TYPES OF BUDGETING

TECHNIQUES
TOPIC 4
CHAPTER 7

1
 Reforms to promote public accountability and
improved government performance improved
includes:
i. budgeting systems reforms
ii. Improved financial compliance and quality
management
iii. Increase productivity and efficiency in
government operation
 Budgeting reforms are intended to transform
public budgeting systems from focus on input to
focus on output or outcomes for the purpose of
improving operational efficiency and promoting
accountability

2
Budgeting techniques applicable in
Malaysia;
1. Traditional Budgeting System (TBS) –
prior 1969
2. Programme & Performance Budgeting
System (PPBS) -1969-1989
3. Modified Budgeting System (MBS) -1990-
2012
4. Outcome Based Budgeting - 2013now

3
 Used prior to 1969
 Also known as incremental budgeting or line
item budgeting
 Based entirely on line item expenditure or
objects of expenditure.
Total Allocation =
Last years spending level +
Current year budget+
Increase in cost of material &
labour due to inflation +
Costs for new project or programme

4
Code ABC Department Amount (RM) Total (RM)

11000 Salary and Wages 120,000

12000 Fixed allowance 60,000
13000 Overtime allowance 48,000
14000 Other financial benefits 36,000
15000 Statutory Contribution to Employees 20,000
10000 Emolument* 284,000

22000 Stationery & Office Supplies 12,000

26000 Transport of goods 8,500
20000 Services and Supplies* 20,500

32000 Renovation of Buildings 20,000

35000 Purchase of Computers 30,000
30000 Asset* 50,000

41000 Pension & Gratuities 7,000

46000 Scholarship 5,000
40000 Grant and Charged Expenditure* 12,000

51000 Return and Write- offs 1,000

52000 Other payments 1,500
50000 Other Expenditure* 2,500

Total Allocation 369,000

5
Assumptions used to calculate total
allocation;
 All activities making up last years
spending were essential to achieve the
ongoing objectives
 All activities must be continued during
the coming years & more urgent than
newly created programmes
 All increases are due to material and
labour inflation

6
 Allocation Based on TBS

NP
Inc, inf
past

1961 1962 1963

Focuses on extrapolating past spending levels into the next year

& incrementing the level for inflation & new programmes or
projects.
7
 3 facet of budget allocation process;

1. The govt. agencies will submit their proposal to

the Treasury in terms of the type of expenditure
to be made.
2. Treasury will compile & modify the agency
budget proposals & submit an overall proposal
for the organization to the parliament in the
same object of expenditure
3. The Parliament will make line-item appropriation
after revising the proposals, along with object of
expenditure input line.

8
 Simple budgeting technique can be easily
understood by the users which will
facilitate users in preparing budget.
 Information presented can easily be
incorporated into the accounting system.
 Budgeted & actual revenues &
expenditure ensures detailed comparisons
to be made

9
 Data provided is useful primarily for the short -term
planning only.
 TBS tend to complies with legal requirement rather than
providing useful information for management decision
making.
 In the budget preparation process, government agencies
tend to focus on object of expenditure rather than on
overall goals & programmes of the organization
 Since budget is prepared in terms of objects of
expenditure, little information is known on the
programmes & activities carried out.
 The performance of the budget is measured only from the
financial aspect that is on actual expenditure incurred
(based on actual exp incurred not on the outcomes of
programmes & activities undertaken.

10
 Used by majority of developing
countries in the world.
 The adoption was fostered by United
Nation (UN) – 1967 UN workshop in
Denmark
 Introduced in Malaysia in 1969 under
Treasury Circular 5/1968.
 Helps management make better
decisions on the allocation of resources
and achieve government objectives.

11
 Increasing complexity of modern life
 Increase on demands for government services
 Shortage of funds to meet the demand & the
need to determine priorities
 Design programmes & control budgets.
 Programme budgeting refer to a planning-
oriented approach & communication -oriented
 Component of Programme – functions,
objectives, activities & responsibility centers
 Component of Performance – appropriateness,
adequacy, effectiveness & efficiency of the
programmes

12
 Identifying Objectives
 Programme Planning & Structuring
 Developing Performance Indicator
 Performance Evaluation

13
 To set out clearly the purpose for an
organization existence
 Provide framework for a better &
meaningful planning
 Also allow consideration on various
alternatives to achieve objectives
 Allow management to avoid duplication of
functions between department.
 Efficient management shall identify and
formulate objectives in a clear, precise
and concise manner
14
 Ministry of Education- to educate Malaysian
through a national education system to make
them knowledgeable, responsible and capable of
enjoying a comfortable standard of living
 Ministry of Health – to raise the health status of
Malaysians by providing promotive, preventive,
curative and rehabilitative health services.

15
 Programme is a set of activites that have a common
objectives
 Programme planning involves selection of best
alternatives in terms of programmes for the purpose
of achieving identified objectives.
 Programme structuring refers to hierarchical listing of
programmes, activities & sub activities to achieve
objectives.
 Ministry of Education- Higher Education, Primary
Education, Secondary education
 Medical Care services – general patient care services,
laboratory services, psychiatry services and medical
admin services.
 Example : table 7.2 og 124

16
 The purpose: To evaluate physical & financial
performance of the programmes
 Involves the identification of suitable units of
measurement to measure output of each activity
& programme in qualitative or quantitative
terms.
 Allow comparisons to be made between actual
output with targeted output & to find causes for
variance between the two,

17
 Example : Table 7.3 Annual target setting

Long-term Annual Targets Final

Objective Y1 Y2 Y3 Y4 Y5 Out
s put

Intake of 5,00 8,00 12, 15, 10, 50,00

50,000 0 0 000 000 000 0
students
over 5 years
period
18
 Used to access the relevance ,results and impact
of programmes for each agency using
performance indicator which has been
developed.
 Involves process of making comparison between
actual output with targeted output for the same
period & to identify cause for variance.
 Results from comparison will provide information
whether programmes have been planned
realistically and properly managed.
 The most important element for the purpose of
modifying & revising plans.

19
 Comparison between the Planned and Actual
Output

100

80

60 Plan
40 Actual

20

Over Proper Conserve

20
Through performance evaluation the agency can
identify whether;
1. Objective are realistic and reasonable
2. Programmes have been selected properly and
it’s the best alternative to achieve objectives.
3. Programmes have been properly planned and
provided adequately with resources.
4. Programmes were effective to achieve
objectives.

21
 Make the manager to think and plan in terms of
programme objectives and the most efficient and
economical way of achieving them. This will
provide information on effectiveness of
management of every ministry and department
and will facilitate and improve coordination
between economic planning and financial
planning.
 The systematic and continuing methods of
evaluating performance will furnish government
and officials with information for future planning
and making decision.
 Programme planning and structuring will facilitate
the setting of budget priorities between
competing programmes.

22
 Goals, objectives of government agencies not clear as
compared to private.
 Difficult to develop indicator under PPBS which result in
efficient performance evaluation.
 The budget preparation, examination and implementation
still focus on line-items or object of expenditure
 Performance indicator is considered not important in the
management of resources
 Approach of budget preparation is bottom-up
 Delegation of power or authority to make decision is
limited

23
 Modification of PPBS - 1988 TC No. 11
 Implemented in 1990 through issuance
of TC No.8
 Is a management system that focuses
on the relationship between input,
output & impact

24
e.g. supply & svs, emoluments, Measures directly by referring to the
assets, grants, expenditures changes that can be traced directly to
the output of act/ program

Input Output Impact

3
perspectives
Efficiency Effectiveness

Measured in term of qlty, gty, i.e. product/services

timeliness & cost produced

25
Ministry of Transport – objectives
“to deliver qty services towards customers”

Input Output Impact

Program: services dept

+ activities Qlty svs – no. of complaint Target vs. actual
Speed svs – time taken

Through output & impact the performance of the program or agency

can be measured to determine the efficiency & effectiveness
of the program whether the objective can be achieved

26
 Positive or negative changes on
targeted activities.
 Achievement level of actual objective
(efficiency of the activity)
 Changes to overcome the problem
(compare the situation before and
after)
Advantage- enables us to understand
thoroughly the logic of such activities.

27
 Phase 1 – 3 ministries (1990)
 Phase 2 – 7 ministries/ dept (1992)
 Phase 3 – 7 ministries /dept (1993)
 Phase 4 -17 ministries / dept (1994)
 Phase 5 -17 ministries / dept (1995)

28
 Improve allocation of resources to
government program
 Improve effectiveness & efficiency of
government program
 Strengthen mechanisms for the
accountability of Controlling officers
and programme managers

29
 Expenditure Target
 Programme Agreement & Exception
Report
 A Cycle of Programme Evaluation
 A More Generalized Approach to
Expenditure Control

30
Identfying
Objectives Expenditure Target

Programme Programme
Planning & Agreement &
Structuring Exception Report
Developing A Cycle of
Performance Programme
Indicator Evaluation

Performance A More Generalized

Evaluation Approach to
Expenditure Control

31
 Treasury’s estimate of base level of resources
required by government agencies to conduct
existing programmes in the same manner as
previous year
 Allow usage of previous year ET as base for next
year’s ET
 Amount is fixed by Treasury at the beginning of
Budgetary process
 The amount cannot exceeded when agencies
proposed its expenditure.
 Treasury can reviewed the ET if there are
changes in the government policy before the
total allocation for each agency is finalised

32
 Preparation of estimates For Operating
Expenditure
 Preparation for Estimates for
Development Expenditure

33
Formula: ET
ET(2010) = Existing Policy (2009) + (New Policy 2009 – Allocation
for Assets) – New policies 2008 not implemented
+ 2% increment for emolument-2% Efficiency Dividend

ET(2011) = Existing Policy (2010) + (New Policy 2010 – Allocation

for Assets) – New policies 2009 not implemented
+ 2% increment for emolument-2% Efficiency Dividend

Pg 129

34
 Proposal for new policies, one-0ff, Efficiency Dividend and
Programmne Agreement are submitted for two years.
 For New Policy Controlling Officer should take into account
a few factors:
i) Proposal for new policies have been approved by Cabinet
or Central Agency
ii) The threshold value is deducted from the proposed
expenditure for the new policy or one-off
iii) Efficiency dividend has to be submitted in line with the
cost savings principle due to reduction in scope or
abolishment of Existing policy or changes in the process

35
 According to TC no.2, Year 2009 since 2010 is the
last year for the 9th Malaysia Plan, the CO has to
ensure that all project is successfully
implemented and completed.
 Government agencies are required to make
preliminary plan for project to be implemented in
the 10th Malaysia Plan
 Criteria for financed by way of loan
i) Commercial like project and ‘future oriented
project’
ii) Agency is able to secure the loan
 CO has to submit loan application to the Treasury
(Loan Management and Financial Policy Division)
36
 Existing Policies – programmes already approved
by law or constitution; by Cabinet, Ministry or
Treasury or other equivalent parties.
 New policies – new programmes / activities (e.g.
development of new units, development of new
posts, training of new activities and rental
increment for office space)
 One-off is unavoidable & non annual expenses
(e.g. office renovation, moving to new office,
painting of building & general election)
 Threshold – amount fixed by Treasury to
determine the allocation of New Policies & One-
off Expenditure
37
 Efficiency Dividend – deducted for
expected efficiency improvements
associated with the learning effect and
with the implementation of improved
methods of programme delivery.

Efficienccy Dividend = 2% (Existing Policy2009 + New Policy 2009

– Allocation of Assets- New Policy 2008 not implemented

38
 Allow immediate recognition of govt’s fiscal
policy position by government agencies
 Eliminate poker game attributes
 Increase financial discipline in ministries as they
have to decide priorities & trade off on available
programme & activities within budget
constraints
 Greater integration of decision making on policy
& finance matters
 Greater opportunity-Ministries can be
comfortable to use top-down approach in
preparing budget & to use budget as
management tool.

39
 PA – contract between manager & subordinate
managers to certain authority has been
delegated.
 PA at Federal Level – Accountability obtain by
Treasury from controlling officers to disclose
programme output & impact.
 PA at Agency Level – Accountability obtain by top
management from lower level management who
are required to submit periodic & progress report
on exception basis.

40
 ER- used to identify performance
indicators that do not agree with agreed
target.
 ER – must also include explanation on the
extent & reasons for inconsistent
performance & remedial actions
Upper Level Of Mgt
Authority Delegated Accountability through
through Programme Exception Report
Agreement

Lower Level Of Mgt

41
 Improve accountability at all level of
management.
 Emerging programme can be identify
earlier
 Highlights areas on strength & weaknesses
 Evaluation is made to allow preventable
measures to be taken

Figure 7.6 pg 133 format

42
 A systematic examination/ analysis of
programme effectiveness, efficiency,
relevancy and economy
 Four aspect
1. Appropriateness- measures to what extent is the
objective of the activity fulfilling the client’s needs
2. Effectiveness- measured to what extent have the
objective of the activity been achieved
3. Economy-measures to what extent can the cost of the
inputs
4. Efficiency-measures to what extent are the resources of
the activity utilized optimally to produce the required
outputs
43
 Performance Evaluation- tool for management and
decision making and provide the basis for annual
adjustments to ET.
 ‘Value for Money’- overall social economic benefits
of an activity are evaluated in relation to the cost.
 Under PPBS- all programmes evaluated once a
year
 Under MBS – only selected programmes will be
evaluated in any one year to ensure in depth
evaluations – and later to be evaluated after 5
years unless urgent evaluation required.
 Results will act as the basis for annual adjustment
of ET

44
 Pre-evaluation stage – enable decision
makers to ensure an appropriate focus and
approach is adopted
 Evaluation Study- involve searching files and
papers, conducting interviews, preparing
questionnaires, surveys, compiling and
analysing data and interpretation of findings
 Evaluation Report- results of the evaluation
are communicated to decision makers and
other interested parties.

45
 Based on 2 main elements:
1. Devolution of Authority – provision of greater
flexibility or authority to managers particularly
line management level in deciding on how to
deploy given amount of resources
2. Accountability to Match Authority – stricter
control on allocated resources whereby
supplementary allocations rarely provided.
Breaches of aggregate control are dealt with
swiftly & effectively.

46
‘Let Managers Manage’
 The CO devolve as much authority as possible
to the lower level managers to control and
manage resources.
 The nature & extent to which managers are to
be held accountable must match the authority
delegated to them.

** Figure 7.7 pg135: Budgetary process of MBS

47
Central Budget Level
 Improve identification of priority budget expenditure in
budget submission
 Shifting the focus of budget expenditure from’cutting
expenditure to identifying the best mix of resources.
 Reduce paperwork in the preparation of budget
submission ands and the conduct of budget examination
 Allow more time to discuss new policy proposals and its
modification
 To provide BMD with better information on programme
performance and enable it to more effectively hold
departments accountable for programme performance

48
Departmental Headquarters Level
 Increase the department’s opportunity to use strategic
planning as the basis for budget preparation
 Enable more top-down approach to budgeting
 Enable controlling officer to play a more active role in
budgeting and to use it as a management device
 Improve communication of top management priorities to
lower level managers and staff
 Allow finance divisions in HQ to become more involved in
matters of programme policy and programme evaluation
and less in matters of line item control

49
Line- management Level
 To improve motivation among line managers through
increasing awareness and understanding of top
management priorities through programme agreement
 Greater flexibility in the deployment of resources within
the aggregate constraints
 To enable budget preparation at the line management
level to take place at the same time as the preparation of
work plans
 Enable the financial plans regarding input, output and
impact to be used as management tools
 To enable better integration of decision-making of financial
and programme policy
50
 Lack of trained staff
 Lack of top and lower level
management commitment
 Argument for devolution

51
Outcome Based Budgeting-
Introduction
 The planning for outcome begins with the National Plan
where the Economic Planning Unit developed the National
Result Framework (NRF) under the 10th Malaysia Plan.
 NRF is based on five National Strategic Thrusts covering 24
Key Result Area (KRA), 24 National Outcomes and 30
National Programmes.
 Outcome Based Budgeting (OBB) is a continuous process
under Outcome Based Approach (OBA) with the objectives
to achieve the results determined under NRF.
 OBA is the planning framework used by the Economic
Planning Unit of the Prime Minister’s Department to plan
the outcome at national level.

52
Outcome Based Budgeting-
Introduction
 The Ministry of Finance issued Treasury Circular No. 2 Year
2012 to introduce and give guidelines regarding the policy
and implementation of OBB.
 Five selected ministries used OBB as test-bedded in year
2012 and will be rolled out across all ministries starting
from the year 2013 onwards.
 Many of the fundamental philosophies of MBS are used in
OBB.
 It uses the strengths of MBS, with added value from other
international best practices adapted to Malaysian use.
 The key enhancements of OBB from MBS are program
approach, focusing on outcomes, addressing issues of
horizontal and vertical integration at all levels of
implementation, improved monitoring and evaluation
framework, and better reporting formats.
53
Outcome Based Budgeting-
Introduction
 OBB is a strategic management tool designed to improve
resource management and public sector accountability.
 It is a tool to allocate resources effectively and efficiently in
order to achieve specific target.
 It explains why the money is being spent by using
statements of missions, goals and objectives.
 It differs from traditional approaches because it focuses on
what the money buys and the outcome of the purchase.
 This is in line with government’s emphasis on outcomes
rather than output and will enable policymakers to
determine what activities are cost-effective in
accomplishing their final outcome.

54
Objectives of OBB
 Provide structural mechanism to translate policy
and concept of National Transformation
Programme (NTP) to outcome and results.
 Empowering Controlling Officer to manage
resources under their control.
 Increase accountability at all levels through
strengthening of governance framework.
 Ensure government will achieve the concept of
value for money for budget expenditure
management.

55
 8 Principles of Designing OBB

 Planning and constructing of budget is based on

Programme Based Approach
  Roles and responsibility of Ministry of Finance,
Economic Planning Unit and Public Service
Department in examining ministry’s budget
  Ministry’s programmes aligned to the National
Results Framework (NRF)
  Medium-term perspectives in planning and
budgeting
  Strengthen performance management
  Empowering Controlling Officer. 
 Incentives for results achievements  
 Continuous development of ability
56
 Implementation Structure of
OBB
Main committees:
National OBB Steering Committee (NOSC)
Central Performance Management Committee (CPMC)
Programme Rationalisation Committee (PRC)
Ministry OBB Implementation Committee (MOIC)

Subcommittees:
Programme Performance Management Committee (PPMC)
Activity Performance Management Committee (APMC)

57
Strategic Process of Implementing OBB

58
 Strategic Process of
Implementing OBB
 Under OBB, each program can be executed by
multiple ministries while each ministry will be
responsible for a component of program.

 Agreement on which ministry is responsible for

the program component, the activities needed for
that component, and resources needed for these
activities are achieved through Program
Agreement

59
Top-Down Approach for Budget Planning and
Bottom-Up Approach for Budget Preparation

60
Allocation of Budget for
Programmes and Activities under OBB

LEVEL BUDGET ILLUSTRATION

National VISION 2020: DEVELOPED NATION

STATUS

National RM200
100% Literacy Eradication of 80% Reduction
Programmes million
Rate Poverty in crime
RM30 million RM120 million RM50 million

Ministry 20% Increase Elimination of 10% increase

Outcomes in farm hard core in agro tourism
RM120
income poverty
million
RM30 million RM80 million 10 million
Ministry of Ministry of Rural Ministry of
Agriculture Development Tourism

Ministry Consolidation Training of Upgrading

RM30
Programmes of farm Farmers infrastructure
million
facilities
RM15 million RM10 million RM5 million

Activities RM10 Training

million Trainers Farm inputs
materials
RM1 million RM4 million
RM5 million

Operating Expenditure
Development Expenditure
Source: Ministry of Finance (www.treasury.gov.my)

61
 Process
Input
Operation Output
Resource
or work Direct
s used by Outcome Impact
process product &
program The final
where services
me/activit Effect & outcomes
input is produced
ies to result from as the
uitilised from
generate programm results of
to activities
output & e output program
produce under
achieve
specific program
outcome
output

62
 Emphasis on the  Method of
following issues; evaluation;
1. Appropriateness 1. Formative
2. Effectiveness 2. Summative
3. Efficiency
4. Economy

63
 Quarterly and Annual Ministry’s Performance
Report
 Quarterly and Annual Projected Cash Flow
 MOIC Report
 Quarterly and Annual Monitoring of OBB
Programme or Activities Report
 Formative Assessment of OBB Programme or
Activities Report
 Summative Assessment of OBB Programme or
Activities Report

64
 Responsibility of Central Agencies under
OBB
Economic Planning Unit
Prepare policy and strategy framework
 
Ministry of Finance
Coordinate, evaluate and approved Ministry’s budget proposal to be
presented in Parliament 

Public Service Department

Look at the improvement of human resource management aspect  

Implementation Coordination Unit

Coordinate, monitor and evaluate performance of projects development

Malaysian Administrative Modernisation and Management Planning

Unit
Act as driving force and consultancy expert
 
National Audit Department
Perform audit on identified Ministry’s Programmes or Activities from time to
time

Accountant General Department

Continue to develop, manage, control and improve the government
accounting system
 
65
Purposes Strategic Template
 To show clearly  Ministry Executive
alignment and Summary
relation between MRF  Programme
& NRF Performance
 To identify other Management
programmes that Framework
coincides  Activity Performance
 To give holistic view Management
on integrated budget Framework
preparation

66
 Set clear priorities at national, ministry and activity level
 Integration the De and OE will provide a holistic view of
nationa priorities
 Remove duplication and better manage
 Provides a framework for eliminating overlapping
programmes
 Provides a basis for better integration of M& E systems
 Better focus on results especially on outcomes
 Allow online budget preparation and submission
 Provide availability of audit trail
 Enables to facilitate any ad hoc requests
 Allow analytical on budget utilisation and results

67
 The level of acceptance and understanding still low
 Requires commitment from the top level
management of ministries and agencies
 Quality of information in the results framework
need to be improved
 The government need to review the existing
structure of programmes and activities to adapt to
OBB
 The structure of OBB requires more work and more
commitment from the officer. Thus workload may
be more

68