TOPIC SIX

THE BUDGET
6.1 INTRODUCTION

The lecture introduces you to the planning purpose of the government. Types of budgets are
explained. The budget is the master financial plan of the government. It brings together
estimates of anticipated revenues and proposed expenditures for budgets the activities to be
undertaken and means of their financing can be inferred.

6.2 LECTURE OBJECTIVE

At the end of the lecture you should be able to:

a) Explain the various types of budget.
b) Explain the role of each participant in the budgetary process
c) Explain the Zero base budgetary procedure

The nature and purpose of governments' budgets has changed "over time, and differs from
country to country. Powers, policies and obligations of federal, state and national central
governments, vary and so do their financial requirements.
The budget is an account of the State, showing how much the government spends and on what
and how it finances the expenditure. It is the master financial plan of the government.
Purpose of government budgeting:
In general budget is considered as an instrument of achieving economic policy such as full
employment high level of investment and a better distribution.

6.3 CANNONS/PRINCIPLES OF BUDGETING

1 Executive programming. Being the programme of the executive, the budget should reflect all
government responsibilities and activities. The social, economic and political programmes of the
government should be clearly unveiled in the budget programme.
2 Executive responsibility. Chief executive should ensure that the departmental programmes
planned is capable of fulfilling the desire and intention of legislature
3 Reporting. Information regarding the progress of the work, programmes executed, revenue
mobilized and expenditures made should be furnished to the executive periodically.

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4 Flexibility. Budget should be flexible enough to meet the government’s financial policies
according to the changing social- economic conditions in the society.
5 Adequate tools. The chief executive should be armed with sufficient and adequate
administrative tools to fulfill its budgetary responsibilities
6 Active co-operation. Efficient budgeting depends upon the active co-operation of all
departments and their sub-division mobilized and executions

6.4 Types of Budget

The budget can be approached from two angles. First, the Minister decides on expenditure both
on current account (government's consumption of goods and services, transfer payments, grants,
subsidies, interest payment) and on capital expenditure (investment in physical assets, grants).
He then adjusts taxes to cover expenditure entirely or partially and then borrows the rest. The
second approach is on the basis of the principle of 'living within one's means'. The Minister
assesses the total resources available to him, He then works out how much he can 'afford' to
spend on different programmes to keep his total expenditure within the limits of the available
resources.
A balanced budget can be regarded as neutral. It has been called an 'orthodox' budget, reflecting
the Treasury view of sound finance.
A deficit budget is expansionary as more money is pumped into the economy than is withdrawn
in taxation. The borrowing that this policy requires is likely to have an inflationary effect in
some circumstances. During the Great Depression of the 1930s, governments sought to stimulate
economic activity by means of deficit budgets.
A surplus budget is deflationary insofar as the government takes out more than it puts into the
money flow. Which type of budget a Minister of Finance will present will depend on the
government's assessment of the economic situation and the overall economic, social and political
policy, it seeks to pursue. However, within the three types of budgets there is scope to vary taxes
and expenditure to achieve the desired effect.
INCREMENTAL BUDGETING
It a process in which past level of expenditure are taken as given and only new additions to or
reduction from the past outlay are examined. In incremental budgeting existing and old

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programmes are unexamined, since no substantial changes are called for in the budget. Only
additions and reductions in outlay is subject to scrutiny and examination.
ZERO BASE BUDGETING
The organization should not take earlier years expenditure for granted, but should state
everything afresh. It means that while framing its budget for the coming year an organization
should start from zero point, instead of treating the current budget as the srating point or base for
next years budgetary exercise. It involves a complete reexamination of ongoing programmes to
assess their continued utility instead of following the method of incremental approach to
budgeting. It involves fresh evaluation of every item of expenditure as if were a new item. Each
department ministry is required to justify its budget request from the bottom up, evaluating
alternative programme proposal and prioritizing them so as to select the best alternative on need
base. It focus the budget process on a comprehensive analysis of priorities objectives and needs.
It helps to eliminate those programmes which have outlived their utility. It also help to stimulate
and redirect the resources from less productive to more productive activities.
It involves examination of the very rational of an expenditure item under consideration. The aim
is to guard against wastage in public expenditure. It involves a detailed investigation of excess
item of expenditure to see whether it is really needed or it should be revised or done away with.
If a sector is not able to justify its existence, it should be closed down. If its existence is justified,
the optimum level of its operation and the corresponding budget provision must be defended. In
zero base budgeting no section is essential. It must proof its worthiness.

Performance and programme budgeting system (ppbs)

This is when a budget covers both performance and programme. Programme budgeting involves
laying down the sequence of steps for executing the project along with expenditure of resources
involved at each stage. Performance budgeting is a devised tests for comparing actual with the
expected results and thereby assessing the performance efficiency of the project. It involves the
development of scientific management tools, such as work measurement, performance standards
unit, costs etc. In each classifications government activities are identified in physical and
financial terms. The actual performance results are estimated and compared with target results,
so as to measure the efficiency of a particular project. The government budget decisions are
divided into major functions based on the objective of the government, and then sub-divided into

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major specific programmes activities and projects. The funds are allocated according to the
achievements expected from a department/ministry over a specific period, from the proposed
expenditure. Therefore in performance budgeting, emphasis is placed on the size of the project,
the cost involved and the expected return from the project. Thus the budgeting procedure is
focused towards the efficient and economic use of scarce public resources.
The implementation of performance budgeting involves the following steps:
1. Establishing a meaningful functional programme and activity and classification of government
operations (for example education is a classification, and elementary education is a programme,
training of elementary teachers is an activity and the construction of a school to impart
educational management service is a project.)
2. Bringing the system of accounting and financial management in accordance with the
classification made.
3. Estimating the quality of physical resources like personnel materials, services etc.
4. Developing standard norms for work units of performance.
6.5 SUMMARY

The lecture discussed in details the types of budget

6.6 ACTIVITIES

1. What is the role of parliament in the budgetary process in Kenya?

2. Explain in details the zero base and performance budgeting procedure.

6.7 FURTHER READING

A.T. Peacock and J. Wiseman, The growth of public expenditure in the United Kingdom
(London:George Allen Unwin, 1967)
C.V. Brown and P.M. Jacson, Public Sector Economics (Oxford:Basil Blackwell, 1992)
R.A. Musgrave and P.B. Musgrave, Public Finance in Theory and Practice (Ney York:
McGraw-Hill,1989).
C.T. Sandford, The Economics of Public Finance (Oxford: Pergamon Press, 1992).
J.Batas, Managing Value for Money in the public Sector (London: Chapman & Hall, 1993)

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