Part Two: Budgeting

Budget: meaning
• It is used for the plan of revenue and expenditure in a
given period of time.

• A national budget is a public finance management

instrument;

• Is government policy, priority, planning and

implementation process for the delivery of public goods
and services.
• Budget originally meant the moneybag or the public
purse.

• “Plans of government finances submitted for the

approval of the legislature”.

• The budget reflects what the government intends to do

• The budget covers all the transactions of the central

government.
• Budget is a time bound financial program systematically
worked out

• It is a comprehensive plan of action, which brings

together in one consolidated statement

• Thus, budget is an annual statement of receipts and

payments of a government
Function of Budget
• Allocative Function: arises out of the failure of the
market to adjust the outputs with the preferences of
society

• It is a process by which total resource use is divided

between private and social goods and by which the mix
of social goods is chosen

• The budget policy ensures the optimum allocation of

resources
• Also it will cause to remove the evils or shortcomings of
price mechanism

• But to determine an optimum quantity of public goods is to

some extent a difficult
• As no one wants to pay the price for public goods rather
they want to be as a 'free rider'.

Distributive Function
• The tax and expenditure measures are adopted to modify
the existing distribution
• Through budgetary policy, distribution and the optimum
distribution of income and wealth can be ensured.

• Resources can be diverted to the poor and depressed

segments of the society

Stabilization Function

• It is used to maintain a high level of employment,

• A reasonable degree of price level stability,
• An appropriate rate of economic growth and stable
balance of payments.
The objective of budget policy implies
a. To take corrective measures or to adopt regulatory
policies incase of mkt imperfections or inefficiencies
b. To make provision of social goods or the process total
resources are divided
c. To maintain a high level of employment, and economic
growth
• Therefore, budget stands for the yearly plans or forecasts
of government revenues and expenditures.
Parts of Budget
 Operating: an estimate of expenditures such as salaries,
wages, contractual services, materials and supplies

Uses of Operating Budget

• Provides information for evaluating competing requests

• Provides the basis for the adjustments to fiscal policy

• Facilitates the scheduling of work and the co-ordination

• Establishes the parameters for a fiscal audit and
performance evaluation

Capital Budget: It identifies the expenditures to be

incurred to meet long-term improvements
Budgeting Approaches
£ Budget as a process and a system has different features
and applications.

• Different budgeting and accounting principles and

procedures are associated each[

Line-item budget: object-of-expenditure budgets

Performance Budgeting: Management Orientation
Program Budgeting: Emphasis on Planning
Zero-Base Budgeting: starts from scratch
Line item budget
• A traditional approach to budgeting

• It is most likely present in some portion of every

governments budget today

• It provides no genuine information base for decision

makers who read it

• It is overly control centered, to the detriment of the

planning and evaluation process.
Line item budget
• Attention is focused upon short-term dollar inputs of
specific departments

• Inadequate attention is given for long term and

relevant programs

• Components
• Lists expenses
• Provides previous year expenses
• Provide present year expenses
Performance Budgeting
• It is management oriented type of budgeting.
• Its principal aim is to help administrators to assess the
work efficiency of operating units

• Focused on the relation between inputs and outputs than

programs
• Shifting of emphasis from objects of expenditure to
measurable performance

• The primary focus is on evaluation of the efficiency with

which existing activities are being carried out
Program Budgeting
• The program budget is the replacement of the traditional
budget

• The program approach stresses the end product –

poverty reduction

• The program budgeting stresses the relationship between

input and output

• The program approach seeks to be all-inclusive

• It provides a more useful basis for evaluation of agency
requests by department

• Refers to a budget format that discloses the full costs of

programs or functions

• Address the fundamental issues of whether program

should exist at all

• It is a planning and communication oriented approach

which emphasizes on programs
• Known as the planning-programming-budgeting system
(PPB)

• Integrate long-term planning of governmental activities

and programming of specific activities

• Systems analysis and cost-benefit techniques are

employed

• This approach seeks to aid in defining the goals and in

choosing among the goals
• Specifying alternative programs to attain the goals,
• In choosing the best alternatives, and,
• Subsequently, in measuring performance

Cost Benefit Analysis

• Defined as a systematic examination of the benefits and
costs of a particular governmental program

• Setting out the factors that should enter into the

evaluation of the desirability of the program and
• Frequently analyzing several alternatives for the
attainment of the objective

• Designed to ascertain the optimal alternative for the

attainment of the desired goals
Steps in cost benefit analysis

1st Statement of Objectives

• The goals of the particular programs must be defined.

• The goal may be very specific-bringing 2,000 acres under

cultivation by providing water
• The goal may be long term, such as to increase the
country's potential food supply

• Other projects have multiple goals; dams may have flood

control, irrigation, navigation, electric generation and
recreational objectives

• The more sharply the goal can be defined, the greater the
contribution

2nd Statement of Alternatives

• There are various alternative ways of attaining the goals:
• Different locations for irrigation facilities,

• Different timing for parts of the project,

• Different methods of construction

3rd Analysis of Benefits
• Determination of the physical units of 'output' from the
activity
• Only those benefits should be included that alter the
physical conditions of production
• The benefits that reflect changes in prices and incomes
should not included
4th Analysis of Costs

• The direct costs included both capital costs and operating

costs over the years

• Indirect costs include those created for other

governmental agencies, and

• Overall costs to society not directly borne by the

government
5th Interest Rate
• Some of the costs will be incurred now while others will be
incurred in subsequent years

• As a birr of benefits now is worth more than a birr of

benefits 10 years from now

• Interest factor must be used to determine the present

value of future benefits and costs

• The alternative that provides the maximum excess of

benefits over costs may be regarded
Zero – Base Budgeting (ZBB)
• The basic concept is that each activity as well as the
amounts of resources requested must be justified each
year
• It starts as new each year and therefore it is a more time
consuming process
• It facilitates identification of inefficient and unnecessary
activities
• All activities included in the budget are justified on cost
benefit considerations
• Discards the attitude of accepting the current position in
favor
Operation of Budgetary process
• Budgetary process has inevitably developed many
shortcuts in order to be workable

£ Specialization: The various agencies play a key role in

determination of actual expenditure levels
£ Fragmentation: the overall budget is fragmented into
small pieces for most of the work
£ Incremental nature action: Existing programs are not
reviewed in detail each year.
• No one considers each year the questions of antitrust
regulations, restructuring of postal department
Budget - Balanced or Unbalanced
• There are two ways of balancing budget

Cutting government spending: Can be done by reduction

of purchases or reduction of personnel

Raising revenue: is politically unpopular,

• However, the economic effects of raising taxes may be less
evident

• Increased taxation, takes money from local communities

• The government spends the money back into the economy
so there is not a net loss

• Sending taxes to the Federal Government and expecting

them back is like…

• Giving oneself a blood transfusion from the right arm to the

left and spilling half of it on the floor

• This is the most complicated and controversial issue of

public finance.
• Every government faces heavy criticism from social and
political organizations

• More employment, more public welfare and a balanced

budget have no mutual relationship

• Cannot be attained at a time.

• But important to identify expansionary stimulus and fiscal

constraint is needed
The Concept of Budgeting in Ethiopia

• Budgeting involves different tasks on the expenditures and

revenues sides

• It deals with the determination of the total deals with

the determination of the total size of the budget-
expenditure

• Size of outlays on different functions, and the magnitude

of outlays on various activities- exp.
• Determination of the size of the overall revenue and foreign
aid –revenue

• Furthermore, budgeting also address the issue of the

budget deficit

Budget Structures in Ethiopia

• Formats that organize budget data
• Budget data could be classified in different ways and for
different purposes.
• Focused on providing a better understanding of the
intentions and purposes of government

• The budget structures indicate the full responsibility of the

spending agency

• The budget are mostly mapped to each spending agency

• Due consideration must be taken to make the structure

manageable and appropriate
Revenue: the annual forecast of revenues to be raised by
government through taxation and other discretionary
measures

• is usually structured into three major headings: ordinary

revenue, external assistance, and capital revenue.

Ordinary: Tax and nontax revenue

External assistance: cash grants, technical assistance
Capital revenue: external loan from multilateral and bilateral
creditors
Expenditure Budget
• It includes recurrent and capital budget
• In practice three criteria have been in use to define budget
into capital and recurrent.
• These are sources of finance, object of expenditure, and
nature of activity.
Source: as it is financed by loan
Object: particular activities to be performed with that budget
like
Nature of activity: whether the activity is short term or
ongoing, and objective specific
• In Ethiopia, expenditures of recurrent nature (like salaries of
civil servants) and fixed assets with a multi-year life –
recurrent budget
• An outlay for the acquisition of improvements to fixed assets,
and expenditures made for consultancy services.” Capital
budget
• The capital budget is presented under three functional groups
viz., economic development, social development, and
general development.
• Services like cartography, statistics, public and
administrative buildings
Budget Deficit
• A budget is considered as surplus or deficit according to
the position of the revenue accounts
• Surplus budget is one in which revenue receipts exceed
expenditure
• Deficit budget is one in which expenditure is greater than
current revenue receipts
• “the financing of a deliberately created gap between
public revenue and public expenditure”.
• Ethiopia has used deficit financing for acquiring funds to
finance economic development
Objectives of Deficit Financing
• Method of meeting the financial needs of the government in
times of war
• An instrument of economic policy to overcome conditions of
depression
• Essential for financing economic development
• Mobilization of surplus idle and unutilized resources in the
economy
Effects of Deficit Financing
• Inflationary Rise in Prices
• Effects on Distribution of Wealth and Income
• Faster Growth
• Change in Pattern of Investment
• Credit Creation in Banks
 Step Six
Step five • Budget
Hearing and
Step four • Budget Defense
Review by • Spending
Step three • Budget Call MoF and public bodies
and Ceiling MoED defend their
Step two • Allocation of Notification • Spending budget with
Federal • MoF will public bodies MoF for
Step one • Determinatio Expenditure release the will submit recurrent
n of Federal between budget their budget budget
• Macro- Government Recurrent ceiling to the proposals to • Spending
Economic Expenditure and Capital line MOF for public bodies
and Fiscal and Subsidy Budget ministries - recurrent will be called
Framework to Regional • First the recurrent budget to defend
• The Government amount of
s
budget • MoED their projects
framework is budget • MoED review the chaired by
composed of • PMO will necessary to issues capital PM or DPM
macro- decide on the cover such detailed budget
economic shares of recurrent capital requests from
forecast and Federal determined
fiscal forecast budget different
government • Performed by preparation public bodies
• The forecast expenditures the PMO in
of gross guidelines • Sector
and subsidies consultation and budget
domestic departments
• Subsidies is with mof and ceiling of
product of MoED
determined moed capital
• Provides base on the basis submit
line budget recommenda
information
of a formula.
tion to the
• Conducted Developmen
by MoED t Finance
and
submitted to
and Budget
PMO Department
 Step Eleven
• Supplementary
Step Ten Budget
• Additionalbudge
• Notification
Step Nine t will be
and Publication
proclaimed
• Submission to • approved when necessary
Step Eight
the Council of budget will then
• Submission to • Budget
Peoples’ get the legal
the council of reallocation will
Step Seven Representatives status
be made mainly
ministers
• Review and • Prime • Spending public based on
• The two budgets bodies will then
Recommendati (recurrent and Minister will performance
on formally be
capital) will be present both
• The budget notified
consolidated, the recurrent
committee of • MoF will
the mof will
and capital
prepare a brief budget to PR
review the analysis of the
discussion and total budget. • The budget
make a will then be
• MoED will
recommendatio
n
defend the debated up
budget in the on budget
• If there is an council- capital
increase (over budget
committee
ceiling) this will recommenda
go to the PMO tion
for approval
• Sector departments
of moed will give a
final
recommendation -
capital budget