Budget Process

Topics: Public finance, Tax, Macroeconomics Pages: 62 (15678 words) Published: November 30, 2012



During budget preparation, trade-offs and prioritization among programs must be made to ensure that the budget fits government policies and priorities. Next, the most cost-effective variants must be selected. Finally, means of increasing operational efficiency in government must be sought. None of these can be accomplished unless financial constraints are built into the process from the very start. Accordingly, the budget formulation process has four major dimensions:1

Setting up the fiscal targets and the level of expenditures compatible with these targets. This is the objective of preparing the macro-economic framework.

Formulating expenditure policies.

Allocating resources in conformity with both policies and fiscal targets. This is the main objective of the core processes of budget preparation.

Addressing operational efficiency and performance issues.

This chapter focuses on the core processes of budget preparation, and on mechanisms for aggregate expenditure control and strategic allocation of resources. Efficiency and performance issues are discussed in chapter 15. Operational efficiency questions directly related to the arrangements for budget preparation are discussed in Section D below.



The need to address all three objectives of public expenditure management–fiscal discipline, strategic resource allocation, and operational efficiency—is emphasized in chapter 1. This calls for a link between policy and budgeting and for a perspective beyond the immediate future.

Of course, the future is inherently uncertain, and the more so the longer the period considered. The general trade-off is between policy relevance and certainty. At one extreme, government “budgeting” for just the following week would suffer the least uncertainty but also be almost irrelevant as an instrument of policy. At the other extreme, budgeting for a period of too many years would provide a broad context but carry much greater uncertainty as well.2 In practice, “multiyear” means “medium-term,” i.e., a perspective covering three to five years including the budget year.

Clearly, the feasibility in practice of a multiyear perspective is greater when revenues are predictable and the mechanisms for controlling expenditure well- developed. (The U.K., for example, has recently moved beyond a multiyear perspective to an outright three-year budget for most budgetary accounts.) These conditions do not exist in many developing countries.3, The dilemma is that a multiyear perspective is especially important in those countries where a clear sense of policy direction is a must for sustainable development, and public managers are often in sore need of some predictability and flexibility.4

The dilemma that a multiyear perspective is especially needed where it is least feasible cannot be resolved easily, but must not be ignored. On the one hand, to try and extend the time horizon of the budget process under conditions of severe revenue uncertainty and weak expenditure control would merely lead to frequent changes in ceilings and appropriations, quickly degenerate into a formalistic exercise, and discredit the approach itself, thus compromising later attempts at improvement. On the other hand, to remain wedded to narrow short-term “management” of public expenditure would preclude a move to improved linkage between policies and

expenditures. In practice, therefore, efforts should constantly be exerted to improve revenue forecasting (through such means as relieving administrative or political pressures for overoptimistic forecasts), and strengthen the linkages between policy formulation and expenditure, as well as the expenditure control mechanisms themselves. As and when these efforts yield progress, the time horizon for budget preparation




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