Ireland Incremental Budget Model with Reference to the 2012 Budget - Case Study Example

Running header: Incremental budgeting Student’s name: Instructor’s name: Subject code: Date of submission: Outline and critically evaluate the incremental budget model with reference to the 2012 budget process (in Ireland) Overview of incremental budgeting Incremental budgeting is among the most common approaches towards the preparation of an organization or government financial estimates. The incremental budgeting process involves coming up with a budget based on estimated amounts for the current financial year from the provisional accounts of the actual expenditure incurred in the previous financial year. Small amounts known as increments will then be deducted or added so as to accommodate budget cuts or increases for the coming financial year. This is the idea behind incremental budgeting. In this process, the government is able to come up with the same level of decreases or increases for all budget lines which is common with Ireland national budget when the government is allocating funds to different ministries (Blomstrom, 2009). However, certain expenditure items such as salaries are not treated in this manner owing to their long-term financial commitment involved in hiring or sacking permanent staff. As such, the increments (increases or cuts) are concentrated in other areas of the budget. Critical review of incremental budgeting model with reference to the 2012 budget process (in Ireland) In Ireland, public sector budgets rely entirely on the incremental budgeting model described above. This implies that for instance to come up with the 2012 budget estimates, the previous year's (2011) budget for a government departments or divisions were carried forward to the 2012 annual budget. The budget carried forward was then adjusted for known factors which includes additional resources required, service development, legislative requirements, expected inflation in prices and wages among other factors. In other words, the incremental budgeting process is mainly a process involving negotiation and compromise. If the various functions can not reach compromise, then the incremental process will be deemed invalid. This model therefore calls for a form of representative government that is relatively stable as is the case in Ireland. The steps involved in the budgeting process The main stages followed by the Irish government in coming up with the 2012 budget estimates is as follows (Department of finance, 2012); a) The process of establishing the base- in this regard, a decision was made regard what to commit to expenditure. Adjustments were then made so as to reflect the changes deemed unavoidable. Such unavoidable changes includes, i) The full year effects of the staff expected to be appointed, ii) The full year effects of the capital projects that the government intended to undertake, iii) The effect of salary increments within the year, iii) Those items from the 2011 budget deemed as non recurring were identified and removed from the budget, iv) External factors including legal changes arising from legislation and changes in government funding regimes were put into consideration, iv) Inflation or changes in levels of prices for goods and services as well as labor were also considered and adjustments made. b) The implications of the development budget were then considered so as to reflect the projected savings as well as growth. c) All the deductions and additions identified above were aggregated to produce the 2012 budget. The above process consequently brought about the adjustments below which now characterize the Ireland 2012 budget among other adjustments, a) 3.8 bn pounds fiscal adjustments is required in 2012, b) 2.2 bn pounds adjustment from spending c) 1.4 bn pounds in cuts in day-day spending b) Reduction in public service staff by 6000 which will result in reduction in public service pay bill by 400 million pounds. Advantages of the incremental budget model The incremental budgeting model such as the one used by Ireland has a number of merits which makes it a preferred option for public sector budgeting by governments such as Ireland among others. The process is easily understood since it is retrospective. The process makes marginal changes while securing compromise through negotiations that occur between the various stakeholders in the process. The process is gradual since increments/ changes which are minimal are made on previous financial years' budgets. This means that the budgeting process is carried forward from one year to the other. For example, the 2012 budget for Ireland is just the 2011 budget that has incorporated the adjustments (Economy watch, 2010). This means that changes in the budgeting process are always gradual and do not happen at once. This ensures the continuity of the budgeting process. In addition, the process as explained above is administratively straightforward. This makes it cheap as nothing new is introduced in the process from one year to the other. For this reason, the process has the advantage of allowing policy makers to concentrate on the key areas that require change. For instance, government ministers and elected representatives as well as senior government officials do not need to study detailed and long budgetary documents. in addition, the process is deemed to be particularly useful in cases where outputs are difficult to define and/ or quantify. This makes the process preferable especially for public sector budgeting. Disadvantages of the incremental budgeting process, The incremental budgeting model employed by Ireland among other countries has some drawbacks which may render it unsuitable for national budgeting. The model is backward looking. This is because it focuses more on the previous budgets than the operational requirements and objectives of the future. Since the world is dynamic, the budgetary process ought to be forward looking n so that it can forces on all operational requirements and objectives of the future for it to be meaningful to the nation. For instance, it is not realistic to assume that activities and techniques of working today will continue in the same way into the future without being altered. This is a flawed assumption of the model. This is because any realistic budgeting model should consider the ever changing economic circumstances (Jacqueline, 2010). This is not the case with the incremental model adopted by Ireland. In other words, assuming that the government’s mode of operation will remain the same throughout is not realistic. The incremental model also fails by encouraging a spend it or loose it attitude by those entrusted with budget implementation. As such, this makes it difficult for them to keep up with the terms and conditions of the budgetary process. In other words, this may make the aims of the budgetary process not be achieved. Further more, the incremental budget model may create a habit whereby those entrusted with the role of giving budget estimates as well as implementation overestimate their needs with the aim of making the incremental budget more user friendly to them at the expense of the nation. This does not go well with the budgeting process aims of optimal utilization of resources. Furthermore, the incremental budgeting model does not give declarations of incentives aimed at initiating cost reduction measures. This may encourage Overspending on the part of the managers. Owing to the continued use of the incremental budgeting model, there may be continued budgetary slack built into the country’s annual budget that is never reviewed. This is because those entrusted with giving estimates for the budget might have had estimated their budgetary requirements in the past with an aim of attaining a budget that is easy to work with and which can allow them achieve more favorable results. Since the current budgets always rely on the previous budgets, such slacks will always be carried forward into the future. Usefulness of the incremental budgeting process, Features of the public sector organization as well as governments make the incremental budget model to fit quite well into the budgeting process and the entire system of public finance. Government departments as well as agencies are usually very large as well as complex often fulfilling a wide range of functions in numerous policy areas. However, with the incremental budgeting model, decisions are easily made. The model makes it easier to accept the criteria of expenditure distribution as awarded and therefore concentrate on deviations from the existing budget pattern. This reduces the need for government officials and ministers to spend much time frequently dealing with budgetary reviews (Akyut, 2011). Furthermore, the process allows for slow adjustments to the budget which are easily implemented as opposed to sudden priority shifts. It is for this reason that the incremental approach is considered rational for the public sector since the effects of change are easily monitored and alterations made whenever it is deemed necessary. A number of concerns however exist for the incremental budgeting model. The model does not give the ministerial heads and managers an overall picture of performance. There is also the concern for potential for inertia. In addition, the model can perpetuate inefficient and ineffective use of resources. Conclusion; The current incremental budgeting model made use of in Ireland among other nations has been associated with a number of demerits. The need for a consensus in national budgeting can never be achieved absolutely for example. For instance, social welfare organizations are up in arms in protest against some steps undertaken by the government in making its 2012 budget adjustments. Such steps include the reduction of the number of public staff in a time of rising unemployment. However, this notwithstanding, some of the setbacks could be lessened by adopting new approaches to budgeting that have less drawbacks. References: Blomstrom, M 2009, Budgets and financial management, New York: oxford University Press. Jacqueline, D2010, Budget theory in the public sector, New York: oxford University Press. Akyut, Dick R 2011, Public finance: the case of Ireland’s budgeting process, Financial management Journal 13(3):242-256. Economy watch, 2010, Incremental budgeting, accessed on 27 January, 2012 from; http://www.economywatch.com/budget/types/incremental.html Department of finance, 2012, Budget 2012, Accessed on 27 January, 2012 from; http://budget.gov.ie/Budgets/2012/2012.aspx Read More