Introducing the budget

World Bank Institute’s Parliamentary Staff Training Program

Overview

Definition of the budget

Components of the budget

Some principles of good budgeting

Objectives of budgeting

Definition of the budget

“…concerned with the translation of financial resources into human purposes.” (Aaron Wildavsky)

“A document which forecasts and authorizes the annual receipts and expenditures of the State.” (French Decree of 1862)

An itemized summary of estimated or intended expenditures for a given period along with proposals for financing them.

Components of the budget:Revenues Direct taxes: Tax paid directly to government, e.g. a tax

imposed on the income of individuals or companies.

Indirect taxes: Tax paid to 2nd party, e.g. shop owners, who pass it on to the government. Value added tax & custom duties.

Progressive versus regressive taxation: Progressive tax increases as a percentage of income as one’s income increases.

Other sources of government income consist of user charges for certain services, foreign aid, and income from investments or commercial activities.

Components of the budget:Expenditures

Capital expenditures: Investments in physical assets, such as roads & buildings that can be used for several years.

Current expenditures: Reflect spending on wages, benefit payments, and other goods or services that are consumed immediately.

Functional classification: According to various activities and policy objectives, such as health care,education, defense or justice.

Components of the budget:The budget balance Deficit: The difference when spending exceeds revenues Surplus: The amount by which revenues exceed outlays or

expenditures (not common). Deficit changes not necessarily result of a shift in fiscal policy,

but can also reflect the business cycle. Consistently growing deficits cause for concern:

Pressure on interest rates and ‘crowding out’ Rising debt servicing costs Inflationary pressures Unfair for future generations to have to pay for today’s

consumption

Some principles of good budgeting

Comprehensiveness: Covers all fiscal operations Predictability: Certainty by agencies about

spending allocations in medium term to plan ahead. Contestability: No item should have an automatic

claim to funding. Transparency: Accurate, timely, reliable &

comprehensive information. Periodicity: Should cover a fixed time, & follow a

clear schedule.

Objectives of budgeting (Schick 1998)

Fiscal discipline: Budget totals should be the result of explicit, enforced decisions; they should not merely accommodate spending demands.

Allocative efficiency: Expenditures should be based on government priorities and on effectiveness of public programs.

Operational efficiency: Agencies should produce goods and services at a cost that achieves ongoing efficiency gains.

These objectives are interrelated!

Concluding remarks

Public resources are always limited and inevitably fall short of meeting all the needs of society.

A well-functioning budget process helps assess competing claims on the budget and facilitates difficult tradeoffs.

Meeting this challenge successfully requires that budgeting achieves: Affordable budget totals Strategic prioritization of public funds Sound operational management