permeated by western cultural and socio-economic influences (Arestis and Sawyer, 2004). The results of such deficiencies in the research literature are that the nature of the budgetary process at the organisational level in developing countries remains largely unexplored.

Research Question

Q. How budgetary process in an institutional setting is being applied by modern organisations in Europe?

Literature Review

The fiscal policy of the government is encapsulated in the budget, and if one wishes to view a snapshot of it, it can be seen as the government budget deficit which is a summary position of the expenditures and revenue of the government. Whether the government activity seeks to use the budget as a tool in influencing the economy, any budgetary changes will mean an effect on the economic status of the economy. (Osborne and Hutchinson, 2004)

The government can engage in expansionary or contractionary fiscal policy. If there are unemployed resources in the economy, the government can spend more while leaving taxes unchanged—or even reducing them—or it can reduce taxes and leave spending unchanged. This is an expansionary measure. If the government perceives growing inflation or an economy growing too rapidly, then it can take contractionary measures, that is, lower spending, raising taxes, or both.

Aggregate demand is the target of fiscal policy, whether it be of a stimulating or dampening effect. By spending more and/or taxing less, the government ultimately increases aggregate demand. But if it chooses to stimulate aggregate demand by spending more, the effects are direct. If it chooses to lower taxes, it works indirectly through household spending. A tax cut is then at the discretion of household spending and saving choices. (Osborne and Hutchinson, 2004)

Consider an expansionary fiscal policy through an increase in spending. Whenever the government increases aggregate demand, there are two possible effects, and the ...