Government Budgeting PDF

GOVERNMENT BUDGETING Revenue, Expenditures, Surpluses and D e fi c i t s +  BUDGETING is the process of creating a plan to spend y o u r m o n e y. Add a Footer 2  ETYMOLOGY The word 'budget' has its origin in the Fr e n c h w...

GOVERNMENT BUDGETING Revenue, Expenditures, Surpluses and D e fi c i t s +  BUDGETING is the process of creating a plan to spend y o u r m o n e y. Add a Footer 2  ETYMOLOGY The word 'budget' has its origin in the Fr e n c h w o r d Bougette, which means leather briefcase. Add a Footer 3  GOVERNMENT BUDGETING Government budgeting is the critical exercise of allocating revenues and borrowed funds to attain the economic and social g o a l s o f t h e c o u n t r y. I t a l s o entails the management of government expenditures in such a way that will create the most economic impact from the production and delivery of goods and services while supporting a h e a l t h y fi s c a l p o s i t i o n. ( D B M , 2012) 4  ECONOMISTS’ VIEW P h i l i p E. Ta y l o r ( 1 9 6 1 ) d e fi n e s b u d g e t a s t h e master plan of the government. It brings together estimates of anticipated revenues and proposed expenditures to be undertaken and the m e a n s o f fi n a n c i n g those activities. 5  ECONOMISTS’ VIEW Allan Schick - Viewed budget as a process consisting of a series of activities relating expenditures to set a goal. 6  ECONOMISTS’ VIEW Grooves and Bish – Process through which public expenditures are made. while considerations of revenue constraints and taxation are inherent in the budget process, budgeting is generally treated as a part of the expenditure process, rather than as a revenue raising and spending of public revenues. 7  ECONOMISTS’ VIEW Aaron Vidavsky –Budget is a document containing w o r d s a n d fi g u r e s w h i c h proposes expenditures for certain items and purposes. The words describe items of expenditures or purposes a n d fi g u r e s a r e a t t a c h e d t o each item or purpose. 8  GENERAL DEFINITION Budgeting is concerned with translation of fi n a n c i a l r e s o u r c e s i n t o human purposes. Thus the budget may be viewed as a series of goals with price tag attached, hence a plan where choices are created. 9  AS TO PURPOSE Budget may be designed to coordinate and integrate diverse activities so that they complement one another in the achievement of common goals. Budget may be f o r m u l a t e d f o r a s p e c i fi c target clientele of a development program. 10 Therefore one may adopt a particular view of the budget depending on the purpose he has in mind. In this respect, Wildavsky emphasizes the importance of the political and behavioural aspects of budgeting. 11 He considers the budgetary process as a phenomenon of human behaviour in a government setting and treats politician as dealers of “preferences” and of “what people want.” 12  DEFINITION Ta k e n a s a w h o l e , Wildavsky writes, “…the national budget is a representation in money terms of governmental a c t i v i t y. 13  If politics is regarded in p a r t a s a c o n fl i c t o v e r which preferences shall prevail in the determination of national policy, then the budget records the outcome of this struggle. 14. If one looks politics as a process by which the government mobilizes resources to meet pressing problems, then the budget is a focus of t h e s e e ff o r t s. 15  FUNCTION It is a legal document It is a political document It is a management tool and basis for accounting 16  OBJECTIVES Strengthening administrative process A c h i e v i n g m o r e e ff e c t i v e o r m o r e s t r i n g e n t fi s c a l control S e c u r i n g e ffi c i e n c y a n d economy E ff e c t i n g b e t t e r utilization of resources 17  C o n t r o l l i n g i n fl a t i o n o r improving economic conditions Broadening the awareness and understanding the budget control. 18  PURPOSES OF BUDGETING (DURY, 2004) Planning Budgets are used to plan for future activities for organizations: They are aimed to ensure that companies act in the best way in order to reach their goals. Budgets contain information about how much resources that are needed, which makes it possible to plan i n fl o w s a n d o u t fl o w s o f l i q u i d i t y. When setting a budget, managers should predict the future and consider what changes and problems that may o c c u r. W h e n p l a n s a r e m a d e i n advance, the numbers of ad hoc decisions are reduced. 19  PURPOSES OF BUDGETING Coordination All units within organization are, more, or less, dependent on e a c h o t h e r. B y u s i n g b u d g e t , t h e units have to cooperate and compromise when it concerns limited resources. Every unit has its own budget, but when budgets are compiled, defects and inaccuracies are revealed. The budget is meant to make it possible to see the organization as a whole and try to solve c o n fl i c t. 20  PURPOSES OF BUDGETING Communication Budgets contributes to good communication through the exchange of information that takes place during the budgetary process. The budget process enables employees to communicate and share their ideas with other workers within the organization. Through discussions, employee can share their opinions and ideas with e a c h o t h e r. Fo r m a n a g e r s , t h e budget can be used to communicate and explain strategies and goals within the company to the employees. Furthermore, it connects departments and give insights 21 a n d u n d e r s t a n d i n g f o r e a c h o t h e r.  PURPOSES OF BUDGETING Resource allocation Budgets are aimed to facilitate resource allocation within the government agencies, secure that the resources are being u s e d e ff e c t i v e l y a n d t h a t t h e right amount is distributed to the departments, which is c r u c i a l. U n i t s g e t d i ff e r e n t priorities. By distributing resources, resource allocation serves as a control mechanism. 22  PURPOSES OF BUDGETING Performance Evaluation The budget functions as a control system for performance evaluation. By setting budget targets the accountable are held responsible for reaching the objectives. Through follow- up of the budget, which means when budget is being compared with the actual outcome, managers can be evaluated. 23  PURPOSES OF BUDGETING Responsibility distribution Budgets are often used for d i s t r i b u t i o n o f r e s p o n s i b i l i t y. During the budget process, responsibility is assigned to employees and it is vital that the managers clarify what is expected form the units/departments. It is a mutual commitment between the company and the accountable. 24  PURPOSES OF BUDGETING Establishing Objectives In organizations, budget is used for setting targets for managers. It is common where managers received Bonuses because of this. 25  PURPOSES OF BUDGETING Motivation Budget is used as a tool for motivation. When employees are involved in the budget and target setting process, they are often motivated to try to achieve the goals. 26  PURPOSES OF BUDGETING Awareness The budget creates awareness about the organization’s goals and to make workers understand the “bigger picture”. In doing so, personnel can understand how their work is contributing to the organization as a whole instead of just seeing their units. 27  CONCERNS ABOUT THE BUDGET C o n fl i c t i n g o b j e c t i v e s Bogsnes (2009) states that organizations make budgets w h i c h a r e a i m e d t o f u l fi l l d i ff e r e n t p u r p o s e s , f o r instance setting appropriate targets, making reliable f o r e c a s t s a n d m a k e e ff e c t i v e resource allocation. They are all objectives but can easily c o n fl i c t w h e n t h e y a r e compiled together in a budget. 28  CONCERNS ABOUT THE BUDGET Lindvall (1997) agrees that budgets are often serve several purposes and these c a n c o n fl i c t w i t h e a c h o t h e r. When doing a budget for planning purposes, certain conditions are being a s s u m e d ( Wa l l a n d e r , 1 9 9 9 ) 29  CONCERNS ABOUT THE BUDGET Performance evaluation and B u d g e t a s a fi x e d c o n t r a c t A majority of organization today use budget (budget targets) for evaluation. A l t h o u g h , o u t c o m e o f fi x e d targets can cause undesirable behaviors (smith, 2007, Libby and Lindsay, 2010) Libby and Lindsay (2003) claim that when budgets are used, for evaluation of performance i t b e c o m e s a fi x e d performance contract that workers are supposed to be committed to 30  CONCERNS ABOUT THE BUDGET Employee’s fear of not meeting short term targets, m a k e fi r m s c o n c e n t r a t e o n cost-reduction rather than value-creation (Hope and Fr a s e r , 2 0 0 3 ). Av o i d i n g p o te n ti a l investments in order to meet s h o r t fi x e d t a r g e t s c a n b e harmful for agencies in the long-run (Hansen et.al 2003, Smith, 2007) 31  CONCERNS ABOUT THE BUDGET Planning and Forecasting When market conditions are stable, there is an ability to plan output and coordination of resources in advance. With hindsight, the outcome can be compared with plans and evaluation and control of employees can easily be made. Due to growing competition and short-life cycles, the future is harder to predict and longer plans are based on uncertain assumptions (Lindvall, 1997) Example, cash-based budgeting ( i n fl a t i o n ) p r o b l e m 32  CONCERNS ABOUT THE BUDGET Uncertain and Competitive Environment When market demands and conditions are unstable and cannot be determined in advance, there is neither possible nor necessary to make accurate plans, since they will anyhow be useful as control tools (Samuelsson, 1999). A budget is already out- of-date when it is used and it does not provide helpful information for managers to make decision. 33  CONCERNS ABOUT THE BUDGET Time consuming and Expensive H o p e a n d Fr a s e r ( 2 0 0 3 ) c l a i m that Budget (Budget process) is expensive because much time is spent on negotiations for creating budget even t h o u g h t h e b e n e fi t s a r e uncertain. 34  REVENUE GOVERNMENT EXPENDITU BUDGETING RES S U R P LU S E S DEFICITS Add a Footer 35  TA X REVENUE: D i r e c t Ta x - REVENUE Ta x e s o n incomes. I n d i r e c t Ta x - Ta x e s o n consumption Add a Footer 36  OTHER SOURCES: Sale of goods REVENUE and Services Sale of government property Privatization of state- owned Add a Footer property 37  Current expenditures : day to day EXPENDITURE Capital S expenditures: infrastructures Tr a n s f e r payments: welfare and unemployment Add a Footer b e n e fi t s 38  Balanced Budgets SURPLUSES AND DEFICITS Budget Surplus Budget D e fi c i t s Add a Footer 39 BALANCED BUDGET B U D G E T: D E F I C I T: Expenditures Expenditures = Revenue > Revenue BUDGET SURPLUS: N AT I O N A L Revenue > DEBT Expenditures Sum of all past d e fi c i t s a n d surplus. Add a Footer 40 DISCUSS HOW GOVERNMENT BUDGETING PLAYS A CRUCIAL ROLE IN CONTROLLING INFLATION. IN YOUR ANSWER, EXPLAIN THE SPECIFIC OBJECTIVE OF BUDGETING AIMED AT MANAGING INFLATION, INCLUDING HOW REDUCING GOVERNMENT SPENDING OR ADJUSTING TAXATION CAN INFLUENCE AGGREGATE DEMAND. 41 THANK YOU 42