CHAPTER 4

PUBLIC FINANCE IN ETHIOPIA:

BUDGETING
 Definition and Importance of Budget
Defining Budget
• Thus budget is an annual statement of receipts and payments of a
government.
• “Plans of government finances submitted for the approval of the
legislature”.
• Budget is a time bound financial program systematically worked
out and ready for execution in the ensuing fiscal year
• It is a comprehensive plan of action, in one consolidated
statement all financial requirements of the government.
Importance of Budget
• The budget reflects what the government intends to do.
• It serves as an instrument to allocate the scarce resources
• It uses for as the most important tool for the government to
manage the public resources of the nation economy
• For a rational decision regarding allocation of resources to
satisfy different social wants.
• The process of rising revenues and spending by government
is performed through budgeting.
 Functions of Budget
The functions of budget include the following:
 To establish accountability
 To the proper allocation of scarce resources
 To decisions to specified economic policy objectives
 to ensure efficiency and effectiveness in the implementation of
government programs;
 to facilitate legislative control over the various phases of the
budgetary process.
 equitable distribution of income and wealth and
 Securing long term economic growth ,economic stability and full
employment.
 The Concept of Budgeting in Ethiopia
• As of definition above: The government budget represents a
plan/forecast by government of its expenditures and
revenues for a specified period.
• Commonly government budget is prepared for a year, known
as a financial year or fiscal year.
• In Ethiopia the fiscal year is from July 7 of this year to July 6
of the coming year (Hamle 1-Sene 30 in Ethiopian calendar)
 Budget Structures in Ethiopia
• Budget structures or mappings are the formats that organize
budget data.
• Budget data could be classified in different ways and for different
purposes.
• To make the budget structure manageable and appropriate :
Ethiopian Government’s Budget classification is majorly between
two:
I. Revenue Budget and
II. Expenditure Budget
Revenue Budget:
• It represents the annual forecast of revenues to be raised by
government through taxation and other discretionary
measures.
• Expenditure Budget:
 Classifications of Budget
• The government budget in Ethiopia is classified into: -
I. Revenue budget
II. Expenditure budget
I-Revenue budget:- is usually structured into three major
sources:
1. Ordinary revenue
2. External assistance and
3. Capital revenue
Ordinary Revenue- consists of both tax and non-tax revenues.
The tax revenues includes

1-The direct tax of ordinary revenue consists of:

i. Personal income tax
ii. Rental income tax
iii. Business income tax
iv. Tax on dividend and chance winning
v. Land use fee and lease
2-The indirect tax consists of:
Excise and sales tax on locally manufactured goods, services sale tax,
stamps and duty.
Tax on foreign trade includes customs duty on imported goods and
export tax on coffee.
3. Non tax revenues includes:
Charges and fees, investment revenue, miscellaneous revenue and so on
2-External assistance – include cash grants from multilateral
and bilateral donors for different structural adjust programs;
and technical assistance in cash and material form.
3-Capital revenue: - these could be from domestic (sales of
movable properties
• and collection of loans), external loan from multilateral and
bilateral creditor
• mostly for capital projects.
 II-Expenditure budget
• These expenditures are categorized into:
1. Recurrent expenditure:
2. Capital budget expenditure: -
1-Recurrent expenditure:- is structured by implementing
agencies(public bodies) under four functional categories.
i. Administrative and general services includes such activities as:
• Council of representatives and ministers, ministers, defense and so
on.
ii. The economic services includes:
• Agricultural, industrial and service sector activities
iii. The social service includes such activities:-
• Health, education and culture
iv. Other expenditures includes: - pension payments, repayment of
public debts etc
2-Capital budget expenditure: - is usually made on acquisition
and improvement in to fixed asset and consultant services. It is
grouped under three headings;
1. Economic development
2. Social development and
3. General development
1-Economic development includes: - production activities in the
agricultural and industrial sector, economic infrastructure in
mining, commerce and communication.
2. Social development includes: - education, health, urban
development and welfare etc.
3. General development includes:-general governmental
activities
 The Budget Process in Ethiopia
Budgeting from the initial stage of forecasting the annual
revenues and expenditures, to the final stages of approval of
the annual budget by the council of people representatives,
passes through a sequential and an interactive process.
The budgetary process of FGE involves the following steps:
The budgetary process of FGE involves the following steps:
1) Preparation of macro-economic and fiscal frame work
2) Determination of federal government expenditure and subsidy to regional
government.
3) Allocation of federal government expenditures between recurrent and
capital budget.
4) Budget call and ceiling notification
5) Budget request
6) Budget review by MOFED:
7) Budget hearing and defense
8) Review and recommendation
9) Submission to the council of ministers:-
10) Submission of budget to house of people representatives:-
11) Notification and publication
12) Supplementary(additional) budget: -
 Budget Deficit
• Budget deficit is the excess of total expenditure over total revenue of the
government
• Thus a surplus budget is one in which revenue receipts exceed
expenditure charged to revenue account regardless of the gap in capital
accounts
• Thus deficit financing can be defined as “the financing of a deliberately
created gap between public revenue and public expenditure”.
• The government of Ethiopia has used deficit financing for acquiring funds
to finance economic development.
• When the government cannot raise enough financial resources through
taxation, it finances its developmental expenditure through borrowing
from the market or from other sources.
 Methods of Financing Deficit
There are four important techniques through which the
Government may finance its budgetary deficits.
They are as follows:
A. borrowing from central bank
B. The running down of accumulated cash balances
C. The government may issue new currency
D. Borrowing from market or from external sources.
 Objectives of Deficit Financing
1. Deficit financing has generally been used as a method of meeting
the financial needs of the government in times of war, when it is
considered difficult to mobilize adequate resources.
2. Keynes advocated deficit financing as an instrument of economic
policy to overcome conditions of depression and to raise the level
of output and employment.
3. The use of deficit financing has also been considered essential for
financing economic development especially in under developed
countries.
4. Deficit financing is also advocated for the mobilization of surplus
idle and unutilized resources in theeconomy
 Pattern of Revenue Sharing
Ethiopia has chosen the federal structure in which a clear
distinction is made between the union and state functions
The sources of revenue, but residual powers, belong to the
center, although the states have been assigned certain taxes
The transfer of resources from the central government to the
states is an essential feature of the present financial system.
In addition, the states receive grants-in-aid of their revenue
from the federal government
 Distribution of Revenues between Central and States

The distribution of revenues between the central and states

is followed on the basis of “Constitution of Ethiopia” and
proclamation no.33/1992.
It contains a detailed list of the functions and financial
resources of the center and states.
 Basis for Revenue Sharing
The sharing of revenue between the central government and the
National/ Regional governments shall take in to consideration the
following Principles:
1. Ownership of source of revenue;
2. The national or regional character of the sources of revenue;
3. Convenience of levying and collection of the tax or duty;
4. Population, distribution of wealth and standard of development of
each region;
5.Other factors that are basis for integrated and balanced economy.
 Categorization of Revenue
According to "Constitution of Ethiopia” and Proclamation
No.33/1992-Proclamation, revenues shall be categorized as
Central, Regional and Joint. That is there are three lists given in
the Articles. They are as follows:
A. Central List,
B. Regional List, and
C. Joint/Concurrent List