Understanding government budgets

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Understanding government budgets
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The budget

• The budget reflects the choices that government
  has to make, and is the tool it uses to achieve
  its economic and development goals. The
  government has to balance a wide range of
  legitimate demands with limited resources at its
  disposal. In the budget government sets out what
  it is going to spend (expenditure) and the income
  it collects through taxes (revenue), which it
  needs to finance expenditure.
• Department of Finance, Republic of South Africa
  (1997), Peoples Guide to the Budget, Pretoria, p
  2.

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What is a budget?

• Annual plan of expenditures and income
• A government budget is a plan of what monies the
  government expects to receive in forms of tax
  revenues against how much it expects to spend
  over the coming financial year.

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Why the budget is important

• Reflects the values of a country
• Reflects the choices of a country and the
  strategy to achieve economic development
• It reflects the countries socio-economic policy
  priorities
• The government budget affects our daily lives
• What kind of schools we go to
• Where we work, what kind of health care we
  receive, whether we have clean and safe water or
  other essential services

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Structure of the budget

• Expenditures
• Sources Revenues
• The deficits/surplus

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Focusing of expenditures

• These are spending plans in the budget or the
  budget lines as it is commonly known
• The recurrent expenditure- day to day running of
  departments. It includes wages and non wages
• The capital expenditure/development
  expenditure-spending on fixed assets such land
  building goods and other services.

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Focusing on revenues

• Governments raise money to meet its
  obligations-delivery of services through taxes,
  loans and grants

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Focusing on deficit/surplus

• When government receives more revenue that it
  spends the it has a surplus
• When a government spend more than its revenues
  than it gets a shortfall or a budget deficit
• Governments borrow to cover the deficits at an
  interest rate

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Functions of budget

• Government budgets have an essential role in the
  planning and control of the
• economic activities of a nation. Gender-sensitive
  budget exercises recognise that
• government budgets command substantial resources
  and that the state is an
• influential force through its budgets in shaping
  gender outcomes both directly
• and indirectly (Sharp 1999, forthcoming).
• Government budgets have many functions.

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Central economics Functions of budgets

• Allocation of resources
• This function relates to the provision of public
  goods and services by the government. All the
  goods and services in a country are produced
  either by government, by the formal and informal
  market sectors, or by the not-for-profit
  community and unpaid household sectors. In
  allocating resources, the government must decide
  both the relative size of public service
  provision, as well as how available resources are
  divided among the various government
• functions (e.g. Administration, health,
  defence), policies and programs.

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Cont.

• Distribution of income and wealth.
• This function refers to the use of budgetary
  policy to try to redress inequalities in income
  and wealth distribution. Governments make
  decisions about what constitutes a fair
  distribution between different groups of people.
  

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Functions of budget

• stabilisation of the economy
• Government budgets are used to promote a certain
  level of employment, stability in prices,
  economic growth, environmental sustainability and
  external balance. Stabilisation policy requires
  economic, political and social judgements in
  determining, for example, which objective has
  priority at any one time and what are acceptable
  levels of unemployment, debt, interest rates and
  so on. Budgetary policy can encourage sustainable
  economic growth through the planning potential of
  the budget.

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Other functions

• In addition, government budgets are
• a means of ensuring that governments are
  accountable to Parliament for their revenues and
  expenditures and
• a measure by which governments can maintain
  control over their finances.

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Budget Constraints

• Governments budgets are not drawn in the vacuum.
  All governments face some constraints on the
  overall size of the budget. Some constraints may
  include
• Limited funds to support the competing economic
  priorities
• Harsh donor and lender conditions to supplement
  local funds
• Competing policy decisions e.g. to increase
  allocation to education or increase military
  expenditure
• Competing political interests e.g. to increase
  the number of districts and spend more or to keep
  the same number and disappoint some
  constituencies.

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The Budget process

• The process of compiling and approving the budget
  is known as the budget process. What is important
  for any one wanting to analyse governments
  budgets is to know the process by which they are
  drawn up. Again, this will differ from one
  country to another. The timetable for the
  process provides crues as to the most effective
  points for intervention. These points will not be
  the same for all the stakeholders.

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Stages in the budget process

• The budget process usually has four stages
• (1) Budget formulation, when the budget plan is
  put together by the executive branch of
  government
• (2) Enactment, when the budget plan is debated,
  altered, and approved by the legislative branch
• (3) Implementation, when the features of the
  budget are carried out by the government and
• (4) Auditing and Outcome Assessment, when the
  actual expenditures on the budget are accounted
  for and assessed for their effectiveness.

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The key steps of the budget process in most
countries are

• determining the macroeconomic situation
• the expected output (production) of the economy
• the budget deficit (the difference between
  expenditure and revenue)
• the balance of payments (which measures foreign
  currency)
• the exchange rate (the value of the local
  currency vs. foreign currencies)
• the availability of credit for loans.

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The key steps of the budget process in most
countries are

• preparing budget guidelines and setting
  expenditure ceilings before ceilings are set a
  number of factors are put into consideration
• statutory commitments such as transfers to
  sub-national government, welfare and pension
  entitlements, and revenue expenditure for other
  special funds
• contractual commitments to pay public servants
• debt servicing
• contracts for the delivery of goods and services
  ordered in previous budget periods
• agreements with multilateral and bilateral
  agencies to pay a
• certain share of externally-funded projects and
  programmes.

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The key steps of the budget process in most
countries are

• preparing sector ministry spending proposals
• The next step is for the sector ministries to
  draw up detailed proposals as to how they will
  spend the money allocated in their ceiling. In
  most countries, ministries do this as an
  internal process.

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The key steps of the budget process in most
countries are

• securing legislative approval
• The primary function of the legislature in the
  budget process is to pass the budget act. This
  provides the opportunity for legislators to
  scrutinise, discuss and decide on the
  acceptability of the governments proposals.
  However, legislative scrutiny may be inadequate
  for a number of reasons
• there is insufficient time for scrutiny and
  debate of the budget
• the required information for analysis of the
  budget may be absent
• legislators may lack the capacity, resources or
  will to analyse the budget
• legislative powers regarding the budget may be
  limited
• the government may have too much influence over
  legislative decision-making
• a limited number of special interest groups may
  have too much power, and reduce the ability of
  legislators to focus the budget on achieving the
  nations priority goals.

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The key steps of the budget process in most
countries are

• monitoring, evaluation and accountability.
• Ideally the budget cycle should contain a
  feedback loop that allows for lessons learned
  from current budgets to inform future budget
  preparation and execution.
• In terms of monitoring and evaluation, theres
  need to be checks on whether the money was spent
  as planned.
• Cases of over-expenditure raise questions about
  where the money came from which programmes lost
  out so that this programme could spend more.
• Cases of under-expenditure raise questions about
  delivery which potential beneficiaries did not
  receive services because government did not spend
  the money as allocated, and what were the reasons
  for under-expenditure.
• The role of the Auditor-General is often
  described as ensuring that government provides
  value for money by using the available
  resources efficiently and economically. The OAG
  should also, however, be reporting on whether the
  money is spent equitably.

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The key players in the budget process include.

• The Ministry of Finance Budget department
  (National and district)
• The cabinet (National) and Executive committee
  (local government)
• Other ministries/department (National and
  district)
• Budget forums (CG, BC)
• The legislature (Parliament for national and
  councils for local government)
• The public.

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Ugandas 2009/10 Sector Allocation
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