Introduction to Budgets: Terminology, Principles, Processes, Actors, Documentation

1. Introduction to Budgets:Terminology, Principles, Processes, Actors, Documentation

2. Acknowledgement of sourcesInternational Budget Partnership www.internationalbudget.orgIdasa www.idasa.org.za

3. The Budgetas State Policy Instrument

4. What is a budget ? Financial statement containing revenue, expenditure, and deficit/surplus estimates, which indicates how a household, organisation or government plans to use its expected resources to meet its goals for a given period.

5. The budget system • Budgeting is concerned with taking decisions that will translate policy priorities into resource allocations which will further the realization of these priorities • As an expression of policy preferences, budgeting is inherently a political exercise, not a technical one • Budgeting should not be divorced from the strategic management objectives……..WHY? • Because policy and strategic objectives are unlikely to be achieved without the requisite resources (the budget thus constrains the choice of feasible objectives)

6. Where do budgets fit into policy-making & service delivery? Sectoral impact assessments Costing programmes;Cost benefit analysis;Cost effectiveness Formulate policy; Strategic planning Demographic and prevalence data Data used to revise programme and to budget for future Resource allocation and budgeting Monitoring & evaluation: programme impact assessments & financial audits Structures and institutions for implementation (including financial flows) Service delivery(implementation)

7. The operating (or current) budget: plans the expenditure on the day-to-day running of the government function by function, it specifies all the items and activities the govt plans to spend money on main expenditure items include salaries and wages, admin costs, transport, electricity, etc. the general rule is that the operating budget should be financed through taxes 7

8. Palliative Care Line - item Budgeting Programme Budgeting Salaries and Wages L2000 Provision of medicines L800 Payments on L70 Retirement Overtime L50 Inpatient care L600 Building/Rent L300 Home care L250 Expenses Motor Vehicles L250 Equipment L100 Hospital mobile care L700 Freight, Cartage and L70 Packing Counseling L300 Advertising L3 Water and Lights L5 Awareness raising L217 Consumable Stores L4 Printing L7 Telephone Expenses L8 Total Expenditure L2867 Total Expenditure L2867 Programme vs. Line-item Budgeting

9. The capital (or investment) budget: • represents longer term plans and spending on fixed assets such as buildings, equipment, roads, bridges, etc. • as a general rule, capital expenditure should be financed through borrowing • Revenue: Where do the funds come from? • Generally speaking, there are two sources of revenue for govt, Taxes and Borrowing. 9

10. The legal foundation for budgeting • Constitution • Public Finance Acts • Hungary: Act XXXVIII of 1992 • Georgia: Budget System Law (2003) • Romania: Law on Public Finance No. 500/2002 • Macedonia: Organic Budget Law • Local Government Acts • Hungary: Act LXV of 1990 • Azerbaijan: Law on Financial Principles of Municipalities (1999) • Romania: Law on Local Public Finance No. 189/1998 • Macedonia: Law on Local Self Government • European System of Accounts 1995 (ESA95) • Others?

11. Budget documents and other terminologyReferences: International Budget Project (www.internationalbudget.org)

12. TermsRevenue = total government income collected from various sources such as taxes, levies, duties, investmentsExpenditure = amount of money spent on goods, services, debt or investmentSurplus = extent that revenue exceeds expenditureRevenue > expenditure = surplusDeficit = extent that expenditure exceeds revenueExpenditure > revenue = deficit

13. National / Provincial budgets • Each budget (national, provincial, department, programme) can be presented using the 3 different classifications: • 1. by programme • 2. by economic classification • 3. by standard item • Each department/ sector has its own budget. • We are primarily concerned with the programme classification. Budget documents can provide more/less text on policies, achievements, goals, programme purpose. • In the Provincial/ Regional/ District Health budgets, standard items are important in order to assess the mix of inputs used for service delivery

14. Government budgetscan have the same information listed in 3 different ways: Budget Classification Systems

15. 1. ADMINISTRATIVE CLASSIFICATION Budgets are generally developed for each major ministry or department in a country based on the authority that is responsible for executing the budget. For example, Ministry of Social Services: Department of Welfare and Population Development

16. 2. ECONOMIC CLASSIFICATION Two main sections: Current expenditure Capital expenditure Also known as Government Financial Statistics (GFS) classification Current expenditure = operational expenditure (‘consumed within the financial year’) Capital expenditure: expenditure which results in the formation of physical capital or the acquisition capital assets that constitute a relatively permanent investment (i.e. lasts longer than the financial year)

17. Economic classification of national budget Income Expenditure ____________________________________ Income – Expenditure = Net Budget Surplus/Deficit Revenue Grants / Loans Capital expenditure= expenditure which results in the formation of physical capital or the acquisition of capital assets which are relatively permanent investment (i.e. lasts longer than the financial year) Recurrent expenditure= operational expenditure (‘consumed within the financial year’)

18. 3. FUNCTIONAL CLASSIFICATION Budgets could be classified by functional categories (such as defense, security services, economic services, social services) into areas in which the budget is proposed

19. Example of Education spending under three budget classifications www.cbgaindia.org

20. Questions • Which classification would you use to identify the authority responsible for managing the education budget? • Why do you think the budget for primary education differs between the administrative classification ($15 million) and the functional classification ($17.5 million)? • The economic classification shows an amount of $5 million under transfers and subsidies to universities. The administrative classification shows that $11 million is budgeted for higher education. In the economic classification, where do you think the difference of $6 million might be reflected?

21. Budget Principles

22. Participation Accountability Transparency THREE KEY PRINCIPLES OF GOOD BUDGETING

23. Explaining the Triangle • Governments are obliged to explain and justify their decisions regarding allocation of resources and implementation of tasks for which the responsibility has been conferred on them by the electorate. This requirement best describes the concept of accountability. • A good budget process ensures that stakeholders are accountable to one another. Through full participation and transparency, accountability is easily achieved. • What is more important when examining a good budget process is recognising that all the three elements are interdependent. Therefore, if one element is being overlooked, such as participation, the other elements are not likely to be achieved.

24. GROUPWORK Principles of Open/ Good Budgets • Group 1: Participation • Define ‘participation’ • How does ‘participation’ work? • Why should we encourage or advocate for ‘participation’? • Group 2: Transparency • Define ‘transparency’ • Who has to be ‘transparent’? • How can ‘transparency’ be promoted? • Group 3: Accountability • What is ‘accountability’? • Who has to be ‘accountable’ and to whom? • How can ‘accountability’ be promoted? • Group 4: The Three Principles of Open/ Good Budgets • Look at the triangle and explain the logic behind the diagram.

25. Participation The system should ensure full participation of all relevant stakeholders. In this regard the stakeholders should include government, parliament, civil society, research institutes and independent bodies interested in resource mobilisation, allocation and utilization. Full participation means involvement in all stages of the budget process, from initiation and drafting to final approval.

26. What is Transparency? • The budget process should be open to scrutiny by stakeholders such as legislature and civil society. • Budget information should be comprehensive, accessible, timely, clear and accurate. • Available on a frequent basis and in a useful format.

27. Why Transparency & Participation? • In a democracy citizens have the right to information on the affairs of their elected government • Transparency is conducive to better decision-making in government • Transparency is a pre-requisite for effective participation by legislatures and civil society • It is through participation that the ‘checking’ enabled by transparency and accountability are operationalised • Participation can greatly improve transparency because all stakeholders are directly involved in the process

28. transparency, participation, accountability a legal framework a comprehensive budget contestability and information sharing accurate and timely information predictability of resources and policies Predictability, flexibility Summary: What makes a good budget?

29. Budget performance: Concepts

30. We measure budget performance by looking at: Inputs = resources used to produce results example: money, labour, time Outputs = direct results produced by using those inputs example: # of children immunized Outcomes = changes in the quality of life in society that result from the outputs example: reduced child mortality

31. Budget inputs Budget outputs Formulate policy; Strategic planning Programme costing;Cost benefit analysis;Cost effectiveness Sectoral impact assessments Demographic and prevalence data Data used to revise programme and to budget for future Resource allocation and budgeting Monitoring & evaluation: programme impact assessments & financial audits Structures and institutions for implementation (including financial flows) Budget outcomes Service delivery(implementation)

32. What Kind of Social & Economic Outputs are required from Public Budgets? • Stimulatory~ improve job creation, econ growth, investment • Sustainable ~ fiscal discipline, avoid debt trap • Policy-driven ~ reflect govt stated priorities

33. Social & Economic Outputs are required from Public Budgets cont. • Developmental ~ strategically target sectors, population groups and problems to improve development • Equitable ~ be informed by inequities, not perpetuate those inequities; ideally eliminate or reduce inequities

34. What determines the budget? (national resource allocation) • Previous budget • Policy priorities (political) • Constitutional obligations/legal framework • Rights/moral choices • Need (e.g. prevalence rates) • Cost of programmes • Cost effectiveness research • Equity • Capacity to spend

35. Group Activity With your fellow country persons, identify: • Strengths and weaknesses of your budget systems (In terms of principles and outputs of a good system) • Constitutional obligations/ rights (and Court case rulings) with regards to access to water and sanitation, children or disabled citizens • Relevant Legislation • Policy documents • Programmes – all aspects of your country’s response • Indicators of progress towards the achievement of rights