EELO

UNIVERSITY
Faculty of Management Science
Department of Business Administration.
Senior Class
Course: Public Financial Management
Chapter 4: Public Budgeting
Lecturer: Suleiman Bashir Omar
TEL: 063-4454287 EMAIL: Ibnubashiir99@gmail.Com

Lecturer: Suleiman Bashir Omar

 Chapter outline
After reading this chapter, the students will be able to understand:
What is budget?
What is government budget?
Types of government budget
Characteristics of budget
Objectives of budgeting
Importance of government budget
Principles of a good budgeting
Budget cycle

Lecturer: Suleiman Bashir Omar

 INTRODUCTION
Any organization, private or public, has to prepare a budget to
manage its resources and activities properly, in order to accomplish
its goals. While in the private sector most organizations have profit
maximization as their key goal, the public sector’s main objective is to
improve the welfare of the population.
Budgets are an important tool to discipline governments because the
services they provide (public goods, correction of externalities, and
other market failures) are not subject to market competition as are
those supplied by private businesses. At the subnational level,
budgetary institutions should serve to allocate the community’s
resources to their most preferred activities, e.g., those that best satisfy
their needs.
Lecturer: Suleiman Bashir Omar
Modern states are welfare states and their functions have increased
manifold quantitatively and qualitatively. Besides performing conventional
and traditional functions that a policy state used to perform, they have to
perform many other functions such as providing social and economic
services to the society such as education, health care and medical facilities,
transport facilities, facilities of water supply and electricity supply etc.
Besides, they have to attend to various social and economic problems such
as problem of eradication of poverty, unemployment and income
inequalities and raising the level of economic development.
In the present day scenario the role of 'budget in the economy of the country
has tremendously increased. The pattern and nature of public receipts and
public expenditure are suitably designed keeping into view the situation that
is to be tack­led.
 What Is Budget?
• A budget is a comprehensive plan in writing, stated in monetary terms,
that outline the expected financial consequences of management’s plans
and strategies for accomplishing the organization’s mission for the
coming period.
• A budget is a document or a collection of documents comprising a
detailed description of the expected revenues and expenditures of a
given institution, associated with the activities that are planned for
achieving specific purposes or goals, within a given period.
• A government budget is a government document presenting
the government's proposed revenues and spending for a financial year
that is often passed by the legislature, approved by the chief executive or
president and presented by the Finance Minister to the nation.
Lecturer: Suleiman Bashir Omar
• Government budgeting is the critical exercise of allocating revenues
and borrowed funds to attain the economic and social goals of the
country. It also entails the management of government expenditures in
such a way that will create the most economic impact from the
production and delivery of goods and services while supporting a
healthy fiscal position.
• Budgeting is the process of preparation, implementation and
operation of budgets decisions into specific projected financial plans for
relatively short periods of time. In other words, budgeting is the process
of “translating financial resources into human purposes” (Wildavsky,
1986). Budgeting is also viewed as a process of identifying, gathering,
summarizing and communicating financial information of an
organization’s future activities. Lecturer: Suleiman Bashir Omar
 Types Of Government Budget
In a modern society and especially in a modern state welfare . the
activities of the government are fast expanding and they are trending
to cover almost all aspects of the social and economics life of the
nation.
The government is now an agency of the promoting the general welfare
citizen by positive acts. Government budgeting is one of the major
processes by which the use of public resources are planned and
controlled to attain certain objectives. Budgetary actions of the
government affect production, size, and distribution of income and
utilization of human and material resources of the country. 
So the government should prepare a different budget of the various
situations is the economy. Lecturer: Suleiman Bashir Omar
 Types of
Gov’t budget

Balanced Unbalanced
Budget Budget

Surplus Deficit
Budget Budget
Lecturer: Suleiman Bashir Omar
• Balanced budget is a situation, in which estimated revenue of the
government during the year is equal to its anticipated expenditure.
Government's estimated Revenue = Government's proposed Expenditure.
For individuals & families, it is always advisable to have a balanced budget.
Most of the classical economists advocated balanced budget, which was
based on the policy of 'Live within means'. According to them, government's
revenue should not fall short of expenditure. They also favored balanced
budget because they believed that government should not interfere in
economic activities and should just concentrate on the maintenance of
internal and external security and provision of basic economic and social
overheads. To achieve this, government has to have enough fiscal discipline
so that its expenditures are equal to revenue.
Lecturer: Suleiman Bashir Omar
• Unbalanced Budget is a budget in which income & expenditure are not
equal to each other is known as Unbalanced Budget.
Unbalanced budget is of two types :-
A. Surplus Budget
B. Deficit Budget
A. Surplus Budget
The budget is a surplus budget when the estimated revenues of the year are
greater than anticipated expenditures.
Government expected revenue > Government proposed Expenditure.
Surplus budget shows the financial soundness of the government. When there
is too much inflation, the government can adopt the policy of surplus budget as
it will reduce aggregate demand. Lecturer: Suleiman Bashir Omar
• Deficit Budget is one where the estimated government expenditure is
more than expected revenue.
Government's estimated Revenue < Government's proposed Expenditure.
According to Prof. Hugh Dalton, "If over a period of time expenditure exceeds
revenue, the budget is said to be unbalanced".
Such deficit amount is generally covered through public borrowings or
withdrawing resources from the accumulated reserve surplus.
• In developing countries like India, where huge resources are needed for the
purpose of economic growth & development it is not possible to raise such
resources through taxation, deficit budgeting is the only option.
• In Underdeveloped countries deficit budget is used for financing planned
development & in advanced countries it is used as stability tool to control
business & economic fluctuations.
 Characteristics Of Budget
• A budget is quantitatively stated: The figures in the budget are
expressed in monetary terms. However, the monetary figures are
supported by non-monetary information such as units to be sold,
units to be purchased and others.
• A budget is prepared in advance: A budget must be drawn up
before the period to which it refers. Figures produced during or
after the period may be important, but they are not part of a budget.
• A budget relates to a particular period: Generally, the budget
is prepared for one year. However, in the case of a seasonal
business, there may be two budgets for each year – a slack season
budget and a peak season budget.
Lecturer: Suleiman Bashir Omar
• A budget is a plan of action: A budget is a plan because it
concerns actions to be taken rather than a passive acceptance of
future trends. Planning is the establishment of objectives and the
formulation, evaluation and selection of the policies, strategies,
tactics and action required to achieve the objectives.
• A budget is an estimation or prediction of profit potential:
The budget set forth the expenses and revenues planned during the
budget period and thereby reveals its profit potential. A deed of
estimate: the budget is an estimate of income and expenditure
over a certain period, namely the budget year in question.
Lecturer: Suleiman Bashir Omar
 Objectives Of Government Budget
Government prepares the budget for fulfilling certain objectives.
These objectives are the direct outcome of government’s economic,
social and political policies.
Some of the important objectives of government budget are as
follows:
The various objectives of government budget are:
A. Reallocation of Resources:
Through the budgetary policy, Government aims to reallocate
resources in accordance with the economic (profit maximization)
and social (public welfare) priorities of the country. Government
can influence allocation of resources through: Lecturer: Suleiman Bashir Omar
A. Tax concessions or subsidies:
• To encourage investment, government can give tax
concession, subsidies etc. to the producers. For example,
Government discourages the production of harmful
consumption goods (like liquor, cigarettes etc.) through
heavy taxes and encourages the use of ‘products’ by providing
subsidies.
B. Directly producing goods and services:
• If private sector does not take interest, government can
directly undertake the production.

Lecturer: Suleiman Bashir Omar

B. Reducing inequalities in income and wealth:
Economic inequality is an inherent part of every economic system.
Government aims to reduce such inequalities of income and wealth, through
its budgetary policy. Government aims to influence distribution of income
by imposing taxes on the rich and spending more on the welfare of the
poor. It will reduce income of the rich and raise standard of living of the
poor, thus reducing inequalities in the distribution of income.
C. Economic Growth:
The growth rate of a country depends on rate of saving and investment. For
this purpose, budgetary policy aims to mobilize sufficient resources for
investment in the public sector. Therefore, the government makes various
provisions in the budget to raise overall rate of savings and investments in
the economy. Lecturer: Suleiman Bashir Omar
D. Economic Stability:
Government budget is used to prevent business fluctuations of
inflation or deflation to achieve the objective of economic stability.
The government aims to control the different phases of business
fluctuations through its budgetary policy. Policies of surplus
budget during inflation and deficit budget during deflation helps
to maintain stability of prices in the economy.
E. Reducing regional disparities:
The government budget aims to reduce regional disparities
through its taxation and expenditure policy for encouraging setting
up of production units in economically backward regions.
F. Financing and Management of Public Enterprises:
To finance and manage public enterprises which are of the nature of
national monopolies like railways, power generation and water lines etc.
There are large numbers of public sector industries, which are established
and managed for social welfare of the public. Budget is prepared with the
objective of making various provisions for managing such enterprises &
providing those financial help.
G. Reduction of poverty and unemployment:
To eradicate mass poverty & unemployment by creating employment
opportunities & providing maximum social benefits to the poor .In fact,
social welfare is the single most important objective. Every citizen should be
able to meet his basic needs like food, clothing, housing along with decent
 Components of
Gov’t Budget
Government
budget

Revenue
Budget Capital
Budget
Revenue Revenue
receipt expenditure
Capital Capital
receipt expenditure
Tax revenue Non-tax
revenue

Direct tax Indirect tax Lecturer: Suleiman Bashir Omar

1. Revenue Budget
This financial statement includes the revenue receipts of the gov’t i.e. revenue
collected by way of taxes & other receipts. It also contains the items of expenditure
met from such revenue.
A. Revenue Receipts
These are the incomes which are received by the gov’t from all sources in its
ordinary course of governance. These receipts do not create a liability or lead to a
reduction in assets. Revenue receipts are further classified as tax revenue and
non-tax revenue.
• Tax Revenue :-
Tax revenue consists of the income received from different taxes and other duties
levied by the gov’t. It is a major source of public revenue. Every citizen, by law is
bound to pay them and non-payment is punishable.
• Taxes are of two types, Direct Taxes and Indirect Taxes.
• Direct taxes are those taxes which have to be paid by the person on
whom they are levied. Its burden can not be shifted to some one else.
E.g. Income tax, property tax, corporation tax, estate duty, etc. are
direct taxes. There is no direct benefit to the tax payer.
• Indirect taxes are those taxes which are levied on commodities and
services and affect the income of a person through their consumption
expenditure. Here the burden can be shifted to some other person. E.g.
sales tax, services tax, excise duties, etc. are indirect taxes.
• Non-Tax Revenue :-
Apart from taxes, governments also receive revenue from other non-tax
sources.
Lecturer: Suleiman Bashir Omar
• The non-tax sources of public revenue are as follows :-
• Fees : The gov’t provides variety of services for which fees have to be paid.
E.g. fees paid for registration of property, births, deaths, etc.
• Fines and penalties : Fines and penalties are imposed by the gov’t for not
following (violating) the rules and regulations.
• Profits from public sector enterprises: Many enterprises are owned
and managed by the gov’t. The profits receives from them is an important
source of non-tax revenue. For example gov’t airlines, Oil and Natural Gas
Commission, etc. The profit generated by them is a source of revenue to the
gov’t.
• Gifts and grants: Gifts and grants are received by the gov’t when there are
natural calamities like earthquake, floods, famines, etc. Citizens of the
country, foreign gov’ts and international organizations like the UNICEF,
UNESCO, etc. donate during times of natural calamities.
B. Revenue Expenditure
Revenue expenditure is the expenditure incurred for the routine, usual &
normal day to day running of gov’t departments & provision of various services
to citizens. It includes both development and non-development expenditure of
the Central gov’t. Usually expenditures that do not result in the creations of
assets are considered revenue expenditure.
Expenses included in Revenue Expenditure :-
• Expenditure by the government on consumption of goods and services.
• Expenditure on agricultural & industrial development, scientific research,
education, health and social services.
• Expenditure on defence and civil administration.
• Expenditure on exports and external affairs.
• Grants given to State gov’ts even if some of them may be used for creation of assets.
2. Capital Budget
This part of the budget includes receipts & expenditure on capital account
projected for the next financial year. Capital budget consists of capital receipts &
Capital expenditure.
A. Capital Receipts
Receipts which create a liability or result in a reduction in assets are called capital
receipts. They are obtained by the government by raising funds through
borrowings, recovery of loans and disposing of assets.
• The main items of Capital receipts (income) are :-
• Loans raised by the gov’t from the public through the sale of bonds & securities.
• Borrowings by government from other financial institutions through the sale of
Treasury bills.
• Loans & aids received from foreign countries & other international Organizations.
B. Capital Expenditure
Any projected expenditure which is incurred for creating asset with a long
life is capital expenditure. Thus, expenditure on land, machines, equipment,
irrigation projects, oil exploration and expenditure by way of investment
in long term physical or financial assets are capital expenditure.

Gov’t has several policies to implement in the overall task of performing its
functions to meet the objectives of social & economic growth. For
implementing these policies, it has to spend huge amount of funds on defense,
administration, and development, welfare projects & various other relief
operations.
It is therefore necessary to find out all possible sources of getting funds so that
sufficient revenue can be generated to meet the mounting expenditure.
 Importance Of Gov’t Budget
Why is government budgeting important?
Any political party which forms gov’t at the Centre has certain social, political
and economic responsibilities. In countries with deep cultural, religious and
economic diversity such as India, it is extremely important for the gov’t to
allocate resources wisely.
Various factors such as uplifting underprivileged sections of the society,
facilitating financial inclusion, mitigating regional disparity, upgrading defence
capabilities, providing proper educational facilities, and much more need to be
focused on. Therefore, a well-planned budget is of utmost importance for any
gov’t to ensure economic stability and growth.
Gov’t budgeting is important because it enables the gov’t to plan and manage
its financial resources to support the implementation of various programs
and projects that best promote the development of the country.
• Through the budget, the government can prioritize and put into action its
plants, programs and policies within the constraints of its financial
capability as dictated by economic conditions.
• Here are a few reasons why it’s important for the gov’t to have
a budget:
• Proper resource pool allocation
When it comes to budgeting, identifying areas of weakness helps the gov’t to
allocate resources in a useful and sustainable manner. This is one of the most
fundamental objectives behind framing a gov’t budget. It’s important for the
gov’t to ensure that funds reach where it’s required the most. Therefore using
past data to identify sections of the society in need of economic welfare policies
& implementing those policies helps the gov’t demonstrate efficient governance
and achieve economic stability in the country. Lecturer: Suleiman Bashir Omar
• Ensuring economic growth
A budget allows the gov’t to regulate the imposition of taxes in various
sectors. Investment & expenditure are some of the most prominent
factors contributing to the growth of a nation’s economy. The gov’t
can encourage people to emphasize more on savings and investments
by providing tax rebates and subsidies.
• Growth of business and trading
Businesses and enterprises look forward to the government budget as
resources being allocated to various sectors are revealed. The
government can encourage business owners to revise their policies
accordingly and contribute to the country’s economic prosperity.
• Mitigating economic divide
Economic disparity and inequality is an imminent threat to any country’s
economy. The gov’t can address these kinds of threats introducing public and
economic welfare policies for the underprivileged sections of the society
through the budget. For example, an area A is more economically backward
than area B. The gov’t attempts to address the problem by setting up
industries in area A. This helps locals of area A gain employment and
improve the quality of their lives.
• Administering Operation of PSUs
Industries operating in the public sector contribute immensely to the country’s
economy by providing employment to a lot of people and generating revenues.
A budget helps the gov’t focus appropriately on companies in the public sector
by introducing policies to aid their growth.
 BUDGET CYCLE
Public budgeting varies considerably across the world. It depends on the
country’s legal framework, as well as on the organizational structure of
government. The budgeting process involves interaction among
numerous participants, from citizens to firms, and includes officials from
various levels of government. Although budgets are usually set for a fiscal
year, the budgeting process extends for a considerably longer period and
is best understood as a cycle with overlapping phases, as shown in below:
Four key general phases of the budgeting system can be identified.
• Formulation and submission
• Debate and adoption
• Execution
• Reporting, auditing and evaluating
Lecturer: Suleiman Bashir Omar
 Preparation
&
Submission

Reporting, The Debate

evaluating & budget and
Auditing
cycle approval

Execution

Lecturer: Suleiman Bashir Omar

• Formulation and submission: in most cases, the executive body of
government prepares and submits the budget for approval. The initial
phase of the budget involves flows of information on spending requests
and estimates of the resources available, as well as decisions on how
scarce resources should be allocated among numerous public demands
to attain the community’s goals and objectives. The budget formulation
is both a technical and a political process. Once finished, the budget
proposal is submitted to the legislative body.
• Debate and adoption: the legislative branch analyzes, debates, and
proposes changes to the budget proposal. During this stage, the budget
proposal is also frequently disclosed to the wider public. After being
approved by the legislative body, the amended budget is officially
adopted by the legislature and is put into effect.
• Execution: the executive body implements the budget by
operationalizing plans, collecting revenues and spending money.
Frequently, several control mechanisms are adopted during the
budget’s implementation, including cash management, audit-
systems, appropriation and allotment rules, and transfers of
authority. Accounting and reporting procedures are
implemented to guarantee that revenues and expenditures are
continuously monitored and stay on track with the amounts that
have been estimated and authorized. The executive branch has
discretionary power to implement small budget adjustments, but
substantial changes often require the approval by a higher level of
government or by the legislative branch. Lecturer: Suleiman Bashir Omar
• Reporting, auditing and evaluating: Public officials should be accountable to
citizens for how they raise public monies and how they spend them. To guarantee
accountability and keep stakeholders informed, frequent evaluation and reporting
are critical. Although most citizens lack the time or knowledge to read
governments’ financial reports, they are often exposed to debates during electoral
periods, which are used by opposition parties to attack the incumbent.
Before, during and after the budget execution, several types of audits are
implemented. Fiscal audits are intended to verify the accuracy of expenditure and
revenue records, to determine if actual financial results are in accordance with the
legally adopted budget, and to assess whether financial transactions comply with
finance-related laws, rules and regulations. Operational and management audits
review how specifically programs are carried out and evaluate the efficiency and
effectiveness of management. Performance audits verify if the outputs and outcomes
are in accordance with the benchmarks previously defined. Audits can be internal or
independent. Lecturer: Suleiman Bashir Omar
 Principles Of Good Budgeting
• Comprehensiveness: The budget must cover all the fiscal
operations of government, encompassing all public expenditure and
revenues, to enable full and informed debate of the tradeoffs between
different policy options.
• Predictability: Spending agencies should have certainty about their
allocations in the medium term to enable them to plan ahead. Stable
funding flows support departmental planning and efficient and
effective delivery.
• Transparency: All relevant information required for sound
budgetary decision making should be available in an accessible
format, and in a timely and systematic fashion. Budget information
needs to be accurate, reliable and comprehensive.
• Periodicity: The budget should cover a fixed period of time,
typically one year, and the process of compiling the budget should
follow a clear and reliable schedule that is agreed upon and published
in advance.
• Be conservative not optimistic: Another one of the important
principle of budgeting is to avoid budgeting on the basis that
everything will turn out as expected. Be very cautious about optimistic
forecasts. Try to build in a safety factor by tending to underestimate
your income and overestimate your expenditure. There will always
be unexpected events and therefore a common strategy in developing
a budget is to insert an additional expense called "contingencies".
This item in the expense budget is an insurance policy against the
unforeseen. Lecturer: Suleiman Bashir Omar
• Allow plenty of time: Budgeting is not an activity that is completed in a
few hours. A good budget may be worked on for several weeks, if not
months, adding and changing figures as new information comes to light.
For this reason, budgeting is often referred to as an iterative process. The
budgeting process is lengthy because much research and consultation has
to be carried out before people involved in the process can be confident of
the figures they supply.
• Get Sign Off: Another one of the important principles of budgeting is to
ensure that all departments/persons formally involved in the budgeting
process agree to the final iteration of the budget. This agreement by those
involved is often referred to as the "Sign Off". In other words, those
involved add their signature to the final iteration of the budget. This
ensures that there will be no argument later about who agreed to what.
• Reporting: All budgetary procedures like preparation, enactment and
execution of programs, must be based upon authentic data and
information gathered from various administrative units of the government.
Information regarding the progress of the work, programs executed,
revenue mobilized and expenditures made should be furnished to the
executive periodically. This is a fundamental requirement for a good budget.
• Multiple Procedures: Modern governments have to perform varied
functions of different nature, which requires an altogether different
technique of manage­ment. Sometimes even with in the same
administrative unit different projects require different management
procedure, skill and techniques. However in a government budget this
multiple procedure will be re­flected in a unified form or manner.