Chapter 5: Budgeting &

Financial Management
Lecture by; Ms. Nouf Qureshi
What is budget?
• A government budget is a document prepared by the government or other political entity
presenting its anticipated revenues and proposed spending for the coming financial year. In
most parliamentary systems, the budget is presented to the lower house of the legislature
(NA) and often requires approval of the legislature.(source: Wikipedia)
• A budget(derived from old French word “bougette”) is a quantified financial plan for a
forthcoming accounting period.
• Depending on the feasibility of these estimates, budgets are of three types -- balanced
budget, surplus budget and deficit budget.
• The external resources of revenue comprise i. project loans and grants, ii. programmed loans;
and iii. other loans and grants.
• In Pakistan, budget making as an annual process starts in October each year on issuance of
a Budget Call Circular (BCC) by Ministry of Finance. BCC is issued to all the ministries,
divisions and departments of the government. It explains the procedure for preparation of
Budget estimates.
Financial management
• In other terms, Financial Management is the application of general principles of
management to the financial possessions of an enterprise. Proper management of an
organization's finance provides quality fuel and regular service to ensure efficient
functioning.
• Financial Management means planning, organizing, directing and controlling
the financial activities such as procurement and utilization of funds of the enterprise. It
means applying general management principles to financial resources of the enterprise.
• Finance is the lifeline of any business. However, finances, like most other resources, are
always limited. On the other hand, wants are always unlimited. Therefore, it is important
for a business to manage its finances efficiently.
• In a nutshell, financial management: Endeavors to reduce the cost of finance, Ensures
sufficient availability of funds, Deals with the planning, organizing, and controlling of
financial activities like the procurement and utilization of funds
Budgeting & Pakistan
• The budget of the state is one of the most important policy documents. In Pakistan, the
government and the parliament eagerly anticipate the moment in the month of June when
the state budget is tabled in Parliament.
• A budget is the government's financial plan describing the proposed expenditures and the
means of financing them. An excess of government's proposed expenditures over its
estimated revenues(income)is called a 'budget deficit‘. An excess of revenues(income)over the
expenditure is generally termed 'budget surplus‘.
• What is Pakistan's budget shortfall? 22 trillion for fiscal year 2022-23. In terms of the size
of economy, the revised deficit is equal to 7.4% of gross domestic product (GDP).
• It also reflects the country's social, economic, fiscal(govt. expenditures and sources of income)
and financial responsibilities. It tells government's future policies for the country. It is also a
starting point towards generating economic activities throughout the fiscal year. The practice
of presenting budgets and fiscal policies to parliament was initiated by Sir Robert Walpole as
Chancellor of the Exchequer of United Kingdom.
• An annual budget should be adopted by every governmental unit
• The accounting system should provide the basis for appropriate
budgetary control.
• A budget, when adopted according to procedures specified in state
laws, is binding upon the administrators of a government.
• A budget can be made for a person, family, group of people, business,
government, country. A budget is prepared to have effective
utilization of funds.
• It sets a framework for policy formulation. Budgeting is a means of
policy implementation. The budget is a means of legal control.
• Budget document may be a source of public information on the past
activities, current decisions and future prospectus.
Certain statistics of Budget(2020-2021)
• The gross domestic product (GDP)
measures of national income and
output for a given country's
economy. The gross domestic
product (GDP) is equal to the total
expenditures for all final goods and
services produced within the
country in a stipulated period of
time.
• GDP Pakistan: The Gross Domestic
Product (GDP) in Pakistan was
worth 278.22 billion US dollars in
2019, according to official data from
the World Bank and projections
from Trading Economics. The GDP
value of Pakistan represents 0.23
percent of the world economy.
Types of budgets
In Pakistan, performance budgeting has the potential to significantly improve the poor quality of public service
delivery and the overall allocation of resources, in what has traditionally been viewed as a rigid and unresponsive
budget system. Government budgets are of the following types:
1. Union budget : The union budget is the budget prepared by the central government for the country as a whole.
2. State budget : In countries like India/Pakistan, there is a federal system of government thus every state prepares its
own budget.
3. Plan budget: It is a document showing the budgetary provisions for important projects, programs and schemes
included in the central plan of the country. It also shows the central assistance to states and union territories.
4. Performance budget: The central ministries and departments dealing with development activities prepare
performance budgets, which are circulated to members of parliament. These performance budgets present the
main projects , programs and activities of the government in the light of specific objectives and previous years'
budgets and achievements.
5. Supplementary budget: This budget forecasts the budget of the coming year with regards to revenue and
expenditure.
6. Zero-based budget: This is defined as the budgetary process which requires each ministry/department to justify its
entire budget in detail. It is a system of budget in which all government expenditures must be justified for each
new period.
Public Budgets
• 1. Capital Budget: 'Capital Budgeting' The process in which a business determines
whether projects such as building a new plant or investing in a long-term venture
are worth pursuing. A long-term plan that deals with the financing of capital
projects, investments that include buildings, bridges, and quality of life projects
such as parks. Financed through borrowing, usually in the form of bonds. States,
counties, municipalities issue bonds to raise revenue. Investors buy the bonds and
earn interest on them.
• 2. Operating Budget: A short-term, year-to-year budget that plans how resources be
allocated for government agencies and programs. Based on estimates of income and
expenses associated with the organization’s operations. Administration, marketing,
labor, manufacturing, and any other production associated costs are included,
whereas long-term items such as capital debt and income not associated with
company operations, such as investments are excluded.
Budgeting as a POLICY TOOL
• Multi-year forecasts of revenue and spending(expenditure/expenses)
• Fiscal notes with multi layer projections
• Current services baselines: i. Provides Assessment ii. Helps to understand the
consequences of service iii. Provides neutral evaluation iv. Bring improvement
• Independent consensus revenue forecasts
• Independent legislative fiscal agencies
• Well-designed rainy day funds
• Oversight of tax expenditures
• For debt recovery
• Budget status report
Approaches to budgeting
1. Line Item Budgeting is arguably the simplest form of budgeting, this approach links the inputs of the system to the system. These budgets
typically appear in the form of accounting documents that express minimal information regarding purpose or an explicit object within the
system.
2. Program Budgeting takes a normative approach to budgeting in that decision making—allocating resources—is determined by the
funding of one program instead of another based on what that program offers. This approach quickly lends itself to the PPBS budgeting
approach.
3. PPBS Budgeting or—Program Planning Budgeting System—is the link between the line-item and program budgets and the more
complex performance budget. As opposed to the simpler program budget, this decision-making tool links the program under
consideration to the ways and means of facilitating the program. This is meant to serve as a long-term planning tool so that decision
makers are made aware of the future implications of their actions. These are typically most useful in capital projects. The planning
portion of the approach seeks to link goals to objects or expected outcomes from specific outputs, which are then sorted into programs
that convert inputs to outputs; finally, the budgeting of PPBS helps determine how to fund the program. A leader in the promotion of
PPBS was Robert McNamara's use in the United States Government's Department of Defense in the 1960s.
4. Performance Based Budgeting attempts to solve decision making problems based on a programs ability to convert inputs to outputs
and/or use inputs to affect certain outcomes. whatever Performance may be judged by a certain program's ability to meet certain
objectives that contribute to a more abstract goal as calculated by that program's ability to use resources (or inputs) efficiently—by
linking inputs to outputs—and/or effectively—by linking inputs to outcomes. A decision making—or allocation of scarce resources—
problem is solved by determining which project maximizes efficiency and efficacy.
5. Zero-based budgeting is a response to an incremental decision-making process whereby the budget of a given fiscal year (FY) is largely
decided upon by the existing budget of FY-1. In contrast to incrementalism, the allocation of scarce resources—funding—is determined
from a zero-sum accounting method. In government, each function of a department's section proposes certain objectives that relate to
some goal the section could achieve if allocated x dollars.
Principles of Budgeting
1. Budget should be managed within limits of fiscal policy
2. Budget should be closely aligned with medium term strategic priorities of government
3. Capital budgeting should be designed to meet national development needs in a cost-effective
manner
4. Budget documents and data should be open, transparent and accessible
5. Debate on budgetary choices should be inclusive and participative
6. Budgets should present a comprehensive, accurate and reliable account of the public finances
7. Budget execution should be actively planned, managed and monitored
8. Performance, evaluation and value of money should be integral to the budget process
9. Fiscal risks should be identified, assessed and managed prudently
10. Budgetary forecasts, fiscal plans and budgetary implementation should be promoted through
rigorous quality assurance including independent audit
Budget and Pakistan
• Budget is used as a tool to manage various activities that include providing of information, avoid duplication of activities and information on
expenditures and performance. It also envisages socioeconomic changes by way of progressive taxation, promoting certain economic activities. It is
put under scrutiny of legislature and after thorough debate and discussion approval is accorded.
• In Pakistan, the budget shows receipts and payments of the government under three heads:
• 1. Consolidated fund, including all revenues and loans and receipts by the government
• 2. Public accounts, which consists of all receipts and payments in the nature of deposit accounts
• 3. Contingencies fund which are placed to meet unforeseen expenditure
• The budgetary year in Pakistan starts from first July of every year and ends on 30th June of the next calendar year. Before its presentation before the
National Assembly by the Finance Minister, the budget is discussed and approved by the cabinet. The budget process starts in October by issuance of
budget call circular by Ministry of Finance whereby all the departments and agencies are asked to submit their detailed estimates, expenditures,
receipts keeping in view commitments and past actual(s). These are then routed through respective ministries/divisions to Ministry of Finance where
they are further put to detailed scrutiny before final inclusion in the budget.
• The budget is divided into two sections: revenue budget and capital budget. The revenue part consists of defense, debt, repayment of loan, running of
government and other activities financed through taxation, duties and miscellaneous receipts. The capital budget is designed to create material assets
meant to add into capital assets.
• The annual development plan is prepared in consultation with the provinces and is approved by ECNEC. Ministry of Finance and Planning Commission
play pivotal role in preparing the plan and the executive agencies are communicated sector-wise ceiling and priorities keeping in view overall
requirements of the economy.
• After detailed scrutiny and discussion with the executing agencies, the proposals are finalized and then are further discussed in the Priorities
Committee followed by Annual Plan Coordination Committee and National Economic Council. The component of resource estimates is an essential
feature of the budget as success of whole plan depends on the availability of resources. The main components of resource estimates are:
• Public savings which simply include the excess of revenue receipt over current expenditure of the government. Net capital receipts of the federal and
provincial governments, which include saving schemes, recovery of loans, etc. Other important resources of the federal government are foreign
economic assistance, bank borrowings, etc.
Overview of Pakistan’s budget cycle
1. Setting of budget policy and priorities: The first stage of budget cycle usually covers setting of budget priorities, policies and
initiatives by the National/Provincial Cabinet. These are then formulated by ministries and departments via the Ministry of
Finance/Finance Department
2. Budget Preparation: This stage includes the preparation and submission of budget estimates of expenditure and receipts by
spending departments and subsequent review and consolidation of estimates by the Ministry of Finance/Finance
Department.
3. Authorization: This stage involves submission of the Annual Budget Statement before the National/Provincial Assembly. This
consists of two stages: approval by the National/Provincial Assembly after it is debated/discussed in the Assemblies, and
authentication by the Prime Minister/Chief Minister. The approved budget is referred to as the 'Schedule of Authorized
Expenditure' (SAE), which is then submitted to the President/Governor for assent.
4. Execution: This stage refers to the communication of the budgets to the spending ministries, administrative departments and
respective Accountant General office/Accountant General of Pakistan Revenue by Ministry of Finance/Finance Department.
Budget execution supports the spending departments to carry out their planned activities and incur expenditure within the
authorized limits.
5. Reporting and Monitoring: In this stage, actual expenditure/revenue are recorded and reported by the spending
departments to facilitate monitoring of progress against budget allocations throughout the fiscal year. Expenditure is
recorded by Accountants General/Accountant General Pakistan Revenue.
6. Periodic Review: This covers periodical review of financial performance and the achievement of policy objectives by spending
departments. This also includes audit reviews by Auditor General's office and review by Public Accounts Committee. Standing
Committees of the Parliament and provincial assembly are also authorized to review expenditures of the ministries under
their jurisdiction.
Federal Budget 2022-2023
• Federal budget with outlay of Rs. 9.5 Trillion presented
• Govt employees’ salaries up 15pc, no tax on those earning up to Rs100,000/month. Subsidies on sugar,
wheat flour proposed
• Taxes on cars over 1,600cc to be increased. Pensioner tax reduced to 5% from 10%
• Advance withholding tax to be collected from those sending remittances abroad
• Tax on banking sector increases to 42%
• Families with income below Rs40,000 to be given Rs2,000
• Households using fewer than 200 units of electricity to be offered loans on easy instalments to buy solar
panels
• Tax-to-GDP ratio set at 9.2%
• Rs. 699 Billion on targeted subsidies in new fiscal
• Defense expenditure at Rs1.52 Trillion
• FBR target set at Rs. 7 Trillion. 2% additional tax for those with Rs. 30 Million annual income
• Average inflation forecast at 11.5%
Overview of national budget 2022-2023
• A major chunk of the new budget –the Rs5.45 trillion or nearly 58% of the budget – will be spent only on
two heads – debt servicing and defense. There is an alarming increase of over Rs806 billion or 26% increase
in debt servicing cost in just a year. In the outgoing fiscal year, the share of these two components was half
of the total budget. The defense services share remained constant, but the debt servicing has gone out of
control.
• The domestic debt servicing will eat up nearly Rs3.5 trillion while another Rs511 billion will be given for
foreign debt servicing. The average interest rate in the next fiscal year is estimated at 14%, which would take
away what the government will earn in additional revenues.
• Although the government will be aiming at Rs152 billion primary budget surplus target, the finance ministry
will still borrow Rs4.6 trillion to run its operations, thanks to nearly Rs3.95 trillion debt servicing cost in fiscal
year 2022-23. This will be the highest-ever debt servicing cost in the history of Pakistan.
• The Rs1.75 trillion or equal to 2.2% of the GDP steeper adjustment will be challenging in an election year
and chances for slippages will remain high.
• BUDGET SPEECH: 2022-23 16 expenditure will be Rs 9,118 billion. PSDP expenditure will be Rs 550 billion
Debt servicing will be Rs 3,144 billion. Defense expenditure will be Rs 1,450 billion. Running of Civil
Government expenditure will be Rs 530 Billion, and subsidies will be Rs 1,515 billion.
• A major challenge that the finance
minister has set for himself is to
deliver a primary budget surplus of
Rs152 billion, particularly when the
provincial governments have
announced big development budgets
that leave little room for Rs800 billion
cash surpluses of four federating units,
as budgeted by him.
• The finance minister said that the
government would focus on
agriculture, productivity enhancement
and exports promotion in the next
budget.
Key highlights of Budget 2022-2023