The Role of Budgeting in the Public Expenditure - Essay Example

The role of budgeting in the public expenditure. The purpose of budgeting in the national government is to control use of public resources, to plan for its allocation and management of resources. A weak kind of budget reflects on the management of public expenditure that will not work well for the people. It then becomes important to have an understanding of how a budget works for the economy. Budgeting is vital link to the management of public expenditure. Public expenditure is the cost of goods and services bought by the government for the country. These are capital goods, consumption goods and personnel expenditure. This is managed by the central state and its ministries, regional and local authorities, separate public bodies and international organizations. The management of budget and finance is the responsibility of the Ministry of Finance and that of the Central Bank that exercises control on its use and allocation. This is done through a legislated agreement whereby all revenues are deposited to a Central Bank and could be withdrawn only through a legislature. The system of budgeting being done by the developing countries include line budgeting, performance budgeting, program budgeting and zero based budgeting. This study will focus on the impact of budgeting processes in the developing countries Sample steps of budget preparations to show how government expenditure is planned and implemented will also be discussed What is line budgeting? The line budgeting system requires a listing of expenditures for the coming year. These are itemized according to objects of expenditures and quite often detailed as to where the budget item will be used for instance, how much money will be spent by the agency for personnel services, travel, maintenance, equipment and others. This system has been designed so that an agency will not overspend on their allocated budget for a specific item in a specified year. The advantage of the system is it is simple, easy to understand, expenses are controlled and expenditures are comparable with prior years. While this type of budget management is simple and easy, World Bank sees its limitations such that it should be reformed to cope with the advancement of a rapidly and technologically changing world. WB experts see that line budgeting offers no explanations where budget has been spent; neither will it provide information on the programs implemented. It is short-sighted, as it is programmed for short term, e.g. one year, and does not take into account long-term approach. What is a performance budget process? Upon recognizing the limitations of line budget, another approach focused on performance basis was tried. This time, the activities of the agency is tied up with the budget. The basis of budget decisions depends on what the agency does and just how much it cost. Here, the managers works on measures developed to calculate unit cost of workload. Contrary to the line item budgeting, the performance budget is build around the anticipated workload. The budget could be arrived at by multiplying the “cost of a unit of output by the number of units needed in the year”. What is program budgeting? Program budgeting is focused on the objectives and how to attain it rather than on the organization. More often, the programs lined up here are for more than a year of implementation.. This requires effective measures of output and outcomes with the marginal value that could be attained from it. For instance, in the Philippines, a program is appraised for its feasibility before it is given a project authorization and approved. While there are some countries that have been successful in the use of program budgeting, there are criticisms and flaws found in using this approach. orld Bank, in their study, reported that program budgeting was not very effective in the developing countries. Critics on this system point its ineffectiveness due to the flaws in the political system. The principal argument, according to this study, is that “many people strongly objected to the suggestion that the budget process which is political could be made rational”. The study further said critics of the program feels the program often fails because it is impossible to create programs outside of organizational affiliations. Further, report says that program budgeting has an impact when it is agency identified or sector specific. Moreover, it says that it is impossible to compare effectiveness of programs as there is no comparison index. Further criticisms on this program budgeting are conditions set for the program to succeed. These conditions include information of social, economic and environmental issues as prerequisites. More seriously considered under this set-up, WB says is the lack of stability and political will to establish a long-term commitment. World Bank cited in Box 1.1 the flaws in the program budgeting in Sri-Lanka which amplifies the criticisms on program budgeting Box. 1.1. Program budgeting in Sri-Lanka Sri Lanka engaged in budget reforms in earnest in 1969. This ultimately led to the widespread adoption of a system that closely paralleled program budgeting. By 1974, virtually, the government was presenting the budget in a program budget format. By 1975, a modest amount of performance data as also being presented by each of the twenty-three ministries. The program budget reform was spearheaded by a program budget unit, which was established by the Ministry of Finance in 1971. This unit issued guidelines on budget preparation, designed the required documentation, advised the departments on the development of performance measures and objectives, and reviewed department performance against budgeted targets. By the mid-1970s, the Sri-Lankan budget reform seemed to succeed. In 1977, the socialist government was replaced by free market focused government. The program budget unit was disbanded by the new government, depriving program budgeting of focus and impetus. Department managers continued to submit the required reports for a time, but the sanctions that existed for failure to do so were eliminated and ministries became much more lax in their adherence. Further, by the 1980s the government no longer had any method of forecasting cash flows. Following the recommendations of the IMF, each ministry was required to report monthly expenditures, but not in relation to programs or performance. Sri Lankan budgeting came full circle, cash flow budgeting triumphed over performance monitoring. Program budgeting in Sri Lanka failed for these three reasons. (a) the reform found no powerful friends in the legislature, (b) there was lack of skilled manpower to carry out the reform (c) program budgeting occurred without important parallel financial and administrative reforms – particularly related to accounting and auditing – that might have sustained it; (d) the replacement of the organizational structure witth programs as the focus of decision making did not occur, and perhaps, most important, e) a rapid, comprehensive and centralized introduction of program budgeting was ill considered in the Sri Lankan administrative environment. A more cautious and selective approach would have increased the likelihood of that the reform could have been sustained. Source: Government Budgeting in Developing Countries, Chapter 6, Peter Dean ` Source: World Bank Another problem identified by the World Bank pertains to the reporting and accounting system and problem caused by project design. This seems to be a problem in management where personnel were not properly trained to do the reporting system. This is the case of budgeting in Jaimaica where failure was traced in the management of the accounting system. Box 1.2 Budgeting in Jamaica The Jamaica Public Administration Reform Project, approved by the World Bank Board on May, 1984, contained three components: human resource management, financial and resource management and line agency restructuring. The financial management reform includes US $600,000 to help the government convert from a line-item budget system to an output performance budget system. This portion of the budget was not considered a success. This is partially the result of a poor project design, which did not recognize the same problems that existed in the previous line-item systems (poor organization, poor planning and lack of expenditure and forecasting ability) would impair a new system as well. The facts that accounts were kept only manually, and in a line-item format was an impediment to the development of the new system.. The starting point should have been a revamped accounting system, but no revision was made for this. There were significant problems in implementation. The reports that were necessary for the operation of the system often were either not filed in a timely fashion, or not at all. the speed of implementation was satisfactory, but no corrective actions were taken in response to the problem identified in the early phase. These included the fact that the quantitative performance were often a misleading proxy for the type and quality of goods and services provided. Budget presentations were not translated into budget implementation nor into accountability of performance. Line ministries did not have commitment to the system, and the desire of the Ministry of Finance to hold ministries accountable for the use of line items undermined the reform to performance accountability. Source: Project Completion Report, Jamaica: Public Administration Reform Project (Loan 2423-JM) Source: World Bank The Zero based approach on budgeting (ZB This was started in 1970s during the era of budget reform where all the programs are evaluated each year. All programs start from zero or “scratch”. WB said that this approach was unsuccessful. The benchmark question used as a guide for ZBB is: “What if the Ministry of Health received only… e.g. 90% of the current year’s funding?” Failure of budget programs The failure of budget program should not be blamed solely because as WB contends, the failure of these concepts is not due to its implementation, but rather due to the failure of techniques of implementation. The budget program has a chance to succeed, if there is proper training and if it has strong political backing. WB study adds that the system should be introduced gradually and there should be government policies and reforms that would require performance. Success of any program therefore would depend on the effort of a particular government taking consideration premised used by the WB. What may be successful in Sri Lanka may not be good for Jamaica, or perfect for another. In this aspect, WB believes that a “truly successful tool is hard to find anywhere, particularly in the central government level.” A budget process becomes performance oriented because its institutional framework demands it. This kind of framework encourages ministers to “cooperate on key decisions, for individual ministers to be given authority over program decisions and to be accountable for living within their budget, and for mangers to manage, but the framework demands that they manage it well. II. Processes of budget making in the Philippines Sources of funding for public expenditure may come from taxes, from public debt and from foreign aids. For better understanding how a project is financed by the government, steps are shown in this study. When a project is presented to those concerned with approval, an appraisal is automatically done. An appraisal is being done to determine the desirability of the project. Discussions will be focused on financing aspect and will not touch marketability, technological and other requirements for appraisal. The study will deal on the process and outcome of the national budget from a project that requires funding from the government. This will entail authorization of project, capital development budget inclusion, and other steps to be taken in the budgeting process. As soon as a project is identified and approved, legislation is needed to secure project authorization and funds appropriation. Projects on a one year length, is done through the General Appropriations Act of the government. For lengthy projects and multi-year funding usually done for infrastructure, funding requirements is secured through the Public Works Act. Special legislation is needed for large scale projects e.g. industrial estate development. There are projects requiring foreign assistance. When approved by foreign sources, e.g. World Bank, the loan becomes a direct national obligation, corporate obligation or a local government obligation. In the case of projects initiated by a government corporation, authorization and appropriation are obtained by a board resolution. In funding government corporate projects, an equity contribution of the government to the corporation is also done through the General Appropriations Act (GAA) and is considered as a counterpart in foreign-assisted project. When projects are authorized under the GAA, funds are appropriated annually in the national budget. For instance, a foreign loan for agricultural development, or rice importation may be obtained from the World Bank on a long term payment plan by Government Corporation. Process of inclusion in the capital development program. A capital development program is an infrastructure project (IP) usually done on a five-year period or longer. These projects should be authorized by the Ministries concerned like the Public Highways and Transportation and Communication. An IP requires special legislation for purposes of national budget inclusion, and an annual program is submitted for inclusion in the budget. A budgetary ceiling is set in the preparation of a national budget. For infrastructure projects for instance, a budgetary ceiling of say, USB$500 (set as an example figure only to cover for funds to be allocated to authorized projects. When the national budget is approved and before the budget year starts, a list of approved projects and funding requirements is done as a basis for the budget execution for the year. How is the capital development program included in the national budget. The preparation, review and approval of the capital development program follow a coordinative process identified by the National Development Committee, illustrated as follows: a. On the basis of guidelines set by the central government, agencies submit program proposals to their ministries. b. Agency proposals are reviewed and onsolidated at the ministry level c. Ministry program are submitted to the NEDA for review d. NEDA submits the proposed capital development program to the Executive Committee for submission to the Batasang Pambansa. This is the equivalent to Congress of Lower House in other countries. Source: PDM p. 257 Project inclusion in the national budget. A national budget is an allocation of the government’s financial resources to the various programs and activities of the entire government system and when approved authorizes its expenditures for such activities. The capital development program is a major component of the national budget. How does the government come up with a national budget. It takes several months of preparation and review before a national budget is arrived at. Following are steps undertaken * Estimation of the national government revenues * Estimation of national government expenditures * Review and determination of the level of government borrowings to supplement revenues. * Approval of expenditure ceilings and borrowing limits by the Development by the Development Budget Coordinating Committee * Formulation of program priorities, issuance of instructions to prepare the Budget based on guidelines set by the Office of Budget & Management (OBM0 * Preparation of budget proposals by the various agencies * Submission of budget proposals by the agencies to the OBM * Review of the agency proposals by the OBM * Discussion by the cabinet of the OBM recommendations * Finalization of proposed department/agency budget ceilings * Review of the proposed budget by the Exec. Committee and submission to the President. * Review and lump sum approval proposed budget ceilings for departments and agencies by the President * Preparation of the General Appropriations Bill or the national government budget * submission of the General appropriations Bill to Congress * Deliberation of the bill and passage of the General appropriations Act * Signing of the President of the General Appropriations Act. Source: PDM , p.258 The process ends when the President the General appropriations Act, then the budget goes to the next phase of implementation. Summary and conclusion Every budget program has an honest intention of achieving good results. It has a fair chance to succeed if the weakness seen in its implementation will be corrected. The flaws seen from the examples of Sri Lankan and Jamaica were caused by poor planning, inadequate accounting and reporting system, failure to motivate the staff, lack of training and absence of links with the policy makers and planners. In the Philippines, the process of budgeting is a very long that passes from the lower level of the ministry then goes to the executive for budgetary action. Too much resources and manpower are expended in the process. Political issues are sometimes some reasons why projects do not qualify for authorization. In this respect, too much dependence on the lawmakers slims the will of the majority and undermines the essence of the proposed project. The defects are not from the budget program but rather from the bureaucracy and itinerant management policies and control. There is not going to be an identified or uniform budget program tailored to be used in the developing countries, as each country has different needs and management set up. What is good for Sri=Lankan may not be appropriate for Jamaica and for the Philippines. In a rapidly changing world of technology, each country should adopt a system that is designed to fit their type of government. What is important is to have safeguards for better management of government funds in public spending because the money being spent came from the taxes of the people, their contribution to the economy of the country. Works Cited “Project Development Manual”. National Economic and Development Authority. Republic of the Philippines. 1984. pp..251-260. ?Public Expenditure Management Handbook”. The International Bank for Reconstruction and Development/THE WORLD BANK. Washington, D.C.. 1998. pp. 11-16. Read More