Connecting Budget With Policy Objectives Accounting Essay

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The developing and transitional economies are trying to improve the governance by introducing various reforms in the public sector. These reforms are mainly directed towards introduction of various systems that can lead to better accountability and transparency in the operations of the government. Through these reforms, governments wish to enhance and reshape the relationship between citizens and the government. It is worth noting that the success of most the reforms are independent on having a sound public financial management system. The weak or non-existent public financial management systems can lead all such efforts to fail that are intended to increase the span of public services to citizens. (Ahmad, Albino-War and Singh 2006)

The annual budget plays a pivotal role in the reforms efforts since it is a primary financial management tool for the government. A budget interconnects with all facets a governance reform including fiscal policy, administrative efforts, social policy and service delivery. Budgeting can be termed as a series of coherent steps that align the allocation of national resources to the government's strategic priorities.

The recent budgeting reforms are focuses towards following:

To strengthen fiscal discipline, by creating an orderly framework for presentation and management of the annual budget;

To better align the allocation of national resources to the government's strategic priorities;

To improve operational efficiency, by strengthening the capacity of line ministries and other budgetary units to prepare and manage their budgets effectively.

What is Budgeting?

The word Budget is derived from a French word "bougette", which means a purse (Sullivan & Sheffrin, 2003). A budget is defined as the itemized summary of estimated expenditures for a given period along with proposals for financing them.

A government budget has following objectives:

To set a structure for assessment and allocation of government resources

To specify expected revenues and set limitations on government expenditures

To effectively monitor the spending of government fund

Budget Coverage

A government consists of the central government and the provincial/sub-national government. The public sector includes the general government and all other entities that it controls (e.g., state-owned enterprises). Each level of government and public sector entity should have its own budget. For accountability and financial control, reports should consolidate the financial operations of the general government and (to the extent it is possible) the financial activities of all entities controlled by the government. The coverage of the budget should be comprehensive. The budget should include all revenues and all expenditures of the government whatever the arrangements for managing separately some particular programs, the legal provisions for authorizing expenditures, and the financing source.

Connecting Budget with Policy Objectives

The outcome of budgeting is a political document that specifies the resources that is appropriated on the basis of value it imparts to reflect the community/public priorities and preferences (Gildenhuys, 1997). In order to understand the budgeting process it is necessary to understand the processes of policy and planning.

A budget document does only indicates the government finances but also establishes a link between the mobilization of funds and attainment of government policy objectives. A government budget, both national and sub-national must have specific policies, plans and programs which pave the way for the achievement of the overall goals of the governments.

Although development of the government policy objectives are broad and is an integral part of strategic planning process, however the financing for the achievement of these goals come from the budget document. As a result, it is the responsibility of the local governments and to find an adequate linkage between the broad policy objectives of the government and the budgeting exersice. The budgeting must ensure that all expenditures are made to achieve something the public wants and the appropriations are according to the priorities of citizens and the cost relevance. It is the budget that serves as a tool of allocating resources among competing priorities.

Experiences reveal that establishing linkages among bugeting and planning systems has been a difficult task. In many developing countries planning exersices are ineffective due to several reasons that includes lack of capacity, lack of good financial management systems and statistical data. Misuse of public resources, through fraud and corruption has been greatest hurdles in public financial management due to vague accountability. Following sections reveal the line item budgeting and shift to performance-oriented budgeting systems that enhances transparency and accountability to counter above mentioned challenges.

Budget preparation

Budget planning and preparation plays a pivotal role in effective public expenditure management (Barry H. Potter & Jack Diamond).

Budget preparation includes specifically the following activities:

preparation of the macroeconomic framework

preparation of a budget circular, which gives guidelines for the preparation of sector budgets and expenditure ceilings by sector

preparation of the line ministries' budget on the basis of these guidelines

budgetary negotiation between the line ministries and the Ministry of Finance

finalization of the draft budget

submission to the legislature.

Following principles are considered for preparing a sound and transparent budget:

A government budget should be comprehensive. It should include all revenue and expenditures of al government activities.

The budget estimates should be accurate and these estimates should be calculated using reasonable assumptions

A budget should be prepared to cover a defined period of time (e.g. one year budget, multi year forecast)

The information on the public spending should be public and understandable

The budget implementation should be governed by appropriate laws

These principles are essential to ensure that, in budget preparation, all policy proposals for undertaking government expenditure will be forced to compete for resources, and that priorities will be established across the whole range of government operations.

Legal framework for budget

The legal framework for government budgeting is set out at different levels though it may differ for different countries.

The constitution is the supreme in the legal hierarchy. Its sets out the (i) powers of the legislative and executive and their branches with respect to public finances; (ii) defines financial relations between the national and sub-national levels of the government; (iii) the requirement that all funds must be deposited in the designated accounts and that the funds are used after approval of an authority.

The financial laws and regulations are the governing principles of financial management in public sector. These laws and regulations takes the form of a single law that guides the preparation of the budget, its discussion, approval, execution, auditing and control and all other areas of public finance management.

The Public financial management law also gives the government or other entities responsibility for managing public finance and the authority to issue detailed regulations and instructions at different intervals of time as according to the needs.

The constitution and Public financial management law, and financial regulations and instructions are permanent and form the legal basis for all public finance related issues. It may relate to the revenues and expenditure estimates for a given year, is prepared, approved, executed and audited. The annual budget law is contingent to the financial system of the government.

The responsibility for budget preparation

Ministry of finance who has the responsibility for preparing the annual budget by taking input from line ministries and other smaller spending agencies. A dedicated budget department within the finance ministry usually does this exercise.

The responsibilities of the central budget department may vary from country to country. Some are only responsible for preparing the current budget, excluding debt. In such a case, a planning or development ministry prepares the development budgets, while debt services are provided by another entity. Some budget departments are involved in preparing the entire budget, although they are not concerned with the implementation of the budget. Some budget departments also monitore budget execution while some are involved in expenditure commitments. It is very important to know what the budget department really does.

It is very important that all the data on operating budget, development budget and the debt services are consolidated so as to ensure that they are in compliance the macro objectives of the country. In some countries research departments within the central bank does it or the budget department takes the responsibility to do it.

What are the basic steps in budget preparation systems?

In principle, the basic steps in a standard budget preparation system comprise the following:

The first step in budget preparation is the determination of macroeconomic framework for the budget year, and two subsequent years (Medium-term). Macroeconomic unit in Ministry of Finance is responsible for estimating macroeconomic projections. This allows ministry of finance to determine the global level of expenditure that can be afforded.

The second step should be the allocation of resources among line ministries and other budgetary units based on the priority relevance.

The next step is to issue instructions and circular accompanied with hard budget ceilings to each line ministry and budgetary unit in order to guide them on how to prepare their budgets which will be exactly under or equal to the ceiling allocated.

Next step is the submission of bids for the proposals by all line ministries and budgetary units. The budget unit then checks the validity and effectiveness of the costing methods.

The next step is comprised of all the official negotiation sessions between the line ministries/budgetary units and the Ministry of finance so as to reach an agreement.

Next step in the budget process is the endorsement of the cabinet so that it may be passed to the parliament.

The principles of budget preparation are broadly familiar in most of the countries and follows the same procedure as above, however some developing countries' budget procedures may vary a bit. For example, budget department in most of the countries doesn't prepare a macro-fiscal framework, they just draw indicative ceilings before sending out budget circulars. These budget circulars, in such cases, are an administrative methodology that initiates budget making process. IT may also be accompanied with a budget calendar that specifies series of activities throughout the course of the year. In such a system, line ministries are not guided much about their ceilings that's why they usually present their budgets in percentages rather than concrete figures because they are subject to change.

Line Item Budget: The Predominant Method of Local Government Budgeting

Budgets, historically been formulated on the basis of line-item budgeting practices, that perhaps reflects the accounting background of their staff members, and the relationship of the budget to the audited statements required to be submitted after the fiscal year. However, in some systems the actual spending may be controlled and managed on less detailed levels which allows some degree of flexibility in spending while exercising control in minimizing any expenditure overruns.

The primary purpose of input-based budgeting is that of expenditure control and administrative accountability. Inputs are the funds spend on line items and staffing levels. A certain type of performance measurement can also reflect the progress of a local government organization for spending in accordance with the line item budget allocated.

Although line-item budgeting is the simplest form of budgeting, it however, does not provide any information regarding activities and functions of a program, department or a budgetary unit. It does indicate the extent to which the budgetary unit is spending on supplies, salaries , maintenance etc, but does not indicate how much is being spent on the actual delivery of services.

The input-based budgeting, doesn't provide any information on the achievements of an organization, department and overall government. Incrementa-list approach of budget (line-item) provides no mechanism for rationalizing the benefits obtained from the expenditures incurred and therefore does not possess any rationale to adopt it (Kitchen, 2005)

Therefore, for control purposes control budgeting is important but if often creates too much ambiguoity. Although you know the expenditures of the budgetary unit i-e whether used on salaries, maintenance or acquisitions, it often creates too much paper work, duplication, complexity and inflexibility. Knowing all about your spending does not reveal much about service delivery or achievements of government policy objectives. Line item budgeting does not answer the following questions…. How many citizens are being provided with social services? How many kilometers of roads are maintained? What is the cost per kilometer of maintained roads? How many children are in school? What is the quality of education?

The input-based budgeting tells nothing about the cost, efficiency and effectiveness of program delivered and provides very limited information to decision makers on how expenditures are prioritized. Performance-oriented budgeting however, estimates the cost of each program, marks the efficiency and effectiveness of the programs and most importantly consider the multi-year implications i-e considers three years, the budget year and two subsequent years. (MTBF approach).

This is why governments have introduced new reforms, consisting of formats and processes that reflects more current thinking about the achievements of individual goals and ultimately achievement of the overall government goals. For example, in recent years, DUBAI municipality in United Arab Emirates has introduced a programmatic approach of budgeting.

Program Budgeting at the Local Government Level

Budgetary systems, which are usually named as program budgeting often vary in their structure and content, based on the different local conditions of different governments. The general features of program budgeting are defining the objectives and programs, appropriations by programs and subprograms, use of performance yardsticks or indicators for measuring performances and in some cases use of cost-effectiveness tests or other forms of financial and economical anaylsis (Bellamy, 1995).

A government budgeting build on the foundations of program budgeting differs widely from a traditional line-item approach. The preparation, revision and presentation of budgets in both approaches differ. In program budgeting the revenues earned by the government are clearly linked to multi-year community goals and objectives. The ultimate aim of the programmatic structure or approach of budgeting is to better enable the community to understand what individual budgetary units and collectively government is doing. Programmatic presentation clearly indicates what are the goals and whether these goals have been achieved or not.

Program areas often utilized by local governments include public safety, public works, human services, leisure services, and general government.

The main purpose of program budgeting is to allow the community, leaders and the decision makers to make better decisions and to create better accountability to counter corruption and misuse of public fund.

A program budget identifies the anticipated results and outputs and outcomes of spending items and helps to address the local government's proper role and responsibility in addressing the needs of the community.

Researches have been conducted on local governments in the united states and Australia. The result indicates that it has become an important management tool for most of the state administrations. The percentage of cities using program budgeting in United States had stabilized to about 77 percent of all municipalities by the end of 1980 (Poister, 1989).

This is because program budgeting enables better cost control under each program than does the line-item budgeting (Tower, 1998)

Efforts to introduced such performance-oriented budgeting systems are found everywhere, so to as better estimate costs and connect expenditures with outcomes expected to be achieved. However, developing and middle-income countries face considerable problems in implementing such reforms. This is due to lack of capacity, human resource constraints and Public financial management systems and tools. Haphazard accounting systems and control systems may also disallow proper implementation of program budgeting in many countries.

While program budgeting systems may be an attractive tool to generate accountability in spending agencies at all levels of governments, many countries often lack the necessary preconditions and preparatory work at the local government level for effective implementation.

Nonetheless, even in such countries where subnational government budgeting practices are more fundamental, a performance orientation to budgeting and steps toward managing for performance can be introduced, albeit in a more simple form.

Fiscal Transparency and Accountability

An important precondition for fiscal sustainability, good fiscal governance, and fiscal rectitude is the transparency factor in government operations. (Kopit G. a., 1998)). It is far harder to achieve fiscal discipline and expenditure control if you lack transparency in operations (Alesina, 1996). According to (Kopit G. a., 1998) Fiscal transparency is referred to as openness towards the public about whatever the government does, structure and functions of the government, its fiscal policy intentions, public accounts, and projections for future. This means to have timely, reliable, comprehensive, understandable, and internationally comparable information on what the government does.

Fiscal transparency pertains to well-organized windows on public sector policy making and policy implementation (Premchand, 2001). It can be considered as a means to contributing to an effective system of accountability that aims at making government and their officials answerable to the public. It is important to note that fiscal transparency is a medium to achieving fiscal accountability. However, if you involve public in budgeting process, transparency will emerge automatically. No single act in the legislature has such a profound impact throughout the country as does the annual budget and its legislation (Jayawickrana, 2008). If the budget is presented in a form that is easily accessed and easy to understand by ordinary public, not only will be the budget subjected to great scrutiny through wide spreading comments, but will begin a process which will involve public consultations on preferences for the use of national or public resources.

It is also argued that when any system of government possesses higher level of transparency, it faces lower cases of budget deficit (Poterba)

Tranparency enhances the scale of government as a result of transparent budget institution (Khan, 2008) In fact lack of transparency and accountability in public governance means that rules are not enforced properly and that the budget process isolates participation of the citizens (Campos, 1996)

Fiscal accountability is referred to as the pattern of relationship between governments and the legislature as well as to the public (Premchand, 2001)). Fiscal accountability as a derivative of fiscal transparency permits the availability of information on the fiscal activities of government to a specified group (legislation) or to several groups is a means to accountability. Accountability implies the existence of an oversight body in charged by the law with the responsibility of reviewing the content provided, the actions taken, and reporting to an authority above them or to the public.