Limits set on overall expenditure in cash terms. In particular, the use of cash limits in the public sector aims at more efficient use of government expenditures. When any government or business organization forms its spending plans, it provides its managers, who are responsible for spending, with budgets. These budgets may be specified in real or in nominal terms. The objection to budgeting in real terms is that it leaves managers with no incentive to shop around for the best value for money in their purchases, or to resist price increases when they bargain with contractors and wage increases when they negotiate with trade unions. With cash limits, if the managers make bad bargains or are weak in wage negotiations, they will get fewer real goods and services for their departments. The disadvantage of cash limits is that if prices or wages change for reasons which are beyond the managers’ control, the level of real spending will be higher or lower than the budgetary authorities intended.
|Reference: Oxford Press Dictonary of Economics, 5th edt.|