Theory of the Budget

1. Theory of the Budget Reported by John C.T. Ko September 2, 2005

2. Outline of the Presentation • Theories and Definitions of the Budget • Modern Dimensions of Budgeting • Practical and Operational Theory of the Budget • Basic Concepts in Budget • Relevant reports from Department of Budget and Management

3. Theories & definitions Why budgeting?

4. Theories & definitions History of “budget”?

5. Definitions of the Budget Definition I: (American economist, Philip Taylor, 1961) The budget is the master plan of government. It brings together estimates of anticipated revenues and proposed expenditures, implying the schedule of activities to be undertaken and the means of financing those activities. In the budget, fiscal policies are coordinated, and only in the budget can a more unified view of the financial direction which the government is going to be observed.

6. Definitions of the Budget Definition II: (Allan Schick) The budget is a process consisting of a series of activities relating expenditures to a set of goals.

7. Definitions of the Budget Definition III: (Grooves and Bish) • The budgeting is considered as the process through which public expenditures are made. • While considerations of revenue constraints and taxation are inherent in the budget process, budgeting is generally treated as a part of the expenditure process, rather than as a revenue-raising process. • Therefore, a budget is necessary to provide a comprehensive view of revenues and expenditures to facilitate the process of rationing involved in raising and spending of public revenues. In this respect, public budgeting serves as the allocation of expenditures among different purposes so as to achieve the greatest results.

8. Definitions of the Budget Definition IV: (Aaron Wildavsky) • In the most literal sense, the budget is a document containing words and figures which proposes expenditures for certain items and purposes. • Budgeting is concerned with the translation of financial resources into human purpose. Thus, the budget may be viewed as a series of goals with price tags attached. • Taken as a whole, the national budget is a representation in money terms of government activities.

9. Definitions of the Budget Definition V: (Eric Kohler) • Kohler defines the budget as a financial plan which serves as the pattern for and a control over future operations (hence any estimates of future costs) and as a systematic plan for the utilization of manpower material or other resources. • Two major management functions are clear in this definition: (1) A budget may serve as a plan indicating requirements of certain factors (e.g. cash, productivity) at some future date. (2) A budget may serve as a control, containing criteria of costs or performance which will be compared with actual data on operations, thus facilitating evaluations, and possibly encouraging or even enforcing some measures of efficiency.

10. Modern Dimensions of Budgeting for National Development • Role in the Political Process • Impact on the National Economy • Instrument of Administrative Control • Tool for Learning the Relationship of Government Programs

11. Improvements in Budgeting • Strengthening administrative processes • Achieving more effective fiscal controls • Securing efficiency and economy • Effecting better utilization of resources • Improving economic conditions • Broadening the awareness of budget control

12. Contents of National Government Budget and 5-Year Development Plan • Forecasts • Elements of task-setting • Target objectives • Elements of Planning • Figures concerning money movements

13. Challenge 2008 – National Development Plan (Taiwan) Source: Council for Economic Planning and Development, Taiwan

14. Challenge 2008 – National Development Plan • Challenge Goals • 1. At least 15 World No. 1 products or technologies • 2 . At least doubling of visitor arrivals • 3. R&D expenditures 3% of GDP • 4.  Reduction of unemployment rate to under 4% • 5. Economic growth rate above 5% • 6. More than 6 million broadband Internet users • 7. Creation of 700,000 new jobs

15. Practical and Operational Theory of the Budget On the expenditure side, on what basis shall it be decided to allocate X dollars to Item A instead of allocating them to Item B?

16. Practical and Operational Theory of the Budget • 3 Principles:(Verne Lewis, 1952) • Budget analysis based on relative merits • Incremental analysis to be required • Comparison of relative merits made in terms of relative effectiveness

17. Practical and Operational Theory of the Budget • Philippine scholar Dr. Jose Soberano postulated a budget theory focusing on the fiscal side may be possible if certain requirements are met: • A Positive Government • Scientific Policies • An Abundant Economy • A Responsive Society

18. Basic Concepts in Budgeting What basic law governs the use of government funds? The following provision of the Philippines Constitution sets the basic rule for the use of government funds: "Art. VI, Sec. 29. No money shall be paid by the Treasury except in pursuance of an appropriation made by law. "The aforequoted provision of the Constitution also establishes the need for all government entities to undergo the budgeting process to secure funds for use in carrying out their mandated functions, programs and activities.

19. Basic Concepts in Budgeting How are government funds appropriated? Funds for the use of government entities are appropriated or authorized following the steps : 1) individual agencies prepare their estimates of expenditures; 2) agencies justify details of their proposed budgets before DBM technical review panels; 3) DBM reviews and consolidates proposed budgets of all agencies for submission to Congress; 4) agencies explain the details of their proposed budgets in separate hearings called by the House of Representatives and the Senate for inclusion in the General Appropriation Bill; and 5) the President signs the Bill into law or what is known as the General Appropriations Act (GAA).

20. Basic Concepts in Budgeting What is referred to by the term "national government budget"? The National Government budget (also known simply as the budget) refers to the totality of the budgets of various departments of the national government including the NG support to Local Government Units (LGUs) and Government-Owned and Controlled Corporations (GOCCs). It is what the national government plans to spend for its programs and projects, and the sources of what it projects to have as funds, either from revenues or from borrowings with which to finance such expenditures.

21. Basic Concepts in Budgeting • What is a balanced budget? What happens when the budget is not balanced? • In the context of government budgeting, a budget is said to be balanced when revenues match expenditures. When expenditures exceed revenues, the government incurs a deficit which may result in the following situations: • The government borrows money either from foreign sources or from the domestic capital market which increases the debt stock of the NG and its debt servicing requirements; • The government borrows money from the Bangko Sentral ng Pilipinas; or, • The government withdraws funds from its cash balances in the Treasury

22. Basic Concepts in Budgeting Why is surplus budgeting necessary? The surplus budget policy is important to encourage economic growth. The less the government borrows from the public, the lesser the pressure on interest and inflation rates and the more funds are made available in the financial market. Such funds may be used by businessmen to build factories, hire workers, buy equipment and open more employment opportunities. The government also needs to generate a budget surplus to repay the huge debt it has accumulated over the years. The reduction of the national budget debt will correspondingly lessen government's requirements for interest and principal payments. This becomes important particularly during periods of rising interest rates and unstable exchange rates.

23. Basic Concepts in Budgeting What is the planning-programming-budgeting system (PPBS)? The PPBS is a concept that stresses the importance of establishing a strong linkage between planning and budgeting. It emanates from the policy of the government to formulate and implement a national budget that is an instrument of national development, reflective of national objectives, strategies and plans.

24. Budgeting Process

28. BUDGET ACCOUNTABILITY

29. Basic Concepts in Budgeting What is the General Appropriations Act? The General Appropriations Act (GAA) is the legislative authorization that contains the new appropriations in terms of specific amounts for salaries, wages and other personnel benefits; maintenance and other operating expenses; and capital outlays authorized to be spent for the implementation of various programs/projects and activities of all departments, bureaus and offices of the government for a given year.

30. Basic Concepts in Budgeting • Why are adjustments made on the budget program? • Adjustments are made on the budget even during implementation primarily because of the following: • Enactment of new laws • Adjustments in macroeconomic parameters • Change in resources availabilities

31. Basic Concepts in Budgeting What is the difference between appropriation and allotment? Appropriation refers to an authorization made by law or legislative enactment directing payment out of government funds under specified conditions or for specific purposes. On the other hand, allotment is an authorization issued by the DBM to an implementing agency to incur obligations for specified amounts contained in a legislative appropriation.

32. Basic Concepts in Budgeting What is the LIBOR and its significance in the budget? The London Interbank Offered Rate (LIBOR) is the rate offered to prime borrowers in the international capital market based in London, and is used as the base for most interest quotations. An increase in LIBOR means an increase in expenditure for foreign interest payments which will reduce budgetary surplus if the increase in foreign interest payments will not be matched by additional revenue flow.

33. Basic Concepts in Budgeting How does the foreign exchange rate reckon with government expenditures? The foreign exchange rate is the rate at which a currency is exchanged for another currency, in the case of the Philippines, the peso to the US dollar. Any change in the exchange rate assumption will correspondingly change the peso cost of all expenditures paid in US dollars like foreign debt service, repayment and interest, the regular operating requirements of foreign-based government offices like embassies, consulates, etc. and other government contracts which are to be settled using foreign currency.

34. Taipei 101 The tallest building in the world Thank you!