This paper studies the effect of separation of government agencies on fiscal policies. Weconstruct a model with moral hazard which compares the integrated system and theseparated system. In the separated system, two independent agencies are in charge of taxesand government expenditure, respectively. Meanwhile, in the integrated system, one agencydecides on both policies. In both systems, there is a third party which provides informationon the effectiveness of government expenditure only to the budget agency and is willing tooverstate in order to acquire more budget. It is shown that the separated system is better atcontrolling the information provider’s incentive to mislead and can be superior under someparameter values in spite of its coordination problem.