CHAPTER ONE

OVERVIEW OF PUBLIC BUDGET

Chapter objectives
₩ At the end of this chapter the students will be able
to:
₩ Define: budgeting
₩ Describe the purpose of budgeting
₩ List and describe theories of public expenditure
 Introduction

• budget is a tool that managers use to plan and control the use of scarce
resources.
• A budget is a plan showing the company’s/orgn/ objectives and how
management intends to acquire and use resources to attain those objectives.
• Formalizes management’s plans in quantitative terms.
• budget is a program for future action and is generally framed for a year
• Generally:- a budget is a series of goals with price tags attached
 Definition of public budgeting
• Public budget is a process by which government sets levels of
expenditure, collects revenues and allocates the spending of
resources among all sectors to meet national objectives.
• It is the financial plan of action for the year, reflecting government
priorities on expenditure, revenue, and overall macro-economic
policy.
• Public budget is a policy tool to describe the implementation of
public policy.
• Public budgets are the means through which public policies are
translated into tangible and targeted developmental actions.
 Purpose Of The Budget
• Monitoring Tool :> Accountability; provides a way for performance to
be measured against projections.
• Evaluation tool :> evaluate how program is doing overall, may need to
increase allocation expense in one area or add new expense based on
program performance
• Control tool - provides an action plan to ensure that the organization's
actual activities are least deviated from the planned activities.
• Quality Improvement Tool – how to improve program overall 
allocate expense towards Standardized Patient Encounters
 ₩ Other Essentials Purpose Of Budget Include:-
• To control resources
• To communicate plans to various responsibility centre
managers.
• To motivate managers to strive to achieve budget goals.
• To evaluate the performance of managers
• To provide visibility into the company's performance
 ҉ Important Features Or Characteristics Of Public Budget

• The budget, after its approval by the legislative authority, is enforceable.

• Financial and/or Quantitative Statement.
• Futuristic prepared and approved prior to a defined period of time.
• Goal Oriented for the purpose of attaining a given objective.
• Components of Income, Expenditure and Employment of Capital.
• The budget brings together a variety of considerations.
• It is prepared in advance and is derived from the long-term strategy of the
organization.
• It is expressed in quantitative form, monitory unit or labour hours, unit of product,
machine hour and other numerically measurable terms
• It is usually prepared for one year
 cont.
Moreover, Gregory (2005) gives characteristics of a good budget. According to him, a
good budget is characterizing by the following:
҉Participation- involves many people as possible in drawing
up a budget
҉ comprehensiveness- embraces the whole organization
҉ standards based it on established standards of performance
҉ flexibility – allows for changing circumstances
҉feedback – constantly monitor performance
 1.2 Theories of Public Expenditure

• Public expenditure is spending made by the government of a country on

collective needs and wants such as pension, provision, infrastructure.
• Public expenditure refers to the expenses which the government incurs for its own
maintenance as also for the society and the economy as a whole.
• Public expenditure has to perform the functions of :-
(1) ) Protective functions
(2 ) Commercial functions
(3) Development functions
† In spite of this, economists have concentrated on the theory of taxation and
neglected the theory of public expenditure. However, lately there have emerged
two important theories of increasing public expenditure.
• He propounded the 'law of increasing expansion of public and
1.2.1 Wagner’s Law

particularly state activities', which is referred to as the 'law of increasing

expansion of fiscal requirements.
• His prognosis of increasing state activity states that the level of economic
development is a causative factor for the growth of public expenditure.
• According to Wagner's law A number of reasons can be attributed to the
increasing of public expenditures such as:
• Expansion of traditional function of the state (Defense, Administration,
Law and order, etc.).
• New activities (Developmental activities, Cultural enrichment, Social
Securities, Subsidies etc.).
In addition to these, other factor which increase the public expenditures
relate to a growing role of the state in ever-increasing socio-economic
complexities of modern society are:-
† Population growth
† Increasing urbanization (needs civic amenities, traffic control, etc)
† Prices tendency to go up:
† Higher cost to provide high quality services:
† Increasing cost of debt services and repayment-
† Growth of public sector and its inefficiency
† Political factor
 † Criticism of Wagner’s Law
• Wagner’s Law is based upon historical facts. It does not reveal
the inner compulsions under which a government has to
increase its activities and public expenditure as time passes on.
• It is not clear whether Wagner was referring to an increase in
(a)Absolute Level Of Public Expenditure
(b)Ratio Of Government Expenditure To GNP Or
(c) Proportion Of Public Sector To National Economy.
 1.2.2 Peacock and Wiseman Theory of public expenditure

• Peacock and Wiseman (1967) suggested that the growth in public expenditure does
not occur in the same way that Wagner theorized.
• The Main finding of the author is that Public expenditure does not increase in a
smooth and continuous manner, but in Jerks or Step like Fashion.
• Peacock and Wiseman have considered the role of emergency or abnormal
situations such as war, in raising the level of public expenditure.
• At times, some social or other disturbance or abnormal situations takes place which
need additional public.
• The Present (existing) revenue becomes insufficient, new taxation for bigger
amount of revenue becomes necessary. This is known as displacement effect public
expenditure.
• The inadequacy of revenue compared with the required public expenditure creates
an inspection effect.
• The government and the people review the revenue position for the solution of
important problems and agree to finance the increased expenditure.
• This thesis apparently appears to be convincing but look at the previous theory i.e
Wanger’s Law in which it has been stated that public expenditure grows due to
several factors.
• Thus, Peacock-Wiseman Hypothesis is still a description of a particular tendency
and does not isolate all the relevant causes at work.
• It must emphasized that apart from various factors like population growth, defense
expenditure, urbanization, rising prices etc.,
• which by themselves push up public expenditure, an important additional
contributory force .
• w
END OF
CHAPTER ONE

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Q
 Quiz 1(5%)
1.Write the meanings of public expenditure and its
functions?
2.Write at least four causes of increasing public
expenditure in short and briefly?
3.List some actors of budget(who decide the budget)?