Government Budget

CHAPTER FIVE
PUBLIC BUDGET
1
Objective of the chapter

In the modern times when countries are fast becoming
welfare states with increasing responsibilities of government,
the activities of public authorities have expanded and
government budgeting has become a chief instrument of
economic development. In this chapter therefore we will try to
address issues like:
 Meaning and importance of government budget,
 Objectives of budgeting
 Theories/principles of government budgeting,
 Classification of budget and
 procedures of budgeting
By: Getish B. June 29, 2024

Learning Outcome:
2
After a successful completion of this chapter students will

be able to:
Define what government budget is
Explain the importance of government budget
Understand the different principles of government
budgeting
State the various classification of budget
Explain the role the government budget can play as
instrument of economic policy, and
Explain what makes public budgeting different from
private budgeting.
5.1 Meaning of Public/government Budget
The word budget comes from a Middle English word “bujet”

which means King’s bag containing the money necessary for
public expenditure.
In its modern sense, many scholars have defined public budget in
different ways.
According to Prof. Rene Stourn “it is a document containing a
preliminary approved plan of public revenue and expenditure”.
According to Gaston Gaze “The budget in a modern state is a
forecast and an estimate of all public receipt and expenses, and
for certain expenses and receipts, an authorization to incur
them and collect them.” There are many others, which can be
cited, but they all express the same things.

Cont.
4
The main elements/features that present in public budget are:

 It is a statement of expected revenue and proposed expenditures
of the authorities concerned i.e. budget is an annual statement of
receipts and payments of a government.
 It requires some authority to sanction. For example after it is
prepared, the parliament (Legislative) has to approve public
budget in Ethiopia.
 It has a periodicity which generally in one current year known as
fiscal year.
For example: The 2006 Ethiopian budget year extends from Hamle
1 (July 7), 2005 E.C up to Sene 30 (June 7), 2006 E.C
 It sets procedure in which the collection of revenue and
administration of expenditure is to be executed.
Cont.
5
 Thus with these characteristics we can define public

budget as: The main tool to administer
finance, and is an annual statement of
government fiscal policies, revenue and
expenditure. It is a forecast of expenditures and
revenues for a specific period of time.
Group discussion: What do you think is the
difference between private and public
budget?
NB: A budget is a quantitative plan for acquiring and
using resources over a specified time period.
Private Vs Public Budgeting
6
 Private  Public
 It is simple to set since the  The government budget
personal or family budget involves a complicated
is a financial plan that budgetary process since
helps individuals income it is a plan for the
and their expense.
collection and
 By the same taken, a
expenditure of monies
business budget is
required to carry out the
generally used as a tool to
formulate intelligent
social, military and
decisions on the economic policies of an
management and growth of administration.
a business venture.
5.2. Importance of public Budgeting
7
Every nation needs to achieve many goals like to

achieve rapid economic development, to rise per
capital income, remove poverty, to achieve higher
employment etc, but due to the existence of scarcity
of resources it is impossible to achieve all this goals
at a time. A proper plan of action is therefore
necessary. A budget is a short term plan which
explicitly mentions the programmes that are to be
taken up in the course of the fiscal year, it specifies
what part of different programmes to be completed
with in the year.
Cont.
8
In this regard, public budget enables countries to:

 Use their resources efficiently by setting the physical targets for
different actions considering different factors, It may be
formulating the programmes on the basis of past experience of
implementation of government programs.
 Secure internal balance (economic stability and full employment)
 Avoid arbitrary use of resources
 Avoid corruption. Because at the end of the budget year, the
government and its various departments know that they are
responsible to the legislature for their action and budgetary
performances
 Achieve regional balance by reallocating funds

Cont.
9
 Assessment of Economic Conditions: Budget provides

us the economic conditions of the concerned country, for
example, if economy is growing, it means that all the sectors
of the economy are growing.
Financial Resources' Information: From budget, we
come to know the financial position of the country, as it tells
us about the total revenues, total expenditures, surplus or
deficit.
Importance for Consumers: Budget is a great
matter of concern for the consumers, because the
incidence of tax imposed by the government is finally
rest on the shoulders of consumers.
Cont.
10
Importance for the Producers: Entrepreneurs and the

producers largely depend on the fiscal announcements in the budget
policy. Government's tax cuts can boost the investment level in the
economy; and encourage the private sector to invest thereby
improve the employment and the productivity levels in the economy.
Tax exemptions, rebates, tax holidays, and reduced import duties
on industrial goods can achieve the employers' confidence in the

economy and provide them the opportunity to achieve cheaper raw
material and lower cost of production.

5.3. Objectives of Public Budgeting
11
As an instrument of economic policy, the objectives of

budget are likely to be different depending upon the
economic and social policy of the government. In
developing economies the objectives may be economic
growth, reduction of unemployment and reduction in
economic inequalities; but for developed nations which are
operating at full and near full employment level the
objective is maintaining full employment.
The overall objective of public budgeting is to use the budget
as instrument of government economic policy. More
specifically, budget the following are the chief purpose of
the would involve the following objectives.

Cont.
12
Building of economic overheads: In less developed

countries, there is scarcity of economic overheads. Thus
budgetary provisions help to build infrastructures, which in
turn make important influence on industrial and agricultural
development.
Balanced development: developing countries suffer from
regional imbalance in economic development. Therefore,
government budget can correct these geographical back ward
regions
Poverty reduction: poverty removal programme is a part
and parcel of the budget in less developed countries. All
expenditure measures are designed so that they directly or
indirectly influence reduction of poverty in the country.
Cont.
13
Full employment and price stability (Internal

balance): A significant function of the budget is to
secure the objective of full employment and price
stability
Check on misuse of public goods: it has a way to
check whether the collected revenues are used for the
proposed objectives in an efficient way or not.
Development of human capital: Skilled human
labor is most important for any countries
development more than anything. Thus budget
provisions can go a long way to serve the purpose.
5.4. Principles of Public Budgeting
14
A sound public budget consists of wise spending and collection

of revenue and it involves the following principles:
1) Canon of Comprehensiveness: according to this
principle a yearly financial plan of a nation should include
complete revenue and expenditure lists. It should depict a
clear picture of the state of performance relating to programs
of the government in the previous year so that it becomes
possible to see what have been achieved, what have been the
shortcomings and decide as to what course of action should
be adopted in the budget plan.
2) Canon of Exclusiveness: this canon suggests that public
budget should exclude matters out of finance. This implies
that budget considers only quantitative issues.
Cont.
15
3) Canon of Unity: according to this principle revenue

should be recorded in a revenue account and expenditure
ought to be recorded in the expenditure account.
4) Canon of Specification: this principle suggests that
every item of revenue should be specific, this means the
type, and amount and time of collection ought to be
determined. The same should be done for expenditure.
5) Canon of Periodicity: this rule implies that
government should prepare a yearly plan of revenue and
expenditure. E.g. in Ethiopia the fiscal year is from July 7
of this year to July 6 of the coming year (Hamle 1-Sene 30
in Ethiopian calendar)

Cont.
16
Though budget estimates for the coming fiscal year

contain proposals of taxation, borrowing and public
expenditure, the government in course of
implementation of the budget programs might face
shortage of funds due to some important additions of
activity and, hence, might be in the necessity of fresh
proposal of revenue receipts and expenditure which
are made in what is called a “Supplementary
Budget”. In this way, the action plan of the original
budget gets revised.

Cont.
17
6) Cannon of being open to the legislative and

the people: A good budget should have a room
that will enable the legislature and the people to
appreciate the proposals of receipts and
disbursements in the context of prevailing state of
economy of the country.

5.5. Types of Public Budgeting
18
Government budget can be grouped on the basis of

different aspects like based on:
The way to prepare
The function
Economic Significance
Budget
Periodicity
Baseline they use

Mismatch of gov’t revenue and
expenditure

A. Based on the way to prepare
19
Multiple Vs unified budgets

In some countries of the world, for instance U.S.A,
there was traditional way of preparing budgets in
parts and presents each part separately in order to
evaluate specialize function of the government. This
types of budgets are said to be Multiple budgets.
However, now a days a type of budget that has got
favor is a united budget. In this case a budget is
prepared in a united way; important sub portions are
classified and presented separately under it.

B. Based on the function
20
 Public budget is classified based on the purpose of

the expenditure. This classification covers only the
expenditure. Therefore, the functional classification
of spending has bee divided in to four groups as
shown below. (United Nations, National Council of
Applied Economic Research)
I. General services: the expenditures on civil and
defense activities such as general administration,
tax collection, police defense, mint and currency,
external affairs, provision for against natural
disasters etc.
Cont.
21
II. Social Services: this group involves expenditures on

services like education, health, family planning, housing,
library (public), broadcasting, employment program, and
nutrition program for children, relief expenditure for
disabled persons and etc.
III. Economic Services: this category involves all spending
which facilitate economic activity directly or indirectly. They
are divided into agriculture, industry, transport and
communication, and other economic activities.
IV. Unallocable: this group involves those items that cannot
be categorized under the above groups. These are interest
payment, pension, food subsidies, special loan, aid to foreign
nations etc.
C. Based on Economic Significance
22
Revenue (current) Vs capital Budgets

In various countries of the world, the budget is categorized
in to
 Revenue
 Capital account budget.
I. Revenue budget: includes those items that have
recurring nature. This means it incorporates tax as well as
non-tax revenue and the expenditures financed with
revenue receipts. Current expenditures, which are financed
out of these revenue receipts, are all sorts of administrative
as well as defense expenditures and debt services. They
are also known as non-developmental expenditures.

Cont.
23
II. Capital budget: includes those items that have a

nature of acquiring and disposing capital assets. This
means it consists capital account receipts such as
market loans, borrowing from National Bank of a
nation, through the sell of Treasury Bills, and others in
order to finance capital expenditures that are intended
for the creation of capital assets in the economy. They
contribute to increase the productive capacity of the
nation and hence, are said to be developmental
expenditures. Expenditure of on construction of dam,
building, and irrigation agricultural and industrial
activities are examples capital budget.
Current and Capital Budget: Ethiopian context
24
 Recurrent budget expenditure consist expenses that

are continuous in nature like salaries of civil servants.
Recurrent budget in Ethiopia structured under four
functional categories: administrative and general
services (activities performed by political organs of the
state such as council of representatives, ministries and
defense), economic services (activities under the
agricultural, industrial & service sectors), social
services (health, education and culture) and other
expenditures (expenses on pension payments,
repayment of public debts, and provision of unforeseen
expenses).
Cont.
25
 Capital budget expenditure is usually made on

the acquisition and improvements to fixed assets
which include expenses for consultancy services.
Capital budget grouped in to three headings:
economic development (production activities in
agricultural and service sectors, economic
infrastructures in mining, road, energy, commerce,
communication), social development (activities
like education, health urban and welfare), and
general development (services in statistics,
cartography, public and administrative buildings).
Cont.
26
Expenditure budget
Recurrent Expenditure Capital Expenditure
Admini
Econo Gener
strative Econo Other Social
Social mic al
and mic expen Develo
service Develo Develo
General service diture pment
pment pment
service

D. Based on Periodicity
27
Plan Vs non plan budgets.

Most of the underdeveloped and developing countries
pursue planned economic development through periodic
plans.
A part of the budgetary receipts and expenditures is
devoted to the administration and implementation of the
plans. The part of budgetary receipts which goes to
finance the plan expenditure and the outlays on planned
developmental heads constitute the plan budget, while the
remaining part of the budgetary resources and
expenditures is referred to as the ‘Normal’ or ‘Non-plan
budget.’
E. Based on baseline to use
28
 Incremental Vs Zero-base Budgets

I. Incremental budgeting: a strategy whereby the current
period’s budget serves as a starting point (baseline) in
preparing the next period’s budget. Past levels of
expenditure are taken as given and only new additions to or
reductions from the past outlay are examined.
II. Zero-base budgeting: a strategy in which each budget
period starts with a zero budget and requires consideration
of every activity under taken by the department or segment.
It is necessary to regularly examine the expenditure
components in the light of anticipated results.

F. Mismatch of gov’t revenue and expenditure
29
 Balanced Vs Unbalanced Budget.

Government budget may be balanced or unbalanced. Unbalanced
Budget may be either a surplus budget or a deficit budget.
When the government revenues are equal to government
expenditures, the budget is balanced and when they are not
equal, the budget is unbalanced.
(a) A budget is balanced if during the budget period revenue
receipts are exactly equal to cost payments.
(b) If revenue receipts for the budget period are greater than
cost payments, the difference is budget surplus and (c) if
revenue receipts for the budget period are less than cost
payments, the difference is budget deficit.

6.5.1. Budgetary Deficit Financing
30
Budgetary deficit occurs when expenditure exceeds

revenue. Basically there are three alternatives for
financing budget deficits with their own macroeconomic
consequences that Ethiopia currently uses.
1. Domestic borrowing: the government can finance
excess expenditure over revenue by borrowing from
domestic sources like banks and other private entities.
But it has side effects, because result in increasing of
real interest rate, which leads to decreasing private
investment with adverse implication on economic
growth in the short run and long run.

Cont.
31
2. External borrowing: the government may

finance expenditure from external sources such as
foreign governments and multilateral institutions.
But it widens the balance of payments current
account deficit, appreciates the real exchange rate
and declines the country’s foreign exchange reserve.
3. Money printing: it is the most widely used
method of deficit management (financing). But it
also has side effects in resulting inflation and
deterioration of living standards, which is not that
much advisable to use this method.
6.6. Theories of Public Budgeting
32
There are two theories of government

budgeting:
1. The classical theory of “balanced
budget” and
2. The modern theory of
‘‘Managed/Flexible Budget’’.

6.6.1. Classical Theory
33
The classical theory argues that government budget should be kept balance
They assume that:
i. The economy is at full employment (the economy functions with
maximum efficiency) this implies that the problem of economy in the
classical system is not attainment of growth.
ii. ‘laissez-faire’ doctrine to be followed. This implies that functions of
government are limited to the minimum and, hence, most of the
economic activities are performed by the private sector.
Under such a situation, the size of the budget is always small and the
budget should always be balanced. Why it needs to be balance?
1. If there is budget deficit and it is financed by public borrowing, it will
withdraw funds from private sector where they are more productively
employed. Such diversion of resources will bring down overall
economic efficiency.

Cont.
34
2. Since deficit financing through borrowing is easy, the

practice of unbalanced budget will encourage expansion of
government activities as against the classical notion of
small budgets. This will reduce the capacity of government
to spend for more important purposes because interest
charges on borrowed funds have to be paid in addition to
repayment of the principal amount. Thus, public
borrowings are expensive; they require double payment in
the form of debt charges as well as repayment.
3. It is also argued that a budget deficit adds to the currency
and money supply in the country and thereby strengthens
the inflationary pressures.

6.6.2. Modern Theory
35
Headed by Keynes and criticize the classicalists by saying

full employment cannot be attained automatically and
working at less than full employment is the normal
operation of an economy. They also added that when the
economy is facing unemployment, having budget balance
do not achieve its main objective (Full employment and
price stability).
Therefore, When depression and unemployment occurs in
the economy due to deficiency of effective demand, the
need is to inject additional purchasing power into the
economy so that effective demand, hence employment of
production factors are enhanced.

Cont.
36
This objective can be realized through a deficit budget

policy. How?
This is because such a budget will put additional
purchasing power into circulation and the aggregate
consumption expenditure will increase. This will
raise prices and profit prospects of the business
community which will employ available unutilized
production factors to increase production and meet
the increased demand.

Cont.
37
When the economy, on the other hand, suffers from inflation

due to excess purchasing power over and above the amount
necessary to deal with the transaction of available goods and
services at prevailing prices, the necessity is to pump out the
excess amount from the economy. This can be done by surplus
budget which will raise more revenues like taxes and
borrowings and lower down government expenditures.
When there is neither inflation nor unemployment, the budget
should be balanced. Thus, there should be flexibility in the
budget policy according to the modern economists. Whether
the budget should be balanced or a deficit or a surplus should
be decided by the prevailing economic circumstances.

6.7. Procedures/Processes of Public Budgeting
38
One of the most important factors which affect economic

growth is inefficient utilization of limited economic resources.
Therefore, for a country to achieve its goals, its budget process
or procedure would be summarized in to four phases/stages as
follows:
Stage I- Budget preparation: The Ministry of Finance
prepares the National budget and it incorporates:
The plan to send and raise revenue systematically,
The economic, social and other government policies,
Consistence means for auditing and careful implementation of
financial plans.
Then the plan will be send to the parliament for approval.

Cont.
39
Stage II- Approval of Budget: it is the second stage

that implies the presentation of budget to the parliament
and getting approval. The Minister of Finance presents
the budget. The initial speech that it makes is
emphasized on overall economic and related conditions
of the nation and the main budgetary. Finally, the budget
is approved by the parliament and assumes the power of
law.
Stage III- Execution of Budget: is the third stage of
control over of public expenditure. The implementation
of the budget will be started after it is approved but with
great commitment to avoid wastage.
Cont.
40
Stage IV- Auditing of Budget: is the fourth stage

of control over of government spending. In this stage
the auditor audits government account and prepare
the audit report. This enables government to see the
area where wastage exists and to correct it.
NB: Good public budgeting without effective auditing and

control is a waste of time and effort.

41
End of the
Chapter
Thank You

Quiz # 2
42
Part I: Choose the correct answer among the given alternatives.

1. Assume that the Ministry of Finance and Economic Development of
Ethiopia (MoFED) fails to incorporate all the revenue sources of
Ethiopian government during the preparation of government budget
for 2007 year. Which principle of public budgeting is missed here?
A. Cannon of Unity
B. Cannon of periodicity
C. Cannon of Comprehensiveness
D. Cannon of specificity
Part II: Answer the following Questions neatly
2. Write at least two importance of government budget.
3. Discuss the policy instruments currently used in Ethiopia to finance
budget deficit. And also explain their respective negative
consequences on the Economy.

Government Budget

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Government Budget

Uploaded by

Copyright:

Available Formats

CHAPTER FIVE

Objective of the chapter

By: Getish B. June 29, 2024

After a successful completion of this chapter students will

The word budget comes from a Middle English word “bujet”

By: Getish B. June 29, 2024

The main elements/features that present in public budget are:

 Thus with these characteristics we can define public

Every nation needs to achieve many goals like to

In this regard, public budget enables countries to:

By: Getish B. June 29, 2024

 Assessment of Economic Conditions: Budget provides

Importance for the Producers: Entrepreneurs and the

on industrial goods can achieve the employers' confidence in the

By: Getish B. June 29, 2024

As an instrument of economic policy, the objectives of

By: Getish B. June 29, 2024

Building of economic overheads: In less developed

Full employment and price stability (Internal

A sound public budget consists of wise spending and collection

3) Canon of Unity: according to this principle revenue

By: Getish B. June 29, 2024

Though budget estimates for the coming fiscal year

By: Getish B. June 29, 2024

6) Cannon of being open to the legislative and

By: Getish B. June 29, 2024