Government and Public Sector Budgeting

When we resort to fiscal policy to combat unemployment or inflation, we are deliberately tampering with the federal budget. That is what discretionary fiscal policy really is budget policy.

The federal budget is a statement of the federal government's planned expenditures and anticipated receipts for the coming year. Whenever unemployment exists (whenever the unemployment rate is above the natural rate), the federal government should plan a deficit budget. That is it should plan to spend more than it expects to collect in taxes. By taking this action, the government infect the economy with additional spending or aggregate demand, that should help drive it toward full employment. Inflationary times call for the opposite approach, a surplus budget, which expresses the government's intention to spend less that it expects to collect in taxes. A surplus budget help reduce the amount of aggregate demand in the economy and thereby moderates inflationary pressures. A balanced budget – a plan to match government expenditures and tax revenues – is appropriate only when the economy is operating at full employment, when it has achieved a satisfactory and needs neither stimulus nor restrains.

 

One of the most important policy of the government is fiscal policy, which deals with the government through tax and non-tax sources and its expenditure. Detailed treatment is given on this policy. An attempt is also made to explore all possible ways to account for the different sources that constitute the government revenue. Due consideration is also given to the component of government expenditure. These expenditures may consist of the government expenditure. These expenditures may consist of the government spending on public goods and social services that are usually provided by the government.

The government budget is a financial plan of activities to be performed sometime in the future. However, in the process of delivering these public goods and social services, the government may face budgetary deficits when expenditures exceed government revenue, it looks for ways and means to finance these deficits.

Regardless of the type of economic system that a country follows there is always a government. However, it may take different forms depending on the political, social and economic factors. Some economies may have highly centralized government systems while others may have a decentralized body of governments. Some of the forms of the government include federal government, regional government and local government.

The duties and responsibilities of the local government may be different from the regional government and again may be different from that of the federal government. Regardless of the type and form they take, government usually have some common goal and objectives by and large. These goals and objectives include the following.

1. The maintenance of law and order, so that the property rights can be secured and economic, social, and political activities can be facilitated.
2.  The achievement of macro economic stability, such as: controlling inflation, reducing unemployment, avoidance of regional imbalances, fair or equitable income distribution, and promoting economic growth.
3. Adoption of sound economic and social policies, and
4. Provision of public goods (defense and police force, the judiciary, highways, and other economic infrastructures) and the basic social services (primary education and the health care services and other social infrastructures).

This involvement become strong and necessary, particularly in the case of the existing situations of developing countries where the majority of the population is poor and where the private sector plays relatively minimal role.

 

Fiscal policy involves managing the economy through the generation of revenues to discharge the responsibility of the government by financing expenditures. The role and functions of fiscal policy in the economy can be outlined in the following ways:

1. The allocation of resources into the production of public and private goods
2. The distribution of income in order to reduce gross inequality; and 
3. The promotion of economic growth, and stabilization of economy by reducing fluctuation in the level of price, output, and employment.

Source of government revenue are divided into tax and non-tax revenue. The principal source of government revenue is tax revenue. Tax revenue can be further decomposed into direct, indirect and foreign trade taxes. Direct taxes are taxes levied directly on persons or legal person entitles in the form of personal income taxes, property taxes, corporate income and profit taxes and others. Indirect taxes are taxes levied on goods and services. Consumer pay these taxes indirectly when they buy goods and services. The third category of taxes constitutes the foreign trade taxes that are levied on imports and exports.

The non-tax revenue can be composed of collection of charges such as capital charges and residual profits, fees, fines, sale of government properties and others.

The expenditure side of public finance may include recurrent and capital expenditure. The recurrent expenditures include expenditures of wages and salaries of government employees, pension payments, debt service payments, operating expenses of the government ministries and other expenses of repeated nature. Capital expenditures contribute to economic growth and they are targeted towards adding the capital stock of the country. Expenditures of this type include investment on social and economic infrastructures such as roads and construction of school and health care faculties.

 

The structure of government budget constitutes the formats in which the budget data are organized and classified for different purposes. Not only the intentions of the government will be revealed but also the responsibility of implementing agencies will be clearly indicated in these formats. The classification of government budget is divided into revenue and expenditure budget.

   6.4.1 Revenue Budget

Revenue budget consists of the annual forecast of government budget from tax and non-tax sources. In Ethiopia, the annual revenue budget is structured into ordinary revenue, external assistance and capital revenue.

The direct tax of the ordinary revenue consist of personal income tax, rental income tax, business income tax, agricultural income tax, tax on dividend and chance winning, land use fee and lease. The indirect tax is consisting of the excise and sales tax on locally manufactured goods, service sales tax, stamps on duty. Tax on foreign trade includes customs duty and excise tax on imported goods, sales tax on imported goods and export tax on coffee. The revenue budget for the federal government of Ethiopia is prepared by the ministry of finance (MOF) and for these regional governments by the respective regional finances bureaus.

   6.4.2 Expenditure Budget

The recurrent budget is mostly financed from the domestic revenue source, that is from tax and non-tax revenues. The capital budget is usually financed by external borrowing and grants.

The recurrent budget expenditure consists of expenses that are repeated in nature like salaries of civil servants. The recurrent budget is structured in Ethiopia under four functional categories: Administrative and general services, economic services, social services, and other expenditures. All government bodies fall under either of these categories. For instances, administrative and general services include such activities as political organs of the state such as council of representatives and ministers, ministries, defense and so on. The economic services include such activities under the agricultural, industrial and service sectors. The social services include such activities as health, education and culture. Other expenditure include pension payments, repayment of public debts, provision of unforeseen expenses and similar items. Capital budget expenditure is usually made on the acquisition and improvements to fixed assets and includes the expenses for consultancy services. The capital budget is grouped under three headings: economic development, social development, and general development. Economic development includes production activities in the agricultural and industrial sectors, economic infrastructure in mining, road, and energy, commerce and communication. Social development includes such activities like education, health, urban development, and welfare.

 

It is the policy of the federal government to have effective budgets that comply with the financial law/regulations/directives, that comprehensively manage public expenditure, that link public expenditure to government policy, that limit expenditure to revenue and debt targets, that promote a balance of capital and recurrent expenditure, that transparently present items and activities of expenditure, that are prepared systematically according to an authorized calendar, that are fully funded and promptly disbursed, and that are prepared and implemented by staff trained in the regulations, principles and practice of budgeting.

Compliance with the financial law, regulations and directives. Budgets will be prepared and implemented in compliance with the financial law, regulations and directives.

i) Comprehensive management of public expenditure

Proclamation No. 57/1996 "Financial Administration proclamation of the Federal Government of Ethiopia" stipulates that the budget will comprehensively manage public revenues and expenditure. The proclamation requires that all public money except those allowed by law by placed in the consolidated fund and that all disbursement from the consolidated fund be approved by the council of peoples representatives through an appropriation. Appropriations will be implemented through the annual budget and through supplementary budgets as necessary. No expenditure or commitment of expenditure can be incurred from an appropriation without the approval of the ministry of finance.

ii) Linking public expenditure to government policy

Council of minister's regulation no 17/1997 stipulates that the priorities of the public investment programs will set the priorities of the capital budget and no capital expenditure shall be included in the capital budget if it has not been approved by the public investment program. The civil service reform will expand the public investment program into a public expenditure program which will comprehensively plan for three years both capital and recurrent expenditure. The public expenditure program will set the priorities of the capital and recurrent budget.

iii) Limiting Expenditure to Revenue and Debt Targets

The ministry of finance will establish the revenue projection for the annual budget. Expenditure ceiling will be established based on this forecast taking into account policy largest and external agreements establishing financing limits.

iv) A balance of capital and recurrent expenditure

It is government policy that public expenditures be sustainable. Capital expenditure will have adequate complimentary recurred expenditure. To promote this balance of capital and recurrent expenditure, the planning and budgeting reforms of the civil service reform will improve the linkage between the planning and budgeting of capital and recurrent expenditure. One reform will be the introduction of cost center budgeting, which will link expenditures within and between the recurrent and capital budgets to common activity. A second reform will be the introduction of the public expenditure program that will link capital and recurrent expenditures and frame the priorities of both the capital and recurrent budgets. A third reform will be the development of budget norms which link an activity's capital, non-wage recurrent and salary costs.

v) Transparent Presentation of items and activities of expenditure

It is government policy to strengthen the line item budget and their introduce cost center budgeting to promote responsibility for inputs and their outputs. Five steps are being taken to implement these reforms. Once step is to develop a consistent coding of the chart of accounts. The charts of accounts are the major budget headings used to present the budget.

A second step is to promote consistency in budget categories. Consistent formats should be used to the extent possible by both the capital and recurrent budgets.

A third step is to link where possible capital and recurrent expenditures on a cost center basis. Cost centers will allow managers in public bodies to know the total cost of an activity or an administrative unit and can guide budgeting decisions.

A fourth step is to improve the list of the items of expenditure. Line item budgets are based on items of expenditure and are designed to control the inputs of expenditure. (Strengthening line items budgets require improving the item of expenditure codes so they are consistent, detailed and transparent.)

A fifth step in improving the budget will be the introduction of work plans for the cost center. The work plans will link inputs to outputs and will form the bases of a public body's request for a budget.

 

Budgets will be prepared according to an authoritative calendar. The calendar will schedule the seven phases of budgeting:

• call

• request

• recommendation

• approval

• notification

• operation and

• execution.

The first phase, call is when the coordinating ministries of finance and planning ask each public body to prepare a budget request and would provide the budget ceiling for the public body. The second phase request is when public bodies submit their request for requirement and capital expenditure to the ministry of finance and the ministry of economic development and cooperation respectively. The third phase, recommendation, in a review by the ministry of finance and the ministry of economic development and cooperation of the agency requests and then a recommendation for each agency based on a recommended ceiling for the total capital and recurrent budget. The fourth phase, approval, has two stages: Approval by the council of ministers and approved by the parliament. Phase five is notification where the ministry of finance and the ministry of economic development and cooperation, notify the agencies of their approved estimates of revenue and expenditure by class of account and line item. The six phase of budgeting is operation, which has three tasks:

1. Preparation of action plans for the financial and physical implication which are submitted to the ministry of finance, the ministry of economic development and cooperation and the prime minister's office.

2. The elaboration of these action plans for internal use to implement the budget, and

3. The establishment of an operating budget linked to accounts for financial control. The seventh phase of budgeting is execution which has three tasks: 1) request and adjustments for transfer and supplementary allocations, 2) preparation of a monthly report on the financial and physical action plans to the ministry of finance, the ministry of economic development and cooperation, and the prime minister's office, and 3) identification of savings and transfer.

Except for emergencies that require reallocation or delay of appropriated disbursements, or shortfalls in revenue collection, budgets will be fully funded from the consolidated fund and promptly disbursed.

Effective implementation of budget procedure required staff who are trained in the regulations, practice and principles of budgeting. Government has recently trained trainers to instruct staff in the financial law and regulations. Government is also developing a training program based on a partnership of federal and regional training institutions that will instruct staff in current practice and budget principles as well as the new budget procedures of the civil service reform. Instruction is basic job skills will be delivered by finance and planning bodies at the federal and regional level. The institutional approach to training reflected in this strategy of building a partnership between federal and regional training institution will promote continuity in the instruction of staff and strengthen the capacity of training institutions to deliver instruction to a large number of federal and regional staff.

 

The government budget is a financial plan of activities to be performed sometimes in the future. However in the process of delivering these public goods and social services, the government may face budgetary deficits when expenditures exceed government revenue, it looks for ways and means to finance these deficits.

Fiscal policy involves managing the economy through the generation of revenues to discharge the responsibility of the government by financing expenditures.

Source of government revenue are divided into tax and non-tax revenue. Tax revenue can be further decomposed into direct, indirect and foreign trade taxes. The non-tax revenue can be composed of collection of charges such as capital changes and residual profits, fees, furies, sale of government properties and others.

The expenditure side of public finance may include recurrent and capital expenditure. The recurrent expenditures include expenditures of wages and salaries, pension payments, etc. Capital expenditures contribute to economic growth and they are targeted towards adding the capital stock of the country.