Government Budgeting

BUDGETING

Budgeting is the process of estimating the availability of Resources and then allocating them to various activities of an organization according to a pre-determined priority. In most cases, approval of a budget also means the approval to various spending units to utilize the allocated resources. Budgeting plays a criucial role in the socio-Economic Development of the nation.

Budget is the annual statement of the outlays and tax revenues of the government of India together with the laws and regulations that approve and support those outlays and tax revenues . The budget has two purposes in general :
1. To finance the activities of the Union Government
2. To achieve macroeconomic objectives.

The Budget contains the financial statements of the government embodying the estimated receipts and expenditure for one financial year, ie. it is a proposal of how much Money is to be spent on what and how much of it will
be contributed by whom or raised from where during the coming year.

Different types of Budgeting

Economists throughout the globe have classified the budgets into different types based on the process and purpose of the budgets, which are as follows:-

1- The Line Item Budget

line-item budgeting was introduced in some countries in the late 19th centuary. Indeed line item budgeting which is the most common form of budgeting in a large number of countries and suffers from several drawbacks was a major reform initiative then. The line item budget is defined as “the budget in which the individual financial statement items are grouped by cost centers or departments .It shows the comparison between the financial data for the past accounting or budgeting periods and estimated figures for the current or a future period”In a line-item system, expenditures for the budgeted period are listed according to objects of expenditure, or “line-items.” These line items include detailed ceilings on the amount a unit would spend on salaries, travelling allowances, office expenses, etc. The focus is on ensuring that the agencies
or units do not exceed the ceilings prescribed. A central authority or the Ministry of Finance keeps a watch on the spending of various units to ensure that the ceilings are not violated. The line item budget approach is easy to understand and implement. It also facilitates centralized control and fixing of authority and responsibility of the spending units. Its major disadvantage is that it does not provide enough information to the top levels about the activities and achievements of individual units.

2 – Performance Budgeting

a performance budget reflects the goal/objectives of the organization and spells out performance targets. These targets are sought to be achieved through a strategy. Unit costs are associated with the strategy and allocations are accordingly made for achievement of the objectives. A Performance Budget gives an indication of how the funds spent are expected to give outputs and ultimately the outcomes. However, performance budgeting has a limitation – it is not easy to arrive at standard unit costs especially in social programmes which require a multi-pronged approach.

3- Zero-based budgeting

The concept of zero-based budgeting was introduced in the 1970s. As the name suggests, every budgeting cycle starts from scratch. Unlike the earlier systems where only incremental changes were made in the allocation, under zero-based budgeting every activity is evaluated each time a budget is made and only if it is established that the activity is necessary, are funds allocated to it. The basic purpose of Zero-based Budgeting is phasing out of programmes/ activities which do not have relevance anymore. However, because of the efforts involved in preparing a zero-based budget and institutional resistance related to personnel issues, no government ever implemented a full zero-based budget, but in modified forms the basic principles of ZBB are often used.

4- Programme Budgeting and Performance Budgeting

Programme budgeting in the shape of planning, programming and budgeting system (PPBS) was introduced in the US Federal Government in the mid-1960s. Its core themes had much in common with earlier strands of performance budgeting.
Programme budgeting aimed at a system in which expenditure would be planned and controlled by the
objective. The basic building block of the system was Classification of expenditure into programmes, which meant objective-oriented classification so that programmes with common objectives are considered together.
It aimed at an integrated expenditure management system, in which systematic policy and expenditure planning would be developed and closely integrated with the budget. Thus, it was too ambitious in scope. Neither was adequate preparation time given nor was a stage-by-stage approach adopted. Therefore, this attempt to introduce PPBS in the federal government in USA did not succeed, although the concept of performance budgeting and programme budgeting endured.

Budgetary Control

Budgetary control refers to how well managers utilize budgets to monitor and control costs and operations in a given accounting period. In other words, budgetary control is a process for managers to set financial and performance goals with budgets, compare the actual results, and adjust performance, as it is needed.

Budgetary control involves the following steps :

(a) The objects are set by preparing budgets.

(b) The business is divided into various responsibility centres for preparing various budgets.

(d) The budgeted and actual figures are compared for studying the performance of different cost centres.

(e) If actual performance is less than the budgeted norms, a remedial action is taken immediately.

The main objectives of budgetary control are the follows:

To ensure planning for future by setting up various budgets, the requirements and expected performance of the enterprise are anticipated.
To operate various cost centres and departments with efficiency and economy.
Elimination of wastes and increase in profitability.
To anticipate Capital Expenditure for future.
To centralise the control system.
Correction of deviations from the established standards.
Fixation of responsibility of various individuals in the organization.

Responsibility Accounting

Responsibility accounting is an underlying concept of accounting performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts.

These decentralized parts are divided as : 1) revenue centers, 2) cost centers, 3) profit centers and 4) Investment centers.

revenue center (a segment that mainly generates revenue with relatively little costs),
costs for a cost center (a segment that generates costs, but no revenue),
a measure of profitability for a profit center (a segment that generates both revenue and costs) and
return on investment (ROI) for an investment center (a segment such as a division of a company where the manager controls the acquisition and utilization of assets, as well as revenue and costs).

Advantages:-

It provides a way to manage an organization that would otherwise be unmanageable.
Assigning responsibility to lower level managers allows higher level managers to pursue other activities such as long term planning and policy making.
It also provides a way to motivate lower level managers and workers.
Managers and workers in an individualistic system tend to be motivated by measurements that emphasize their individual performances.

In India the budget is prepared from top to bottom approach and responsible accounting would not only improve the efficiency of Indian budgetary system but also will help in performance analysis.

Social Accounting

Social accounting is concerned with the statistical classification of the activities of human beings and human institutions in ways which help us to understand the operation of the economy as a whole.

Social accounting is the process of communicating the social and environmental effects of organizations’ economic actions to particular interest groups within Society and to society at large

The components of social accounting are production, consumption, capital accumulation, government transactions and transactions with the rest of the world.

The uses of social accounting are as follows:

(1) In Classifying Transactions

(2) In Understanding Economic Structure

(3) In Understanding Different Sectors and Flows

(4) In Clarifying Relations between Concepts

(7) In Explaining Movements in GNP

(8) Provide a Picture of the Working of Economy

(9) In Explaining Interdependence of Different Sectors of the Economy

(10) In Estimating Effects of Government Policies

(11) Helpful in Big Business Organisations

(12) Useful for International Purposes

(13) Basis of Economic Models

Budgetary Deficit

Budgetary Deficit is the difference between all receipts and expenditure of the government, both revenue and capital. This difference is met by the net addition of the Treasury Bills issued by the RBI and drawing down of cash balances kept with the RBI. The budgetary deficit was called Deficit Financing by the government of India. This deficit adds to Money Supply in the economy and, therefore, it can be a major cause of inflationary rise in prices.

Budgetary Deficit of central government of India was Rs. 2,576 crores in 1980-81, it went up to Rs. 11,347 crores in 1990-91 to Rs. 13,184 crores in 1996-97.

The concept of budgetary deficit has lost its significance after the presentation of the 1997-98 Budget. In this budget, the practice of ad hoc treasury bills as SOURCE OF FINANCE for government was discontinued. Ad hoc treasury bills are issued by the government and held only by the RBI. They carry a low rate of interest and fund monetized deficit. These bills were replaced by ways and means advance. Budgetary deficit has not figured in union budgets since 1997-98. Since 1997-98, instead of budgetary deficit, Gross Fiscal Deficit (GFD) became the key indicator.

Fiscal Deficit

The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government and thus amounts to all the borrowings of the government . While calculating the total revenue, borrowings are not included.
The gross fiscal deficit (GFD) is the excess of total expenditure including loans net of recovery over Revenue Receipts (including external grants) and non-debt capital receipts. The net fiscal deficit is the gross fiscal deficit less net lending of the Central government.
Generally fiscal deficit takes place either due to Revenue Deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development.
A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and Bonds.

Revenue Deficit

Revenue deficit is concerned with the revenue expenditures and revenue receipts of the government. It refers to excess of Revenue Expenditure over revenue receipts during the given fiscal year.
Revenue Deficit = Revenue Expenditure – Revenue Receipts
Revenue deficit signifies that government’s own revenue is insufficient to meet the expenditures on normal functioning of government departments and provisions for various Services.
In India social expenditure like MNREGA is a revenue expenditure though a part of Plan expenditure.
Its targeted to be 2.9% of GPD in the year 2014-15, though the fiscal revenue and budget management act specifies it to be zero by 2008-09

Government bodies raise money by imposing taxes on citizens and then use those funds to pursue various programs such as Education, defence, Infrastructure-2/”>INFRASTRUCTURE and research and development. A government’s budget describes all of its sources of income and where it spends that income, and budget reform is the process of making changes to how the government collects and spends money.

Governments pursue budget reform for many reasons. If government spending is greater than the amount of money the government takes in with taxes, reform may be necessary to balance the budget and control government debt. Politicians may pursue changes in government spending or Taxation to gain favor with their constituents.

Budget reform can have many potential benefits. Reforms can reduce wasteful expenditures and help lessen government deficit, potentially leading to surpluses. A surplus occurs when a government takes in more money than it spends. Budget reform can result in funding for new beneficial programs or increases in funding education, infrastructure or other areas to help certain individuals or organizations. Tax Reforms can benefit individuals and businesses if they reduce their tax burden. Cutting taxes can stimulate spending, which can help stimulate economic activity.

Budget reform only describes changing the collection or spending of money, not whether spending or collection goes up or down. Any potential benefit to budget reform can also be a drawback if changes occur in an unfavourable direction. For instance, if the government reforms its budget by cutting spending on education and infrastructure, it could hurt students and those who rely on public infrastructure spending for their jobs. Increases in spending can make governments fall into debt.

Government spending and taxation is controversial, and any budget reform that a government pursues is likely to be viewed as beneficial by some and negatively by others. Budget reforms passed by Congress often reflect a compromise between desires of different Political Parties.

The parliamentary committee headed by the Congress MP M Veerappa Moily, had been constituted to review the all budgetary reforms. Besides the budget, the committee will also review the Disinvestment policy, Banking sector in India.

Budgetary Reform in India for 2017

The Union Cabinet had given in principle approval last year for advancement of the date of Budget presentation from the last day of February to a suitable date.

Besides in another reform relating to budgetary process, Union Cabinet had approved merger of Plan and Non Plan classification in Budget and Accounts.

Advancement of the date of Budget presentation Benefits Pave way for early completion of Budget cycle and enable Central Ministries and Departments to ensure better planning and execution of schemes from beginning of financial year. It will also enable Central Ministries and Departments to ensure better utilize the full working seasons including the first quarter of the year. It will preclude the need of appropriation through ‘Vote on Account’. It will enable implementation of legislative changes in tax and laws for new taxation measures from the beginning of financial year.

Merger of Plan and Non Plan classification in Budget and Accounts the Union Cabinet also approved proposal of Union Finance Ministry to do away with the Plan and Non-Plan expenditure classification from 2017-18and replace with ‘capital and receipt’. The relevance of plan and non-plan expenditure was lost after the abolition of the Planning Commission. However Budget will continue earmarking funds for Scheduled Castes Sub-Plan/Tribal Sub-Plan and similarly, the allocations for North Eastern States. Plan/Non-Plan will help in resolving the following issues This distinction of expenditure had led to a fragmented view of resource allocation to various schemes. It had made it difficult to ascertain cost of delivering a service and also to link outlays to outcomes. It had led to bias in favour of Plan expenditure by Centre as well as the State Governments and had neglected essential expenditures on maintenance of assets and other establishment related expenditures to provide essential social services. The merger is expected to provide appropriate budgetary framework that will have focus on the capital and revenue expenditure.

Government Budgeting is the process of planning and controlling government spending. It is a complex process that involves many different stakeholders, including elected officials, government employees, and the public.

The budgeting process typically begins with the development of a budget proposal by the executive branch. The proposal is then reviewed by the legislative branch, which may make changes before approving it. Once the budget is approved, it is implemented by the executive branch.

There are many different Types of government budgets, including line-item budgets, performance budgets, and zero-based budgets. Line-item budgets are the most common type of budget. They list all of the government’s expenditures, organized by department or program. Performance budgets focus on the results of government programs, rather than the inputs (such as personnel and materials) that are used to produce those results. Zero-based budgets require each department or program to justify its entire budget each year, as if it were starting from scratch.

The components of a government budget include revenues, expenditures, and reserves. Revenues are the money that the government collects from taxes, fees, and other sources. Expenditures are the money that the government spends on goods and services, such as salaries, benefits, and infrastructure. Reserves are funds that the government sets aside for emergencies or unexpected expenses.

There are many different budgeting methods, including incremental budgeting, planning programming budgeting system (PPBS), and zero-based budgeting. Incremental budgeting is the most common method. It involves making changes to the previous year’s budget based on changes in economic conditions, program priorities, and other factors. PPBS is a more comprehensive budgeting method that focuses on long-term planning and program evaluation. Zero-based budgeting is a more radical budgeting method that requires each department or program to justify its entire budget each year, as if it were starting from scratch.

There are many different budgeting tools that can be used to help governments manage their finances. These tools include spreadsheets, Software programs, and online resources. Spreadsheets are a simple and versatile tool that can be used to track revenues, expenditures, and other budget data. Software programs are available that can automate many of the tasks involved in budgeting, such as tracking spending and generating reports. Online resources can provide information on budgeting best practices, as well as tools and templates that can be used to create budgets.

Government budgeting is a complex and challenging process. However, it is essential to ensure that governments have the resources they need to provide essential services to their citizens. By following Sound budgeting practices, governments can ensure that their finances are managed in a responsible and efficient manner.

Here are some of the budgeting challenges that governments face:

Uncertainty: Governments face a great deal of uncertainty, both in terms of revenues and expenditures. Revenues can be affected by changes in the economy, tax rates, and other factors. Expenditures can be affected by changes in the number of people served, the cost of goods and services, and other factors. This uncertainty makes it difficult to plan and budget effectively.
Political pressure: Governments are often under pressure from interest groups and the public to spend more money on certain programs or services. This can make it difficult to control spending and maintain a balanced budget.
Complexity: Government budgets are complex documents that must account for a wide range of revenues and expenditures. This complexity can make it difficult to understand and manage budgets.
Lack of transparency: Some governments do not publish their budgets in a timely or transparent manner. This can make it difficult for citizens to hold their governments accountable for their spending.

Despite these challenges, there are a number of best practices that governments can follow to improve their budgeting practices. These best practices include:

Planning ahead: Governments should develop long-term budget plans that take into account future economic conditions, program priorities, and other factors. This will help governments to avoid surprises and make better decisions about how to allocate their resources.
Setting realistic goals: Governments should set realistic budget goals that are based on their actual revenues and expenditures. This will help governments to avoid overspending and maintain a balanced budget.
Managing spending: Governments should carefully monitor their spending and make adjustments as needed. This will help governments to avoid overspending and stay within their budget.
Communicating with the public: Governments should communicate with the public about their budgets and how they are being used. This will help to build trust and accountability.
Being transparent: Governments should publish their budgets in a timely and transparent manner. This will help citizens to hold their governments accountable for their spending.

By following these best practices, governments can improve their budgeting practices and ensure that they have the resources they need to provide essential services to their citizens.

What is a budget?

A budget is a financial plan that outlines how much money you expect to earn and spend in a given period of time. It can be used to track your income and expenses, set financial goals, and make sure you don’t overspend.

What are the benefits of budgeting?

There are many benefits to budgeting, including:

Improved financial security: A budget can help you track your income and expenses, so you can make sure you’re not spending more than you earn. This can help you avoid debt and build up Savings.
Reaching financial goals: A budget can help you set financial goals and track your progress towards them. This can help you stay motivated and on track to achieve your financial dreams.
Reduced Stress: A budget can help you reduce financial stress by giving you a clear picture of your finances. This can help you make informed financial decisions and avoid surprises.

How do I create a budget?

There are a few different ways to create a budget. One common method is to use the 50/30/20 rule. This rule suggests that you allocate 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment.

Another method is to track your income and expenses for a month or two. This will give you a good idea of where your money is going. Once you know where your money is going, you can start to make changes to your budget to reach your financial goals.

What are some common budgeting mistakes?

There are a few common budgeting mistakes that people make, including:

Not tracking your spending: It’s important to track your income and expenses so you can see where your money is going. If you don’t track your spending, you’ll never know where your money is going and you won’t be able to make changes to improve your financial situation.
Not setting financial goals: It’s important to set financial goals so you have something to work towards. If you don’t have any financial goals, you’ll be less likely to stick to your budget.
Not being realistic: It’s important to be realistic when creating your budget. If you set your budget too high, you’ll be more likely to give up on it.
Not being flexible: Your budget should be flexible enough to accommodate changes in your income or expenses. If you don’t make changes to your budget when your circumstances change, you’ll be more likely to overspend.

What are some tips for sticking to a budget?

There are a few tips that can help you stick to a budget, including:

Make a budget that you can stick to: Your budget should be realistic and flexible. If you set your budget too high, you’ll be more likely to give up on it.
Track your spending: It’s important to track your income and expenses so you can see where your money is going. If you don’t track your spending, you’ll never know where your money is going and you won’t be able to make changes to improve your financial situation.
Set financial goals: It’s important to set financial goals so you have something to work towards. If you don’t have any financial goals, you’ll be less likely to stick to your budget.
Automate your savings: One way to make sure you’re saving money is to automate your savings. This means setting up a direct deposit from your paycheck into your savings account. This way, you’ll never even see the money and you won’t be tempted to spend it.
Avoid impulse purchases: Impulse purchases are one of the biggest reasons people overspend. If you see something you want, don’t buy it right away. Take some time to think about it and see if you really need it.
Don’t be afraid to ask for help: If you’re struggling to stick to your budget, don’t be afraid to ask for help. There are many resources available to help you, such as financial advisors, budgeting apps, and online forums.

Which of the following is not a type of government budget?
(A) Revenue Budget
(B) Expenditure budget
(C) Capital Budget
(D) Balance sheet budget
The purpose of a government budget is to:
(A) Indicate the government’s priorities
(B) Provide a financial plan for the government
(C) Control government spending
(D) All of the above
The government’s revenue comes from:
(A) Taxes
(B) Borrowing
(C) Fees and charges
(D) All of the above
The government’s expenditure goes on:
(A) Goods and services
(B) Transfer Payments
(C) Interest payments
(D) All of the above
The government’s budget deficit is the difference between:
(A) Revenue and expenditure
(B) Borrowing and expenditure
(C) Receipts and payments
(D) All of the above
The government’s budget surplus is the difference between:
(A) Revenue and expenditure
(B) Borrowing and expenditure
(C) Receipts and payments
(D) All of the above
The government’s debt is the total amount of money that the government owes.
(A) True
(B) False
The government’s debt can be financed by:
(A) Taxes
(B) Borrowing
(C) Selling assets
(D) All of the above
The government’s debt can be a problem if:
(A) It is too high
(B) It is growing too quickly
(C) It is not being repaid
(D) All of the above
The government’s debt can be reduced by:
(A) Raising taxes
(B) Cutting expenditure
(C) Selling assets
(D) All of the above