Introducing the budget

1. World Bank Institute’s Parliamentary Staff Training Program Introducing the budget

2. Overview • Definition of the budget • Components of the budget • Some principles of good budgeting • Objectives of budgeting

3. 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.

4. 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.

5. 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.

6. 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

7. 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.

8. 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!

9. 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