Budgeting Process in the Public Sector - Research Paper Example

 Budgeting Process in the Public Sector Abstract In this paper a detailed summary of the process of budgeting especially with regard to the democratic state structure is provided. It has laid specific attention on the process of budgeting with regard to the different steps involved, ranging from planning to the final approval of the budget. It makes an analytic note of the roles and responsibilities commonly shared by the state and non state agencies in the whole process as also the administrative framework most commonly followed by these types of states. Apart from touching upon the above areas from a common perspective this paper also initiates a discussion specifically upon the topics of Budgetary Decision Making and Resource Allocation in the Process of Budgeting. With regard to the process of budgeting the paper discusses the case of state of Washington as an example and the major steps involved in the budgeting process of the state. 1. Introduction The term ‘Budget’ refers to the document or a list of all planned expenditures and revenues. It is commonly characterized as a plan for saving and spending. It can also be called as an organizational plan stated in monetary terms. By budgeting it is intended to get an overview of the actual economic situation and to forecast the revenue and expenditure for the coming year. The budget of the public sector or the government is a summary of the intended revenue and expenditure of the government. It identifies the financial resources required to achieve the scheduled objectives. The budget preparation in the democratic countries is done by an agency appointed or authorized by the government. Then the prepared budget is submitted before the legislature for approval. For e.g., Office of Management and Budget prepares the budget document and submit to the Congress for consideration. Substantial changes may be made by the Congress in the submitted document before the approval. Likewise, Chancellor of the Exchequer (who is the second most important member of the government) prepares the budget in the United Kingdom and submit it before the Parliament. Definition of Budget Process It refers to the process by which budget is prepared and approved by the government. Generally the process of budget starts at least four months before the end of the financial year to ensure that the budget is approved by the board before the start of the new year. Such an advance measurement also helps to provide sufficient time for all the involved state and non state agencies to prepare drafts of the desired policies and programs with necessary estimated allocation of revenues and expenditures1. II. Steps in Budgeting Process For analytical purposes this whole process of budgeting can be classified into seven steps. 1. Planning the Process It is highly essential to identify the agency or group of persons who will coordinate the process of budget. The staff, board members and committees to be involved in the process have to be identified well in advance. The discussions and clarifications are to be made regarding the key definitions, assumptions and document formats. Timelines and key deadlines are to be set. The trainings, key meetings and important discussions are determined and scheduled. 2. Communicating about the Process During this second stage the forms and assumptions are explained to and distributed among the agents, departments and persons who are involved in the budgeting process. 3. Programmatic Goal Setting The major task during this stage is to set the program goals and determine the key objectives. On the basis of program goals, the staffing requirements, salary and benefit assumptions are made. 4. Gathering of Information The skeleton of the budget is the information about the income and expenses based on program goals and assumptions. Hence collecting information through various ways is a crucial task and budget details are constructed on the basis of this information. Communications are made regularly in order to avoid duplication of efforts and to share information and basic assumptions. 5. Compilation and Revision All the collected information are compiled and then reviewed for consistency. The compiled and reviewed information are redistributed to everyone who are involved in the process of budgeting and further reviews and revisions of the same are made. 6. Committee Review The budget draft and key assumptions are reviewed by the board or agency before submitting for the final approval. 7. Final Approval The draft of the budget would be approved by the authorized authority. Three things are considered essential for a completing the whole process of budgeting in rather successful manner. They are i) to identify the programmatic objectives that are aligned with the mission and strategic plan, ii) to determine the financial resources those are already available and those are further needed in order to achieve program goals, and iii) to involve staff and board members completely in the process of budgeting to improve accuracy of information and commitment to the plan. III. The process of Budgeting The job of budget preparation is decentralized to spending agencies and these agencies prepare open ended bids based on their assessment of the need for resources to meet the needy and specific services.The bids prepared by the agencies are then negotiated with the Ministry of Finance, who can make changes in the bids or proposals made by the agencies. These alterations are usually intended to eliminate wastage and to ensure consistency with government policy. Mostly, as there is continuity in the functions of the public sector, there would be stability in the allocation of public expenditure. Therefore, it is not needed to assess the expenditure and requirements each year. Allocations are determined on the past experiences, taking into account prior allocations and budget execution by giving justifications for new programs and increased spending on existing programs. The temporal nature of planning is limited to the budget year and annual budgets which ensures regular and timely legislative scrutiny of spending decisions. The budget proposals consolidated and prepared by the Ministry of Finance are submitted to the Cabinet for review, revision and approval. After it is approved by the Cabinet, the budget proposals are approved and enacted by the legislature in the form of appropriate accounts. Once the budget proposals and expenditures are defined and approved, the financing requirements are assessed. This may entail proposals to the Parliament for the changes in the tax rates and structure or proposals for borrowing, in order to mobilize the funds and resources to meet the expenditure requirements in the budget. Wicksell in the 1890s demonstrated that a simultaneous approval of expenditure and revenue requirements would allow decision makers to assess the trade-offs between spending and taxation, but this was followed until recently2. For instance, in the United Kingdom, the expenditure and revenue sides of the budget were met equilibrium only in 1994. Likewise, in most of the Commonwealth Countries, expenditure and revenue budgets are prepared and approved separately. Fulfillment of the resource allocations is made through detailed expenditure line-item accounts approved for each institution and it is backed up by Centralized fund release mechanisms, regular verifications of accounts and independent auditing of end of year accounts. While the Ministry of Finance can impose cuts and reallocate the resources during the financial year within the limitations set by the legislature, significant alterations in the resource allocations can be made through Supplementary budgets. But the prevalence of more supplementary budgets are considered to be the symptom of poor administration and planning and hence, supplementary budgets are discouraged in many courtiers. Administrative Framework for the Process of Budgeting Ministry of Finance is responsible for the management of public expenditure including the formulation of a consolidated state budget and accounts. The management of government’s cash resources is also done by the Ministry of Finance. Spending agencies are doing for the planning, management and delivery of public services, and the preparation and management of agency budgets. The agencies who are in charge of spending are usually headed by the Ministers or Public Officials. The formulation of public policies and approval of government budgets are done collectively by Cabinet and implementation of government policy is the responsibility of individual Ministers. Legislatures analyze the budget proposals and accounts of the government through the functioning of committees and enact the budget by rule. In the Presidential or Congressional systems of government, legislature may make amendments in the budget proposals of the government, but in Parliamentary systems, the amendments are usually not made by the legislature. Auditors verify the fulfillments of budget laws and procedures regarding the use of public funds and reports directly to the government or to the Ministry of Finance. IV. Budgeting Process: The case of Washington State, US In the Washington state the custom of biennial budget is followed. According to this the budget is usually prepared for a period of two years which, after submitting to the legislature, can go through a series of revisions. These include supplemental budgets by which is meant those annual revisions enacted by the legislature to the state’s biennial budget. Biennium for the purposes of budget preparation in the state starts from the July of every odd numbered year. I shall summarize the whole process also with regard to the roles and responsibilities shared by the involved agents as below.3 The whole process starts with the agencies’ strategic planning process. The Office of Financial Management (from here on OFM) then issues all the necessary budgeting instructions. Once this is done the agencies submit their budget requests which are then reviewed by the OFM. On the basis of these reviews and revisions the Governor then takes the final decisions and the budget is eventually proposed to the legislature for its sanction. Developing budget estimates and submissions of budget proposals to the governor are the responsibilities of the state agencies. They are also responsible for the implementation of policies and programs once they are passed by the legislature. The coordination of the agencies’ requests and the preparation of the Governor’s budget recommendations is the function of OFM. The Economic and Revenue Forecast Council identifies the financial resources that are available to support estimated expenditures. The amount of money that each state agency can spend and with necessary conditions and details is a function of the State Legislature. The caseload forecast council determines the targets of the state entitlement programs like schools, medical and health institutions etc. The limit of the state general fund for expenditure is determined by the State Expenditure Limit Committee. V. Resource Allocation in the Process of Budgeting Resource allocation process is the most important step in the process of all types of budgets- whether they are private, individual, household, corporate, public or government. In the process of public sector budget, resource allocation is made by involving various departments and diverse institutions each one of which represents or holds different interests. The interactions and decision making by involving these different institutions are crucial in determining the resource allocation outcomes. Since the very start of modern budgeting, attempts have been made to formulate an institutional framework of the process of budget so that the desired allocation of resource can be achieved. As a part of resource allocation, attention is being made on the decision making process and also seeks to impose the technical firmness by the way of applying the analytical methods. The most influential argument for the strong decision making in the process of resource allocation is that of the Incrementalists for whom institutional role is crucial in determining the behaviour of decision-makers. Recently, economic theories have been applied to the budget process in which the self-interested politicians and bureaucrats interact to influence the budgetary outcomes. An important milestone in this regard is the emergence of Administrative Budgeting in the public sector. Modern budgeting systems exert legislative control over resource allocation decisions by the executive. Administrative budgeting divides the responsibility for and authority over the resource allocation process between institutions whose powers are well defined by law. A clear distraction is maintained between policy and administrative functions: the former is considered as the exclusive role of politicians in the legislatures while the latter pertains to the responsibility of bureaucrats within the government departments especially Finance and other Spending agencies. Though the bureaucrats advise their respective Ministers and other leaders regarding the appropriate resource allocations, decisions should ultimately be taken by the politicians. Ministers are accountable to the legislature for the proper use of funds that they received and spent while the day-to-day administration of these funds is the responsibility of the bureaucracy. VI. Budgetary Decision Making The traditional approach regarding the process of resource allocation provided no guidance for the basis for resource allocations decisions. Such decisions are made by political realm, where citizens’ preferences are expected to be reflected and expressed and compliance with these preferences are ensured through the electoral process. Accountability to the public is made through the presentation and audit of accounts rather than through the public involvement in the decision making4. Under this traditional approach, it is expected that decisions would be taken in the public interest, though the budget-makers have few tools to support them in the task of decision making and making the decisions pro public. It is assumed that when and where decisions are made against to the public interests, different levels of approvals- that is, Ministries of Finance, Cabinet and finally the Legislature- will identify and correct the mistakes. The main defect of this kind of approach is that it is often difficult to ascertain the purpose of public expenditure or link resource to activities, output and measures. Again, as the allocations are determined by past requirements, only the increments are subject to effective review and approval and hence little opportunity is there for the assessment of the continued relevance of the services. The annual perspective of resource allocation is inadequate to assess the financial implications of policies or to plan and track the reallocation of expenditure and resources. VII. Conclusion Though the resource allocation and budgeting process under traditional administrative approach is with some inevitable shortcomings, it is still regarded as the ideal5. In most of the public expenditure management systems, resources continue to be allocated following these administrative budgeting process. Since 1950’s, it has been started to assume a more activist role in social and economic development and hence government programs and level of expenditure expanded rapidly. Hence, the advocates argued that a technical rigorous approach to decision-making is needed for the efficient and effective resource allocation. The approach which seeks technical application for the efficient resource allocation is k nown as Rationalist Approach. It seeks to relate policy to clearly specified goals for public intervention. In contrast to the traditional administrative approach, where policies are exclusively made by politicians, rational approach depends upon technicians for the defining and setting the policy goals. The mixture of these two approaches- administrative and rational- is the need of the modern time. The resource allocation with the help of technical analytical tools with a strong support of political will is the real and needy approach to the process of budgeting. References Boianovsky, Mauro and Hagemann, Harald. 2003. Wicksell on technical change, real wages and employment. Working paper No. 274. Brasilia: University of Brasilia. Retrieved from vsites.unb.br on 12 March, 2010. Hagmann, Robert. (1999). The Structural Budget Balance: The IMF’s Methodology. IMF Working Paper WP/99/95. Retrieved from www.imf.org/external/pubs/ft/wp/1999/wp9995.pdf on 12 March, 2010. Lang, Bob and Sandy Swain. (2009). State Budget Process. Madison: Wisconsin Legislative Fiscal Bureau. McIntyre, Di and Nicholson, Jillian. (1999). The Budget Process: A Guide for South African Legislators. Durban: The Health Systems Trust: Also available at www.hst.org.za. Ouda, Hassan. A.G. (2003). Public Sector Accounting and Budgeting Reform: The Main Issues Involved. Beirut: Economic and Social Commission for Western Asia (ESCWA). State of Washington Office of Financial Management. (2010). Washington State Budget Process . Retrieved on 13 March, 2010 from www.lwvwa.org. Read More