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Government budget is a financial statement of policies, priorities and social objectives. As the framework for the allocation of resources, budget is a control tool in the management of expenditure and effective utilization of public resources. To perform these functions, a comprehensive classification and coding system is required (Bergmann, 2009).
In the line item system of classification, otherwise known as traditional or incremental line item system, "government operations are distributed between ministries and departments that have specific responsibilities" (Centre for Financial & Management Studies, 2011). These responsibilities are further divided into support, operations and capital budget. Budgetary items in line item system are expressed in financial inputs- salaries, allowances, petrol, office material etc; therefore line item system is relatively simple in putting together and provides managers with ease of control of public expenditure since specification of inputs are usually detailed while funding of the budget is by these items (Shah and Shen, 2007). Shah and Shen (2007) observed that "a prominent feature of a line item budget is to specify the line item ceiling in the budget allocation process and to ensure that agencies do not spend in excess of their caps".
The line item approach to budgeting places the accountability on line managers who are heads of department or ministries and allows direct control and/or performance evaluation with greater emphasis on effective spending since unspent allocation 'on each line item are clawed back to treasury'. And where the need for extra budgetary arises, it is easier to develop supplementary budgets linked directly to specific items in the budget (Centre for Financial & Management Studies, 2011).
Line item budgeting is also associated with incrementalism- the tendencies for departmental and ministries' budget to increase year on year as managers simply add certain percentage to previous year's budget. Over time the budget becomes less discretionary and allocative efficiency is lost in the process (Shah & Shen, 2007). For instance, in 2004, Korean Government discovered that there are more than 6,000 items and an inadequate public finance information system in its budgetary process (Kim, Dorotinsky, Sarraf & Schick, 2009). Kim et al (2009) observed that "the input based micromanagement diverts the focus of budgetary discussion away from objective and performance of public spending and lack of information and analysis necessary for policy decision making reinforces instrumentalism in the budgetary process".
Programme based classification groups' related activities comprising of collection of line items as programmes. The programme based classification provides limits for local discretion over line items expenditures at the appropriate management level (Shah & Shen, 2007). In this regards, budgets are implemented through the allocation of approved programmes to contractors or government agencies for execution that have discretion over the line items in the programme. In contrast to line items classification, programme-based classifications have more emphasis on output. The demerit of programme-based budgeting however lies in the possibility of a swamp of programmes budgets on departments which makes control very difficult at the departmental or ministry level. It could create challenges of human resources allocation at the department/ministry level and could also prevent proper accountability as it becomes difficult to hold individual managers to account (Centre for Financial & Management Studies, 2011).
The solution to the challenge of allocative efficiency posed by the incremental nature of line item based classification is easily resolved via a zero based budgeting approach. It is however difficult considering the amount of work that would be required each year in the development of the budget; therefore a programme based multi-years planning framework- a Medium Term Expenditure Framework (MTEF) - can be used to combines the use of programme based classification and line item classification presentation of the budget (Centre for Financial & Management Studies, 2011).
The value in a Medium Term Expenditure Framework (MTEF) is that activities can be grouped together as programme with output and termination of expenditure over the planning period- usually three years, while the annual budgets would be an aggregation of line items within the MTEF programme, for the required controls. In this manner, 'a programme view of spending for planning that is linked to an administrative and line-item view for implementation purposes' is made possible (World Bank, 2002). Under this approach, control and accountability remain at the departmental/ministry level but it is easy to note that outputs require the contribution from numerous departments. In that regards, the challenges of incremental budgeting are removed over the MTEF as programmes are achieved and new ones developed with fresh lines items over a new MTEF cycle while the challenges of accountability and control in programme based classification are removed at annual budgeting level with aggregations of line items that are directed at programmes over an MTEF cycle (Folscher, 2007).
The 2008 and 2010 budgets have different numbers for expenditures in 2008-09: in the 2008 budget, these were estimates; in 2010, they were audited actual expenditures. The totals for corrections 2008-09 were ZAR1,064,678m in 2008 and ZAR1,022,500m in 2010. Using both the line-item and programme presentations, how can you explain the differences between the two figures?
Headline Personal Correction
Sources of Variance
Goods and Services
Machines and Equipment
Underlying the line item presentation in the Medium Term Expenditure (MTE) estimates in Table 18.5 are programme based items which these items are aggregated to address. Significant changes in these programmes during the MTE cycle are responsible for the variance in the line items between the budgeted and the audited actual outcomes. There are three significant differences in this case:
The postponement of the planned personal tracking device installation in 12 targeted facilities as contained in the White Paper on Correction (2005) which includes the forensic profiling of offenders and by extension, installation of personal tracking devices at 12 targeted facilities contributed to the decline in Goods and Services spending, as a line item, by ZAR48,597m. It was stopped as a result of procurement problems at the State Information Technology Agency (in which control and accountability for that line item probably resides).
Impressive achievement of programme based targets contributed to substantial reduction in line items in the 2008/09 budget. On the one hand, 146,393 sentenced inmates were involved in work opportunities compared to the targeted 108,000 target (output Target). This arguably resulted in the reduction in transfers and subsidies to household by ZAR2,510m in that year. On the other hand, 60,543 offenders participated in correctional programmes compared to the target of 15,704 offenders (output target), resulting in significant rise in Employee Compensation by ZAR10,693m. The department has in the MTE programme for the development of training staff to build institution capacity so that many offenders can benefit.
What are the main differences between Supplementary Table 18A in 2008 and Table 20B in 2010? How would managers use each of these tables to help them to control expenditures?
The summary of expenditure trends and estimates per programme and economic classification in table 18.A is a financial appropriation schedule and audited outcomes based on line items classification system of budgeting. Table 20.B is the schedule of available and budgeted personnel resources per programme/department by salary levels over the medium term periods of 2006/07- 2012/13. The information on table 20.B on the actual and/or projected salary and compensation pay per salary level per year provides the estimated expenditure pattern on compensation of employee per programme as a line item.
Table 20.B can be seen as an associated link to outputs as it contain the information on the number of staffing that may be necessary for project achievement. A good control of line items, as budget inputs may not be possible without a good understanding of this link and its dynamics. Review of table 20.B can be utilized by managers to evaluate performance against budgets on a timely basis. Where the person that approves expenditures for payment takes responsibility for the budget implementation and outcomes, it would be easy for him to see the trend in staffing and be able to adequately prepare budget requirements per project. In this regard, table 20.B makes it possible to integrate outcome measurement and performance control with resource allocation contained in table 18.A.
What is the relationship between the medium-term expenditure framework (MTEF) and the annual budget estimates?
A medium term expenditure framework (MTEF) by design is a short to medium term activities plan, usually three years within which annual budgets are adjusted gradually around the areas where some discretions and controls can be exercised (Centre for Financial & Management Studies, 2011). It has been defined as an "annual, rolling three year-expenditure" plan which "sets out the medium-term expenditure priorities and hard budget constraints against which sector plans can be developed and refined". The process "aims at setting fiscal targets" and "allocating resources to strategic priorities within these targets" (World Bank, 2002).
Medium term expenditure framework (MTEF) allows programs and projects (programme based classification) to be planned into the budgets over the medium term and implemented within the annual budgeted cycle (in phases sometimes) adopting a line item classification approach. It is "a comprehensive, government-wide spending plan that links policy priorities (programmes) to expenditure allocations within a fiscal frameworkâ€¦. usually over a three year forward planning horizon" (Folscher, 2007). He observed that a successful MTEF should promote early prioritisation of competing objectives and programmes and, of course, deliberate matching of current and medium- term plans with available resources.
The annual budget is therefore a one-year presentation of the MTEF for the immediate future year. 'It makes the budget the first year of a rolling plan that is updated each year to accommodate new economic forecasts and policy initiatives' (Kim et al, 2009). In other words, the annual estimates are simply a recast of the MTEF figures approved by the parliaments and implemented by the executive arm of government as the budget.
Annual budget estimates is a short term perspective that has been found to foster incremental decisions, in addition to being too short for analytical assessment of spending decisions in the light of future claims on scarce public resources (Centre for Financial & Management Studies, 2011). An MTEF helps by (re)allocating resources within functional ceilings from the details of expenditures to programmes and programme changes; hence when programmes end, budget items linked to them are dropped or reallocated to other programmes such that incremental tendencies in budgets are eradicated while efficiency of spending is promoted without compromising line of responsibilities and control (Le Houerou & Taliercio, 2002).
Significant variation in the budget and the MTEF values are not unusual; either as a result of savings from adjustment to distortionary items within the budget years or expansion/reduction in target input or output estimates. For instance the audited figure of the 2008/09 of South Africa budget varied from the MTEF by only 3.9% which was accounted for largely by the suspension of one of the programme in the MTEF. This therefore brought down the expenditure on the related line item- goods and services (National Treasury, Republic of South Africa, 2010).
In conclusion, the MTEF has been useful in setting the annual budget estimates through the linking of the level of achievement in planned outputs to line items in the annual budget estimates each year.
Assess the potential use and limitations of the selected performance and operations indicators in Table 20.1 of the 2010 budget.
The performance and operational indicators are useful in assessing the effectiveness of spending over the budget cycle. While some of the indicators on table 20.1 are high-level in terms of link to accrual accounting and line items in the budget, they provide a good benchmark for evaluating the effectiveness of line items in the budget (Boothe, 2007).
It is noteworthy that the main difference in the public and private budgeting is in 'the absence of a bottom line and the presence of a shared and limited source of funding' (Folscher, 2007). The goal of public budget is to achieve a wide range of public objectives some of which are difficult to measure and relate directly to the financial figures in the traditional line budget (Ahrens, 2009).
The quantitative nature of the indicators, despite the indirect link to the line items in the budgets, offers strong insights into how effective are the expenditures of the line items at achieving the targets on the indicators. The level of these target at the end of the budgeting year indicates the effectiveness of expenditure, and/or otherwise. For instance, the first indicator of the Correctional Services Budget over the period of 2006/07 - 2012/13, targets specific (but declining) "number of escapes from correctional centres and remand detention facilities (per 10,000 inmates) per year" (National Treasury, Republic of South Africa, 2010). A gradual reduction in this indicator from 6 to 5 and then 4 in 2006/07, 2007/08, and 2009/10 respectively suggests that the budget spending are effective during these period. The position of these indicators within the past years compared to budgets also provides the basis for, not only the target for the following year budget and MTEF, but also the dynamics of the related line items in the budget in value terms. There is however the challenge of 'the attribution of outcomes issue' which was identified by Pollits (2001); therefore it may be difficult to conclude that the changes in performance indicators' figure in actual terms, is as a result of government spending from the budget and not as a result of other independent factors (Centre for Financial & Management Studies, 2011).
To achieve the targets and more importantly, the challenges of attaching the accountability for their achievement to particular manager or departments in the usual line item classification budgets, an output and outcome based approaches to budget were adopted by the like of Britain in 1997. A periodic comprehensive review of budgetary spending over a two or three years cycle (the MTEF cycle) with the aim of identifying and justifying every item of spending on the basis of the target outcomes is recommended at paced interval. The review objective should include the attempt to improve the predictability of the departments' running of the cost budgets. The UK government supports this review a set of Public Service Agreements that outlines the targeted outcomes that are expected from budgetary allocation and spending. In that way managers are aligned with the ultimate purpose of every spending item executed during the fiscal period (Centre for Financial & Management Studies, 2011).