GOVERNMENT BUDGETING SYSTEMS

Chapter 2: The Budget Cycle

An important guideline of good budget is that they “comprehensively manage public
expenditure”. The budget cycle involves the Preparation, Review, Approval,
Appropriation, and Implementation of the annual budget.
 The federal annual budget should have the following four elements:
1. An estimate of financial resources (domestic revenue, external assistance, and
loan),
2. Subsidies for regions and administrative councils,
3. The recurrent budget (which includes the recurrent expenditure and source of
finance), and
4. The capital budget (which includes capital expenditures and source of finance).

The financial calendar within which all work related to the budget is completed is called
the budget cycle. The term "Cycle" in the budget cycle clearly shows that budgeting is a
continuous process. Budget making is not or at least should not be, an annual affair;
attention to the budget and budgetary formulation should influence the day-to-day
decisions of management at all levels. However, at the same time, this continuity is
marked by specific phases of a cyclical nature. The examination of these distinct phases
serves to center attention on the time dimension of budgeting.
 The phases of the budget cycle can be generally identified as:
(1) Executive Preparation and Submission
(2) Legislative Adoption and Authorization
(3) Executive Execution or Implementation, and
(4) Audit and Monitoring.
These generalized phases are essentially subject to substantial modification from one
government to the next. In governments where executive budget making is not well
developed, legislative decisions extend to the execution phase. In some governments, the
legislature’s role is a minor one, and executive preparation dominates all phases. In still
other cases, execution and audit are mingled, either in time or in accordance with the
governmental agencies responsible therefore.

2.1Budget Preparation and Submission

Budget preparation includes reviewing objectives to compilation of financial needs of
various units and submission to appropriate authoritative body. Two activities receive a
significant attention in national budget preparation; Public Expenditure Estimation and
Revenue Estimation.

2.1.1 Revenue Estimation

Estimates of revenues of the following fiscal year must be made before expenditure
ceilings can be conveyed to spending agencies. Preliminary estimates, which are based on
existing taxations, may change overtime and, eventually, as the final estimates of
proposed expenditures emerge, it may be necessary to take discretionary/optional
measures for mobilizing additional revenues if the level of deficit is to be maintained or
reduced. Revenues and levels of deficit represent the policy variables that, determine the
broad level of expenditures.
 Revenue estimates facilitate the consideration of expenditure
policy options and therefore are to be formulated with greater care.
 Revenue estimates for the next fiscal year are formulated in two ways:

a) The Accounting Approach

 Receipts are forecasted based on the rate of growth recorded in pervious years.
 The forecast could be adopted for each source of revenue.
 The growth in revenue could result from:
 An autonomous growth, i.e., due to growth in revenue sources from changes
in economy and the like.
 On the other hand growth in revenue could result from discretionary
measures, i.e., as a result of the governments decision to raise revenue. For
instance, the government may impose additional taxes with the objective of
raising tax revenue in order to cover increasing amount of expenditures.
b) Based on National Economic Parameters:
Here an explicit consideration is given to economic parameters, including the
likely increase in GNPs, the rate of inflation, and the impact of increased
government expenditure on taxation.
 Specific variables can be introduced, depending on the revenue structure, to
reflect the activities of major sectors, such as international trade.
In countries, which derive most of their revenues from the sale of a few commodities,
such as minerals and oil, revenue estimation may be less complex. In other export
economies, particularly where agricultural products dominate and where foreign
markets have been volatile, estimation of revenues is more complex. In a number of
developing countries, foreign aid is an important part of revenue; sometimes constitute
more than a fourth of total receipts. Estimate of foreign aid has generally proved difficult
and is dependent, among other things, on intangible factors such as political approaches.

2.1.2 Determination of Public Expenditures

In the process of governmental budget preparation the determination of total public
expenditure can takes place in two ways: model of devolution and the aggregate model.

a) MODEL OF DEVOLUTION/ DELEGATION:

Here the totals would be decided by the central finance and planning agency and
information flows from the center to field agencies (spending agencies). In this model,
the central agency undertakes advance planning for the requirements of the government
and indicates what these are for the spending agencies as initial ceilings for their budget.
Inevitably, details of such an exercise pose problems.

Detailed enumeration of projects and programs is, in any administrative context, the
responsibility of the administrative agencies/field agency. The task of the central agency
in formulating and indicating amounts likely to become available is to promote awareness
of resource availability, priority planning and a more coherent relationship between
objectives and programs. The purpose of the process is to ensure a firm bridge between
objectives and actions.
 The quality of indications is dependent on the capability of the organization to
look foreword and on its unbiased formulation of estimates.

b) THE AGGREGATE MODEL:

In this model, individual expenditure requirements are formulated by operating agencies.
Individual expenditures would be compiled and then consolidated. Here, information
flows from bottom (operating agencies) to the center (the central finance and planning
agency). Each operating agency and enterprise acts as an independent decision-making
unit. Amount equivalent to the current year's budget are viewed as "floors", and a
shopping list of projects and programs that are still at an early stage may be included.

 In practice, the combination of the two models is found. Thus, the normal limits of
expenditure may be determined in the following manner:
i) Total government expenditure= Revenues + Deficit.
ii) In countries that traditionally depended on foreign aid, total government
expenditure=Revenues + Foreign aid + Deficit.
iii) In countries that are members of the Organization of Petroleum Exporting
Countries (OPEC), or in contexts where surpluses are aimed at as a matter of
policy, total government expenditure= Revenue - Surplus.
 Aggregative expenditures determined in the above manner are to be adapted
for purposes of initial computation and then adjusted to available revenues
and permissible levels of deficit.

On the other hand, in every plan and estimate of government outlay, the determinants of
expenditure in the day-to-day world may be classified into endogenous and exogenous
factors.

 Endogenous factors comprise continuing outlays reflecting expenditures from recent

or previous legislations and costs of services. Approved policy goals and
organizational capabilities are a part of this group.

 On the other hand, Exogenous factors include policy revisions, reflecting changed
conditions, growth of population and changing pattern of technology of service, price
factors, and above all, the resource availability factor.

In addition to the above tangible factors, there may be some environmental patterns that
may influence the pattern and growth of expenditures. Informal and preliminary forecasts
undertaken by the spending and central agencies are useful in charting their requirements
and needs. The forecasts should take into account:
a) Continuing needs for which commitments were made on a long-term basis
b) Changes in the cost of these services.
 c) Announcements of new expenditures or legislation's affecting the expenditures
enacted during the year.
d) Share of outlays for continuing projects.
e) Outlays on new projects or programs.
Such estimates should take into account any decisions made during the year to wind up or
abandon some government activities. The estimates should also take into account the
previous relationships between estimates and actual expenditures, performance ratios and
factors contributing to their variation, and commitments made during previous years but
requiring cash payments during the current year.

2.2. LEGISLATIVE REVIEW

The struggle over the budget has begun when the budget document goes to the legislative
body. Executive budget preparation at the state and federal levels will have consumed
months, but the product of the process is only a proposal.
 The distinction between preparation and approval is alluded to
by the phrase the executive proposes and the legislature disposes.
Legislative review is part of the budget cycle where the legislative body checks that
operating agencies is consistent with the country's overall economic policy and resources
supposed to be available. It is a program analysis consisting of the internal consistency of
each element of expenditure and its relevance to the overall framework of actions
completed in any year. Participants in the legislative review have got contrasting
interests: operating agencies seek greater allocation of resources whereas the central
agency tries to restrict allocations to manageable levels. As a result, budget review
involves, on the part of the central agency, reduction of demands generated by spending
departments. The review could be done following various techniques. Here, the two
commonly used ones are explained: variation analysis and the item-by-item review.

 Variation analysis: this approach implies that the agencies will first identify the
program and its cost elements, representing increase and reduction over the previous
year's budget. Following this identification, the annual review by the budget agency
focuses mainly on variations, with greater emphasis on the increases in the outlays.
The approach is based on the belief that the items continuing in the government
budget merit further extension and will be review only when special situations
 demand it. The budget of the previous year will then become a threshold point
beyond which no research is needed.

 Item-by-item review: this involves a review of the annual budget requests in terms
of specific objects such as wages and related payments and materials. A general
problem associated with this approach is that it tends to concentrate on trivial items
and, in the process, neglects the more important policy issues.

In practice, it is not uncommon to see combination of both of the above techniques being
used. Customarily, legislative committee reviews the budget requests after inclusion in
the budget. The reviewer probably will reduce some items in the proposal and the
reviewer will be less informed about agency operations than are those who prepared the
budget. These features dominate the budget review. Experience in itself forces upon the
budget analyst the use of a set of rules of thumb. The reviewer/analyst first looks at last
year's appropriations to identify any significant changes. The changes or incremental
requests get his attention.
 Without going into detail, here is an outline of the rules of cutting budgets:
1. Cut all increases in personnel.
2. Cut all equipment items, which appear to be luxuries.
3. Use precedence - cut items which have been cut before.
4. Recommend repair and renovation rather than replacement of facilities.
5. Recommend study as a means of deferring major costs.
6. Cut all non-item operating costs by a fixed percentage (such as 10%).
7. Do not cut when safety or heath of staff or public is obviously involved.
8. Cut department with 'bad' reputations.
9. When in doubt ask another analyst what to do.
10. Identify dubious/questioning items for the manager's attention.
 The analyst, by looking for enough items to cut, proceeds until
the budget is balanced within the existing revenue constraints.

 In addition to the above points, there are some other particular points that
must be considered in the review:
First, the reviewer must verify the arithmetic used to produce program requests. Over
ambitious rounding and errors seem to increase request more often than they reduce
requests.

Second, reviewers should check linkages between justifications and dollar requests. Is
there reason to believe that the request will have the expected result, or will things
stay about the same regardless of the money required?

Third, the reviewer must determine whether the agency proposes changes in its program
or changed directions in existing programs. If changes are contemplated, they
should be consistent with legislative (and executive) matter.

Fourth, the reviewer must seek omissions from the budget requests. For example, some
agencies request a budget for acquiring machines but forget to request the cost
needed for operation. This can create significant budget problems during that year
for that agency since reductions had to be imposed on other activities of the agency
to cover the operation cost.

Fifth, the analyst must use all resources available for analysis, particularly the prior year
budget and actual expenditure to date, and the proposed budget. The analyst should
establish the cause of any deviations from trend. The analyst will often compute
ratios and share of cost elements over time and across agencies to identify variances
and to raise questions for the agency.

Finally the reviewer will consider the extent to which the agency request coincides with
policy directions announced by the chief executive. Those not consistent with that
direction are immediate targets for reduction or elimination.

2.3. Budget Execution/Implementation

Once the budget has been approved, the execution phase of the cycle begins. Execution
is the action phase of budgeting, the phase in which the plans contained in the budget are
put into operation. Every budget either explicitly or implicitly contains plans for the
work to be done and the achievements to be gained. Execution, then, involves
converting those plans into operations.
During execution/functioning, agencies carry out their approved budgets. Appropriations
are spent, and the services are delivered. The approved budget becomes an important
device to monitor spending activity. Although there are other important managerial
concerns during execution, spending must proceed in a manner consistent with
appropriation laws. Law typically forbids often with criminal sanctions - agencies for
spending more money than has been appropriated, spending less than the appropriation
while a possible sign of efficient operation may well mean that anticipated services have
not been delivered or that agency budget requests were needlessly high.

 Some major activities in the execution stage include:

Apportionment and Allotments: An apportionment process is used in which line
agencies submit plans to the central budget office to how appropriated funds will be used;
the plans often indicate proposed expenditures for each month or quarter of the fiscal
year. A primary purpose of apportionment is to ensure that agencies spend at a rate that
will keep them within limits imposed by their annual appropriations. The budget office
may require modification of agency proposals and virtually approves apportionments for
each agency.

 Following the approval of apportionments by the budget

office, allotments are made within the department.

 Initial Planning: Agencies at the outset of the fiscal year must accommodate
differences between the actual appropriations and the original requests. In addition,
some substantive change may be specified in the appropriations or informal
understanding may have developed between an agency and the legislators over how
a program will be redirected.

 Control of Agencies: From the perspective of the central administration, agencies

must live within their budgets; otherwise, the budget process becomes an empty
exercise. Therefore, various controls are imposed upon agencies, including the pre-
audit. After approval of an apportionment plan and granting an allotment, an
agency is still not free to spend, but must submit a request to obligate the
government to spend resources. The request is matched against the unit's budget to
 determine whether the proposed expenditure is authorized and whether sufficient
funds are available in the agency's budget.

 Mid-year Changes: As the year progresses, the budget office conducts reviews of
agency operations. One problem that often emerges is that resources in some
agencies' budgets are insufficient to meet the demand for services. One alternative
is for the budget office to approve requesting supplemental appropriations from the
legislative branch. Mid-session review of the budget discusses economic trends and
how these trends are affecting receipts, spending patterns, the activities of credit
programs, and whatever requests and other procedures are in place to attempt to
limit the budget deficit. In any event, what is actually spent will be different from
what was originally approved.

 End-of-year Spending: As the fiscal year approaches its end, agencies will attempt
to zero out their budgets; an agency having unexpended funds at the end of the
fiscal year may be considered a prime candidate for cuts in the upcoming budget.
Also, unexpended funds often lapse at the end of the budget year. From the
agency's perspective, it is a now-or-never situation for spending the available
money. Another factor is that an agency may have delayed some expenditure,
saving a portion of its budget for contingencies. This delay results in a spur/urge in
expenditures at the end of the year, with some spending being highly appropriate
and other spending utterly wasteful.
An alternative is to allow surplus funds to be transferred to the agency's new budget
without requiring new appropriation. Some justifications allow this within limits, such as
a small percentage of each unit's total budget. Advocates of an entrepreneurial sprit in
governments argue that agencies should be rewarded for efficiency by being allowed to
carry-over funds into the next fiscal year.

2.4. ACCOUNTING & AUDITING

2.4.1 Accounting
Accounting is one type of information system that contains mostly financial information
on the receipt of funds and their expenditure. Accounting system track receipts and
expenditures to ensure that they are handled in conformance with restrictions contained in
revenue and appropriation bills.
In budgetary systems, accounting is used as a basis of controlling current administrative
activities of an entity and measuring past performance. Furthermore, accounting records
are used as a basis of future budget planning and preparation. Government accounts
should be maintained with the objective of enhancing accountability and providing a
basis of managerial decisions. In the budgetary process accounting systems are expected
to have both an accountability functions and managerial functions.

 ACCOUNTABILITY FUNCTIONS
Accounting systems should show compliance with legal provisions. It is evident that
accountability and management purposes coincide at many points, but historically, in the
establishment of government accounting systems accountability has been given primary
if not sole emphasis. Accountability means legal liability-the establishment of pattern of
control over receipts and expenditure that permits determination, either by the executive
or by the legislature (or both), that public resources have been used for public purposes.
Thus:
 Accounts that show the commitment and disbursement of money must be related to
budget accounts comprising requests for new expenditure authority, i.e, budgeting
and accounting should be components of an integrated system of fiscal control.
 Accounts should permit a determination of the adequacy of custodianship of money
and assets under the responsibility of administrative officials.
 Accounts should permit an independent audit extending to all records, funds,
securities, and property.

 MANAGERIAL FUNCTIONS
Management considerations require that accounts be kept on a basis that permits the
continued measurement and analysis of government programs and the efficiency with
which they are performed. Management considerations may relate to the aggregate
performance of the government as a whole and may therefore require accounting for the
total financial transactions of the government. They may also consist of measuring of
activities at the administrative unit level.
Thus:
  The accounting system should provide full disclosure of financial results, including
measurement of revenue and costs of activities, programs and organizations.
 The accounting systems should provide management at all levels with information
for planning and direction, including cost measurement.
 The accounting system should incorporate effective procedures for internal audit
and control of operations and programs.
 The accounting system should provide information necessary for economic analysis
and planning of governmental activities.

2.4.2 AUDITING
Auditing is an examination of records, facilities, systems, and other evidence to discover
or verify desired information. Auditing is of different types, i.e. internal Vs external &
pre-auditing Vs post auditing. Internal audits are those performed by professionals
employed by the organization being audited. External audits are performed by outside
professionals who are independent from the organization being audited. It can also be
classified into three categories as financial statement audit, compliance audit, and
performance audit.

Financial statement audit involves examination of accounting reports of an entity to

vouch/assure for their accuracy and being free from any material misstatement of facts.
Performance audit, on the other hand, focuses mainly on checking that units of an
enterprise are operating in line with pre-established objectives that would lead towards
achievement of goal of an entity.
Compliance audit is concerned more with ensuring that operating units of an
organization are discharging their respective responsibilities in accordance with the rules
and regulations in the organization.
 Since financial statement audit has a very little significance to budgetary
systems, emphasis is made here on performance audit and compliance audit.
Hence, subsequent discussions on auditing will center on these two types of audits. In
budgetary systems classification of audits into pre-audit and post-audit received grater
acceptance.
Pre-audit is an advance verification of legality of transactions before resources are
committed on their completion. It occurs before the government commits itself to a
purchase and is used to verify whether an agency has sufficient funds to purchase given
equipment and that agency is authorized to have that equipment. In this audit, not only
the budget office but also the accounting department or agency is involved.

 A pre-audit may include:

 Counter-signature of documents authorizing incurrence of obligations and
examination of vouchers directing payment of obligation.
 Determination/self-control that obligations were properly incurred, goods were
received, amounts certified are correct, and money is available for a specified
purpose.

Post-audit is an examination of records and activities after they have already been
completed. In governmental budgeting, a post-audit is performed after appropriations are
spent on various programs and projects. A post-audit includes verification of legality of
transactions and accuracy of accounts. Usually, it is undertaken by an agency
independent of the administration. Three types of post-audit could be made with varying
objectives:
(1) Verification of documents and ascertainment that receipts and expenditures have
been treated in accordance with statutory requirements,
(2) Examination of pay orders issued by fiscal officers, and
(3) Examination of transactions and their relation to the administrative rules of an
agency.