Chapter-4

Chapter outline
Public Budget Allocation for Development
Meaning and Objectives of Public Budget
Importance of Public Budget for development
Principles of Budgeting
Types of Budgeting
Approaches of Budgeting
Structure of government Budget
Meaning of Budgeting
 Meaning of Budgeting
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, which brings together in
one the all financial requirements of the government.
Budgeting is the process of designing, implementing &
operating budgets.
It is the managerial process of budget planning & preparation,
budgetary control & the related procedures.
It must be remembered that budgeting is not forecasting.
Forecasting is concerned with probable events whereas
budgeting relates to planned events.
Budgeting should be preceded by forecasting, but forecasting
may be done for purpose other than budgeting.
 Cont’d
Meaning of public budgeting
The gov’t budget is an annual financial statement showing item
wise estimates of expected revenue & anticipated expenditure
during a fiscal year.
Just as your household budget is all about what you earn and
spend, in the same way the government budget is a statement of
its income and expenditure.
Gov’t budget is a statement of expected receipts and
expenditure of the gov’t during a fiscal year.
Gov’t prepares the budget for fulfilling certain objectives.
These objectives are the direct outcome of government’s
economic, social and political policies.
 Objective of Budgeting
Main objectives of government budget are:
Reallocation of Resources (Tax concessions or subsidies and
Directly producing goods & services)
Reducing inequalities in income and wealth
Economic Stability
Management of Public Enterprises
Economic growth and
Reducing regional disparities
 Importance of Budgeting
Budgeting is a financial platform that aids in future planning &
a roadmap to financial security as it provides you with the
essentials to reach a certain point.
Budgeting keeps an eye on target
Budgeting stops you from overspending
Budgeting helps in dealing with emergencies (Life is not
a bed of roses, nor is it predictable. Unexpected bumps
and unwanted surprises are bound to happen along the
road to disturb your equilibrium.)
It sheds light on spending habits
Helps to save money
Ensuring economic growth
 Principles of Budgeting
There are a few principles followed in budget preparation exercise.
These are as follows
Principle of annuality
This implies that a budget is prepared every year on annual basis.
One year is considered ideal period for budget because it’s an
optimum period for which the legislature can afford to give
financial authority to the executive.
Further, executive also needs this much time to implement the
budget proposals effectively.
Rule of lapse/Return
The money left unspent in a year must also lapse to the public
treasury & gov’t should not be able to spend it unless it is re-
sanctioned in next year’s budget.
This is called Rule of Lapse and is useful as an effective tool of
financial control.
 Principles of Budgeting
Fiscal discipline
Budget should be balanced & should be able to display congruence
between the income & expenditure.
It adheres to the Keynesian School of Thought.
Fiscal discipline helps to eliminate fiscal deficits and offset fiscal
surplus.
Inclusiveness
Budget should be comprehensive and inclusive of diverse budget
estimates.
Accuracy
Budget figures are essentially predictions of the amount of money
to be generated in the forthcoming year & expenditure.
These estimates need to be accurate and precise.
The preciseness is dependent on real and credible input data,
information and unbiased information.
 Principles of Budgeting
Transparency and Accountability
Budget transparency implies that government gives out all
data regarding budget.
These two traits of budget also involve ethics on the part of
the Government.
For the sake of clarity & transparency, the revenue &
capital portion of the budget are kept separate.
Types of Budgeting
 Types of Budgeting
I. Revenue Budget
It represents the annual forecast of revenues to be raised by
gov’t through taxation and other discretionary measures.
The amount of revenues raised this way differ from country
to country both in magnitude and structure, mainly due to
the level of economic development and the type of the
economy.
In Ethiopia, the revenue budget is usually structured into 3
major headings:
Ordinary revenue, external assistance, and capital revenue.
Hence, the funds expected from these three sources are
proclaimed as the annual revenue budget for the country.
The revenue budget is prepared by the MoF for the federal
 Types of Budgeting
Ordinary revenues include both tax and non-tax revenues.
The tax revenues categorize direct taxes such as personal
income tax, rental income tax, business income tax, etc. on one
side.
On the other side, there are indirect taxes including excise tax,
sales tax, service sales tax, stamps and duty & tax on coffee
export.
Non-tax revenues include charges and fees, investment revenue,
miscellaneous revenue & pension contribution.
External assistance
It includes cash grants; these are grants from multilateral and
bilateral donors for d/t SAPs; & technical assistance in cash &
material form.
Capital revenue
 Types of Budgeting
II. Expenditures Budget
Government expenditures for administration and developmental
activities are handled through the expenditures budget.
These expenditures are categorized into recurrent and capital
expenditures.
The recurrent budget which covers the current expenditures is
financed in principle by taxation
The capital budget which covers the acquisition of newly
produced assets in the economy is financed through external
borrowing & grants.
a. Recurrent Budget
It is to be covered by domestic revenue from tax and non-tax
sources.
Activities that are recurring and continuous in nature are put in
 Types of Budgeting
In common practice, expenditures of recurrent nature (like
salaries of civil servants) & fixed assets with a multi-year life
are included in recurrent budget.
The recurrent budget is structured by implementing agencies
(public bodies) under four functional categories:
Administrative and general services, economic services, social
services, and other expenditures.
b. Capital Budget
Capital budget equals capital expenditure which equals fixed
assets of short term & consultancy services.
Short-term activities that are project in nature are included in
capital budget.
Capital expenditure as “an outlay for the improvements to fixed
assets, & includes expenditures made for consultancy services.
 Cont’d
The acquisition, reclamation, enhancement as laying out of land
exclusive of roads, buildings or other structures;
The capital budget is presented under three functional groups
Economic development includes production activities , infrastructure
facilities (mining, energy, road etc.), commerce, communication, etc.
Social development includes education, health, urban development,
so on.
General development include services like cartography, statistics,
public and administrative buildings, and the like.
 Approaches of Budgeting

1. Line-Item Budget
The line-item budget is a financial document that lists how
much you will spend on every item.
The focus of the budget is what is bought?
The expenditures for each item are broken out in categories.
Expenditures are organized primarily by objects of expenditure
such as salaries, materials and supplies, and goods and services
bought.
The line-item budget keeps track of how much you spend on
what.
While the simplest to prepare, it does not provide any
information regarding activities and functions of a program.
Knowing how much you are spending for salaries, supplies,
maintenance, and utilities does not reveal much about the actual
 Cont’d

Line-item budgeting is still the most widely used approach in

governmental organizations.
It is a familiar approach to those involved in the budget dev’t
process.
Structuring budgets by organizational unit and object and is
consistent with the lines of authority and responsibility in
organizational units.
As a result, this approach enhances organizational control &
allows the accumulation of expenditure data at each functional
level.
Advantages of LIB
a. Simplicity
You can easily budget for each area or department of your
company based on historical expenditures required in previous
 Cont’d
b. Easy justification
Since proposed expenditures are based on historical needs, there
is often little dispute among departments within the
organizations, as the trends have been well established over
time.
As the business owner, this can help you maintain tight
budgetary control, as you are reducing the possibility of
frivolous spending.
c. Easy to prepare
A line item budget is easy to prepare and monitor.
Managers use the budget from the last fiscal period to create the
budget for the next fiscal period and adjust expenses to account
for cyclical differences, seasonal differences and inflation.
d. Adaptable to d/t economic conditions (incremental
/decremental)
 Cont’d

Disadvantage of LIB
a. Lack of Analysis
Those who prepare a budget may simply accept the status quo,
since this budgeting method worked well in previous fiscal
years.
This may eliminate the opportunity to take an in-depth look at
each line item to determine if the proposed expenditure is truly
necessary.
b. Spending Rush
A line-item budget may result in your departments
unnecessarily spending unused funds near the end of the fiscal
year.
Employing the concept of "use it or lose it," department heads
may feel that if they have too much money left over at the end
 Cont’d
c. Impossibility to determine return
It is not necessarily the best budgetary model.
This type of budget does not demonstrate the return on
investment.
d. Typical incremental approach favors existing programs,
regardless of priority
f. Based on line items of expenditure; control is on inputs rather
than outputs or outcomes
g. Reports are for compliance purposes & control over aggregates
need additional economic classification
h. Supporting accounting system is cash based, focused only on
payment stage of the spending process
 Cont’d

2. Performance Budget
Performance budget is a practice of preparing the budget based
on the evaluation of the productivity of the d/t operations in an
organization.
It leads to optimum utilization of resources such as finance,
skills of the staff, use of the productive time etc.
It is the process of identifying the results achieved by each
division of the organization.
Furthermore, performance budget does not focus on the
individual activities which are necessary for developing
strategies.
Instead, the core focus is the achievement of the overall goal of
the division.
This helps the managers to frame the strategy of the division.
 Cont’d

Performance Budget focuses on the “results”.

The final outcome is analyzed.
Performance budgeting is a motivating tool for the staff.
It asks the question that ‘ why the money is being spent?’
 Cont’d
3. Program Budget
The program budget differs from the traditional line-item
approach to preparing, reviewing, and presenting the budget.
Rather than focusing on what a community buys, a program
budget focuses on the expected results of services and activities.
The emphasis is on the attainment of long-term, community-
wide goals.
In a program budget, you link revenues & expenditures to
multiyear programs that meet your organization’s goals,
objectives, and strategies.
Importantly, a program budget identifies the anticipated results
& outputs of these investments.
What Is a Program?
A program classifies all activities in a government organization
by their major purpose & contribution to overall community
 Cont’d
How Is a Program Budget Different from a Performance
Budget?
Both types of budgets use indicators to measure performance,
but they have a different focus.
A program budget emphasizes the benefits that citizens gain
from municipal expenditures,
while a performance budget emphasizes management efficiency
in expenditure allocations.
Cont’d
 Cont’d
4. Zero-based budgeting
In the mid-20th C, money got tighter & problems associated with
incremental budgeting began to give rise to a feeling that
changes were needed.
By the 1960, ZBB emerged in the concept.
It starts each budget period from a base of zero, with no
reference to the prior period (Anon, 2010).
Every department function has to justify the resources used for
their relevant activities.
Unless the activity is justified, there will be no resource
allocation.
In contrast to Incrementalism, the allocation of scarce resources
funding is determined from a zero-sum accounting method.
ZBB refers to the identification of a task or tasks and then
funding resources to complete the task independent of current
 Cont’d
Stages of ZBB
Step 1: Activities are identified by the managers. These activities
are then described in decision packages.
Step 2: Management will then rank all the packages in the order of
increasing benefits to the organization
Step 3: Resources in the budget are then allocated in order of
priority up to the spending level.
Therefore, ZBB is an approach to planning & decision-making
that reverses the working process of traditional budgeting.
In traditional incremental budgeting departmental managers
justify only variances versus past years based on the assumption
that the "baseline" is automatically approved.
By contrast, in zero-based budgeting, every line item of the
budget must be approved, rather than only changes.
 Cont’d
Advantages of ZBB
Efficient allocation of resources, as it is based on needs and
benefits rather than history.
Drives managers to find cost effective ways to improve
operations.
Detects inflated budgets.
Increases staff motivation by providing greater responsibility in
DM.
Identifies & eliminates wasteful and obsolete operations.
Disadvantages
More time-consuming than incremental budgeting.
Justifying every line item can be problematic for departments
with intangible outputs.
Requires specific training, due to increased complexity
 Budget structure and practice
The budget can be structured in many ways based on the
organization’s (or country’s) standards and method of
budgeting.
A budget practice is a procedure that assists in accomplishing a
principle and element of the budget process.
It is appropriate for all governments and in all circumstances
and situations.
Budget practices must be clearly related to activities identified
in the budget process definition.
It specifically contributes to the dev’t, understanding,
implementation & evaluation of a plan for the provision of
services & capital assets.
 Budget structure and practice
The Ethiopian state budget process
The budget process is guided by a directive (known as the
Financial Calandar) issued by (MoFED) to all entities.
This directive has a schedule to ensure that planning & budgeting are
prepared, approved, appropriated & executed accordingly.
Planning, budgeting and financial management have been devolved
to public bodies, regional and Woreda governments.
With this degree of devolution, it is critical that the planning &
budgeting cycle at each level is harmonized and coordinated.
The existing budget process of Ethiopia falls into four phases:
The policy planning phase – the planning cycle;
The budgeting phase – budget preparation and recommendations
Budget execution and implementation phase;
The budget audit and evaluation phase –performance review.
 Cont’d
a. Planning cycle
There are three stages in the Planning Cycle:
The macro-economic and fiscal framework;
Notification of the 3-year subsidy estimates; and the
Preparation of the annual fiscal plan.
These three planning documents must be consistent with higher-
level national planning strategies.
 Cont’d
b. The Budgeting phase-Budget Preparation and
Recommendations
There are ten major stages in this budgeting phase:
Budget preparation by public bodies
Mid-Year program review
Work plan preparation (program construction)
Notification of annual subsidy
Issue of the budget call
Budget Requests
Budget Hearing
Preparation of the draft recommended budget
Recommended budget reviewed by council of ministers
Legislative approval and appropriation of the budget
 Cont’d
c. Budget Execution and Implementation
After the HPR has approved the budget, it is the responsibility of
the public bodies to implement that budget.
Budget notification
Budget execution and implementation
Unforeseen circumstances
d. Budget Audit and Evaluation
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