Process of Budget Policy

Shiram Sam
Economics of Public policy (ECN4010)
ANC/EDP 2014

DEFINING THE NATIONAL BUDGET
The budget is the most important economic policy tool of the national government. Far from being a mere compilation of income and expenditure, it is the blueprint for a nation's socio economic policies for each fiscal year.
The national budget is thus the fundamental indicator of what government proposes to do and what objectives it pursues. It presents the government's financial plans for an upcoming period and is a comprehensive statement of the priorities of the nation. Which sectors of the economy will be expected to pay for said activities; how government will respond to economic disturbances in the short term; and who will be the direct and indirect beneficiaries of public services?
The budget is about people and should respond to their needs. It is a way of determining how the Government seeks to fulfill goals for the welfare of people as set out in a country's Constitution/Bill of Rights, in international instruments and standards (e.g. MDGs), and in government policy statements.
THE FUNCTIONS OF THE BUDGET
The National Budget allocates resources, distributes wealth and income, and stabilizes the economy. The economic stabilisation function of the budget should be balanced against the need to ensure that there are adequate resources (including from external sources) to guarantee the delivery and development of essential services especially in the social sectors.
The three objectives of budgeting
The first objective of budgeting is affordability. A budget must be affordable; parliament must ensure that the total amount of spending affordable and it must control expenditure.
The second objective is prioritization; setting priorities and allocating adequate resources, this is the allocate level of spending.
The third objective is operational efficiency, how well the resources are spent. This objective falls within the scope of the management function of the budget. That is something that occurs at departmental level, where competent financial managers are needed in the spending departments in order to meet that objective.
The National Budget is characterized by the following elements:
• It is unitary:
It provides an overall vision of State policy. It should therefore include all items and sectors of expenditure foreseen for the period and all sources of revenues, including taxes, duties, grants and gifts.
• It is coherent:
Coherence among the different sectors of activity covered by the national budget should be ensured.
• It is thorough and predictable:
Drawing up a budget should be based on thorough evaluations of revenue and needs. Spending agencies should be sure of their allocations in the medium term to facilitate planning and efficient and effective delivery.
• It is transparent:
The budget should be presented in a clear form and with sufficient detail to be easily understood and therefore transparent. This requires making available comprehensive, accurate, timely, and useful information on the financial activities of government.

• It is specific:
Each projected expense should be listed under a specific heading within a structure of all programmes including all the activities under a particular ministry and the totality of resources allocated to those activities.
• It is realistic:
Given that demand always exceeds available resources, budgeting should be done in a realistic manner.
• It is annual:
Investment expenses are spread over several years while current expenditure covers the fiscal year. It is important, therefore, to ensure that details of investment expenses are clearly set out with projected costs for non-completed projects in the year ahead.
• The budget should also be contestable. All policy and funding should be regularly reviewed and evaluated in the light of determined priorities and performance of agencies. Nevertheless, it is difficult to fully challenge a budget and re determines budgetary allocations every year. In addition to technical and time constraints, this could also provoke a climate of political crisis/tension.
The development of Medium Term Expenditure Frameworks (MTEFs) is useful in that they provide an indication of government’s plans and priorities over a longer period of time than the one covered by the annual budget. This approach offers greater flexibility than incremental budgeting practice which can lead to a continuation of past inconsistencies and lack of contestability and responsiveness of the budget to societal changes and needs.
The process of compiling the budget should furthermore follow a clear and reliable schedule that is agreed upon in advance. The budgetary process includes the following stages:
• Drafting – negotiation within the executive at various levels, administrative and political, as well as consulting with parliament.
• Legislating – parliament reviews, possibly amends and adopts or rejects the draft budget.
• Implementation – revenues are collected and apportioned to departments for expenditure. * Evaluation and audit – the supreme audit institution assesses whether the budget as approved was implemented, efficiently and effectively. Parliament is also closely involved in this stage.
COMPOSITION OF THE NATIONAL BUDGET
Resources
Taxes:
• The taxation system needs to be designed in such a way as to ensure adequate budget revenue.
• In order to reduce the tax burden on the whole of the population, the tax base should be as wide as possible.
Loans:
Loans are often a major source of revenue required to finance the budget. It is important that such loans are properly authorized by parliament and that the government be fully accountable to it for their management. This means that the government must present in advance its borrowing requirements before parliament and that subsequent to obtaining such loans, must report back to parliament on their utilisation.

Deficit spending
Budget deficits may be required, for instance, to maintain essential social services but the ultimate objective should be to have sufficient revenue to cover all expenditure. In order to keep deficits at manageable levels, a variety of methods have been used individually or collectively. These Include:
• Increasing taxes, with the disadvantage of discouraging investment;
• Cutting expenditure, this may lead to a reduction in the provision of essential services;
• Spending efficiently: that is ensuring that the government gets value for money;
• Restructuring the country’s debt to achieve the lowest possible debt servicing cost;
• Increasing the tax base by bringing in more taxpayers through the stimulation of economic growth and by curbing tax evasion.
• Legislating to put a mandatory limit to the deficit as a percentage of the overall budget.
Supplementary budgets
Efforts need to be made to minimise recourse to supplementary budgets (continuous budgeting) which are often used by governments to finance expenditure that is not initially authorized by parliament. They often contribute to aggravating budget deficits. Fiscal responsibility is therefore called for and governments are encouraged to make sure that budget formulation is as thorough as possible to ensure that all foreseeable expenditure and revenue is properly budgeted. Account should also be taken of all factors that may have a negative impact on the economy.
Continuous budgeting can also be minimised by reforming and tightening budget expenditure; tracking implementation by requiring the government to present regular (for instance monthly) expenditure statements; giving greater publicity to government assumptions upon which budget proposals are based.
Public participation informs the process and helps the government to correct or adjust those assumptions.
Donors also have an important role to play in ensuring greater predictability and stability in capital flows thus allowing for better planning and better budgeting.
Decentralisation
In recent years, decentralisation and the devolution of centrally managed functions to lower level government units has been recognized as an important element of public sector reform and a means of achieving budget efficiency. Decentralisation of budget management generally allows for more equitable distribution of resources and makes it possible to respond more equitably to the needs of minority and underprivileged groups. The development of decentralised budgetary units should be accompanied by the creation of adequate oversight and accountability mechanisms and effective regulatory systems.
Why should parliaments be involved in the budgetary process?
• Legislative approval of the budget is a constitutional requirement. The Parliament has an essential role as the link between the public/taxpayer and the government that spends the money.
• As the representative of the people, parliament is the appropriate place to ensure that the budget reflects the priorities of the nation.
• Checks and balances support transparency and good government.
• Participation can build consensus over difficult choices and trade-offs.
• Participation can improve policy, if well designed and structured.
Requirements for a transparent budgetary process
A transparent budgetary process calls for:
• A sound legal framework
• Clear roles and responsibilities in the budgetary process
• The provision of thorough and clear information
• An open budget process
• Independent checks and balances
Ensuring accountability
Accountability is achieved through a system that takes detailed, informative and understandable budget estimates as its point of departure. It requires subsequent yet timely submission of clear performance reports by the government. In addition, there should be public audit reports that present relevant information in a manner that is useful to the reader. On the basis of this information, parliament can exercise its oversight function by examining the information at its disposal in an open manner and by reaching conclusions with recommendations that are subsequently acted upon. The whole system is based upon respect for the public’s right to information.
The public audit should be carried out by a supreme audit institution, for instance the auditor general. This institution should not be part of the government structures and the auditor general should be appointed through a mechanism, preferably by parliament that ensures his /her total independence.
WHAT PARLIAMENT NEEDS TO PERFORM ITS BUDGET FUNCTION
In order for parliament to play an efficient role in the budget process a number of conditions need to be fulfilled. An appropriate constitutional and legal framework (constitution; laws; rules of procedure; standing orders) should be established that enables parliament to operate in an unhindered and independent fashion.
Parliament must have the financial, material and human (professional support staff, experts, analysts from civil society and academic) resources needed to carry out its missions. In this context, the financial autonomy of parliament must be upheld in theory and in practice. The executive is not to judge the suitability of the resources requested by parliament to carry out its functions. Parliamentary oversight of the execution of the budget should be entrusted to a committee of MPs in which the opposition is well represented.
CONCLUSION
In conclusion, civil society can be an ally and partner of parliament in making the budget process more transparent. Parliament provides a key potential forum for participation and a platform for public debate. Through that debate the public can be made to understand some of the difficult trade-offs that are involved making choices and would therefore be willing to accept the final budget. Public debate provides the opportunity to build consensus through participation. Once the media and civil society organisations see there is an opportunity to come to parliament, greater participation is likely to enhance the quality of contributions and reporting.
Finally, this section of the report also deals with the consequences of decentralization and its implications for the budget process. The role of parliament in the budget process is one of the cornerstones of my report. It explains why parliament should be involved in the process, lists the different approaches that exist and reckons the fundamentals for effective parliamentary involvement. Throughout this I have made the point that a strong parliamentary committee system is a precondition for efficient and effective parliamentary involvement in the budget process. This is reflected in the report, which elaborates on the manner in which parliamentary committees are they public accounts, public enterprise, budget, estimates and/or subject committees can work and cooperate amongst each other during the budget process.