Budget coverage, classification and structure Flashcards
Coverage of the Budget
The budget represents the policy intentions and the resources allocated to those intentions by government. If possible, a budget should cover all the expenditures and revenues of the government, at all levels, including subnational governments and government entities, such as state-owned enterprises, as they affect the national budget.
Classification of the Budget
A comprehensive classification and coding system allows the budget to be well planned and controlled, and is transparent and amenable to analysis.
A budget classification should be designed to:
- give a structure that can reflect expenditure priorities of government
- show which part of the state is responsible for managing the inputs and achieving the results
- facilitate control
- facilitate economic analysis.
The IMF Government Financial Statistics Manual provides a standard classification by economic category
Budget Composition
Economic and functional classifications give us tools to analyse the composition of the budget. The term composition refers to the balance between capital and current expenditure, but it is also used to refer to the relative shares of personnel and operational costs.
The key issue in budget composition everywhere is how well budgets are distributed among salary, operational and capital expenditures. If the recurrent budget is dominated by salaries, then those who receive the salaries may not have sufficient working capital to perform their duties: for example, education budgets are dominated by salaries, and often schools lack non-salary resources, whereas health budgets may have a higher non-salary component which is dominated by drug procurement, squeezing operational expenditures.
Capital investment, recurrent expenditure and revenue sources
One of the features of a good coding system is the ability to relate recurrent and capital expenditures. It is important to note that the distinction between recurrent and capital in the budget is based on accounting convention. In principle, capital expenditures yield a stream of returns and are akin to fixed assets, whereas recurrent expenditures represent immediate consumption.
Many developing countries operate a dual budget system with finance ministries responsible for recurrent budgts and planning ministries for capital budgets. One of the major problems that occurs when the capital and revenue budgets are treated separately is that often they are working under different pressures and time scales of consideration. For example, if there was a need to build a prison, should the prison be built at the lowest capital cost, or should it be built to provide the lowest operating cost?
The answer is neither: it should be built with lowest life-cycle costs.
Discretionary and non-discretionary expenditures
When analysing expenditure composition, it is important to distinguish between discretionary and non-discretionary expenditures (the latter sometimes called statutory expenditures). Discretionary expenditures are those expenditures over which there is some choice. Non-discretionary expenditures such as, public debt repayments, pension payments, and other entitlement payments must be paid.
When planning the budget it is necessary to make distinctions between those elements of expenditure that can, in fact, be planned, and those that cannot be planned but that need to be foreseen as well as possible. The idea of relative discretion underlies the British distinction between Annually Managed Expenditure (AME) and Departmental Expenditure Limits (DEL).
Mapping to the organisational structure
It is important to consider how organisational (e.g. ministerial or departmental) structures relate to budget structures. As more sophisticated forms of budgeting are introduced, organisational mapping becomes very important, and determines to some extent whether budget systems can be reformed, or whether the structure of governmental departments itself needs to be reformed first. A fundamental principle behind both New Public Management and resource accounting and budgeting is that there must be clear accountability for financial inputs and that they should be linked to
some form of output.
Line-item Budgets (1)
The most common type of budget structure around the world is often called the ‘traditional’, or ‘incremental line item’ system. Government operations are distributed between ministries or departments that have specific responsibilities. Each department within a ministry has a budget, often simply divided into support, operations and capital budgets.
This type of budget is often called ‘line item’, because it is expressed in terms of financial inputs (salaries, allowances, petrol, office materials, etc.). The Ministry of Finance controls the budget by item, and virement (transfer of budget between items) is only permitted under strict rules, or with special permission. Unspent moneys on each line item are clawed back to the Treasury.
Line-item Budgets (2)
There is no clear relation between inputs and what those inputs are expected to achieve. There is therefore an incentive to ensure all budgets are fully spent for a number of reasons.
- It demonstrates that the original budget was correct, thereby avoiding the stress of explaining why there was an underspend.
- There is the reasonable expectation that in future the budget may be adjusted in alignment with actual expenditure.
- All managers want some slack to meet unexpected events without recourse to higher levels of authority.
Line-item Budgets (3)
The line-item system is associated with incrementalism, because departments develop each year’s budget by adding a percentage to the previous year’s estimates. If a budget is broken into 5,000 separate line items, each item will begin to take on a life of its own (it becomes less and less discretionary)!
Because it is hard to associate the items with the wider objectives to which they are intended to contribute, it is hard to know whether they need to be eliminated, increased or simply kept. The budget becomes driven by its parts, and the total must accommodate the parts. It becomes harder and harder to achieve allocative efficiency, an overall efficient allocation of resources between different objectives.
Programme Budgets (1)
A programme budget is made up of groups of activities that are, of course, collections of line items. The control level should be, in principle, the programme, and within the programme there would (or should) be ‘local’ (i.e. at the appropriate management level) discretion over line-item expenditures, so long as:
- the programme control total is not exceeded, and
- the programme is implemented.
Programme Budgets (2)
Programme budgets therefore appear to offer the greater emphasis on
outputs as desired by NPM. There are, however, some practical and managerial complications involved. The inputs of each department into the programme must be identified (as should alternatives). This could lead departmental budgets to become a mixture of programme budgets over which it would be difficult to exercise control at departmental level. This could create difficulties in allocating staff to different programmes and lead to allocating costs to programmes that have budget (or political) slack. There is also the issue of accountability. It improves the position of the legislature and executive in holding the agencies and ministries to account; however, there will be greater difficulty in
holding individual managers to account.
