CHAPTER 2:

THE LOGIC OF THE

BUDGET PROCESS
 Budget Process
•Provides the medium for determining what government
services will be provided and how they will be financed.*
•A system designed with incentives to induce officials to
respond to public demands is more likely to produce
decisions in the public interest, and thereby provide
citizens with the quality and quantity of desired public
services at the desired times and locations and at the
least cost to society.*
The budget process articulates the choices of the
citizenry for government services ( and how those
services will be paid for) and manages efficient
delivery and finance of those services.*
Size and Growth of Government
Expenditure:
1. Government Purchases
-divert productive resources (land, labor,
capital, natural resources) from private use by
business and individuals to government use in the
provision of education, national defense, public
safety, parks, and all the other services that
government provide.
Examples: wages and benefits to government
employees, some pays suppliers of items used by these
employees in the production of government services,
and some pays private entities who have agreed to
produce government services under contract*
2. Transfer payments
-constitute the other major element of government
spending.
-provide income to recipients without service being
required in return.
Examples: social security benefits, unemployment
insurance payments, and other cash payments by
governments to low-income individuals.*
What is budget?
• Is a critical document in the operation of any
modern public organization.
• Is a financial plan that carried forward the
financial implications of carrying out a particular
planned response to the anticipated operating
conditions in a future period, normally a year.
 The Parts of the Public Expenditure/Public
Revenue Process
There are two distinct components of public finance.
The expenditure side of budgeting should set the size
of the public sector, establishing what is provided,
how it is provided, and who gets it. The revenue
planning side, on the other hand, determines whose
real income will be reduced to finance the provision
of the budgeted services.
The total resources used must equal the total
resources raised (including current revenues,
borrowing, and for national governments, the
creation of new money to spend), the profile of
government expenditure does not ordinarily indicate
how the cost of government should be distributed.
Budget Classification, Structure, and
Presentation Years
• Three fundamental categorizations are:
1. Administrative-responsible of the entity that is
responsible for management of the public funds and
for provision of public services with those funds.
2. Economic-an identification of the type of
expenditure-compensation of employees, utilities to
be purchased, supplies, and so on.
3. Functional-an identification of spending
according to the intended purposes and objectives
of the government.*
The years appearing in a budget logically are
these:
1. The budget year-the document focuses on the
budget year, 2020/2021. These numbers reflect
what the agency plans for operations, what it has
requested for approval by various stages of
review, and what resources will be required for
the execution of these plans.
2. The progress-report year-the budget for 2020/2021 will
have been considered during the 2019/2020 budget year.

3. The final-report year-the fiscal figures for the most

recently completed fiscal year, 2018/2019.

4. Out years-years beyond the budget year in the request

cycle. Some governments prepare a multiyear financial
framework with budget estimates from three to five
years into the future so that a longer perspective on
finances is possible.
 Functions of the Budget Process
Public financial managers expect budget
procedures to:
1. To provide a framework for fiscal discipline and
control.
2. Facilitate allocation of government resources
toward uses of highest strategic priority.
3. Encourage efficient and effective use of resources
by public agencies as they implement public
programs.
 The Four Major Stages of the Budget
Cycle
1. Executive Preparation-At the start of the preparation
phase, the chief executive instructs all departments
and units of government to prepare their agency
requests, includes (a) a timetable for budget
submissions, (b) instructions for developing requests,
(c) indication of what funds are likely to be available,
and (d) overall priority directions from the executive.
2. Legislative Consideration-In a government with
distinct legislative and executive branches, the
budget documents is transmitted to the legislature
for debate and considerations.
3. Executions-Appropriations are spent, and
services are delivered.
4. Audit and Evaluation-An audit is an examination
of records, facilitates, systems, and other evidence to
discover or verify desired information.
Government Accounting and Financial
Reporting
The full accounting system combines several
elements:
1. Source documents
2. Journals
3. Ledgers
4. Procedures and controls
 Funds
1. Government Funds- examples: general fund,
special revenue funds, debt service funds,
capital projects funds, and permanent funds.
2. Proprietary Funds- examples: enterprise
fund, internal service funds
3. Fiduciary Funds-examples: pension funds,
trust funds
 Accounting Basis: Cash or Accrual
The method of matching revenues and expenditures
over time-may be cash (revenue posted when cash is
received, expenditure posted when cash payment is
completed), full accrual (revenue posted when earned,
expenses posted when good or service is used), or
modified accrual (revenue posted in period in which
they are measurable and available, expenditure posted
when liability is incurred.