Classical Theories of budgeting

by arjan kc
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Classical theories of budgeting refer to approaches that have historical significance in shaping budgetary practices. These theories often lay the foundation for understanding budgeting processes and principles. Here are some classical theories of budgeting:
Incrementalism: Incremental budgeting is a classical theory that assumes budgets for the upcoming period are mainly based on the previous period’s budget, with incremental changes. This approach is practical but may lead to inefficiencies if not carefully managed.
Public Interest Theory: This theory posits that budgets are formulated in the public interest, reflecting the needs and preferences of citizens. It assumes that government officials act in the best interest of the public when allocating resources.
Balanced Budget Theory: This classical theory suggests that government budgets should be balanced, meaning that expenditures should not exceed revenues. It promotes fiscal discipline and stability.
Treasury View: The treasury view theory asserts that government spending is funded by taxpayer money and, therefore, has an opportunity cost. It emphasizes the need to be mindful of the impact of government spending on private sector resources.
Wagner’s Law: This theory, proposed by economist Adolph Wagner, posits that as economies develop, government expenditures tend to increase due to rising demand for public services and social programs.
Law of Diminishing Marginal Utility: This economic theory suggests that as the government spends more on a particular program, the incremental utility or benefit of each additional dollar spent diminishes over time.
Benefit Principle of Taxation: This principle, often associated with Adam Smith, suggests that taxes should be levied based on the benefits received by individuals from public goods and services. It implies that those who benefit more should pay more.
Ability-to-Pay Principle of Taxation: This theory, also rooted in Adam Smith’s work, proposes that taxes should be based on an individual’s ability to pay. Those with higher incomes should contribute a larger share of their income as taxes.
Brief Study Notes:
Incrementalism: Builds on previous budgets with small changes.
Public Interest Theory: Budgets reflect public needs and preferences.
Balanced Budget: Expenditures match revenues for stability.
Treasury View: Mindful spending due to opportunity cost.
Wagner’s Law: Government spending grows with development.
Marginal Utility: Diminishing returns on additional spending.
Benefit Principle: Taxes based on benefits received.
Ability-to-Pay Principle: Taxes based on income capacity.
Historical Context: Early budgeting theories’ influence.
Policy Considerations: Balancing fiscal stability and public needs.
These study notes offer insight into classical theories of budgeting. Students can explore how these theories have influenced budgeting practices historically and in contemporary times, analyze their relevance in different economic and political contexts, and discuss the ethical and practical implications of adhering to these theories in the budgeting process.

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