Wolaita Sodo University

College Of Business and Economics

Department Of Public Administration and Development Management

Lecture Power Point

Course Name: Public Financial Administration And Budgeting
Academic Year: IV Semester I
Chapter: Three
 The Budget Cycle/Process

 The budget process is an ongoing complex procedure

involving important policy statement, planning, and socio-
economic priorities, monitoring and reporting processes.
 Moreover, the budget process consist activities that encompass
the development, implementation, and evaluation of a plan for
the provision of services and capital assets.
The budget and its process is also important document in
ensuring transparency, accountability and good governance.
 Cont…
Characteristics A good budget process

Incorporates a long-term perspective

 Establishes linkages to broad organizational goals

 Focuses budget decisions on results and outcomes

 Involves and promotes effective communication with

stakeholders
Phases of Budget Cycle/Process

 The budget formulation/preparation stage involves the drafting

of the budget by the executive.
 The economic forecast and the program and financial plans are
prepared for the various departments. Economic data and
statistics are utilized in developing projected revenues for the
upcoming fiscal year.
 The approval stage involves the deliberation of the budget and its
passage into law through a legislative process. During the
Enactment stage: Public expenditure may be increased and
decreased and Public revenues may be increased or decreased.
 The execution stage is carried out by the executive over the duration of
the fiscal period to which the budget law applies.
 Cont….
 The executive collects revenue and spends money as per the
allocation made in the budget law.
 At the evaluation stage, an independent auditor reviews the final
budget documents and checks the consistency of the documents
with the authorizations made earlier at the time of legislative
approval.

 Audit findings are reviewed by the legislature, which requires

action to be taken by the executive to correct audit findings.

 The four phases recur, so at any time an operating agency will be in

different phases of different budget years.
 3.1 Budget formulation/preparation

 A typical budget process begins with the ministry of finance preparing a

macroeconomic forecast (with the involvement of the Central Bank and
national statistical organizations in many cases) and revenue projections for
the year, which provides guidelines for recurrent and capital spending.

 These guidelines determine the level of total affordable government

expenditure as well as subtotals according to sector or program.

 Difficult economic conditions usually mean an instruction with limited

prospects for expansion of existing programs or the development of new
programs and possibly instructions to reduce spending.

 The ministry of finance then sends out a budget call circular to the line
ministries and invites bids for their spending needs.
 Cont…
 Countries with systems of a federal type (in which various
powers and responsibilities are shared between central and
provincial authorities) tend to have three dominant levels of
budget authority: Central, State or Province and local.

 Redistributive systems of allocation usually operate on at

least two levels: between the federal and state/provincial
governments, and between state/province and local levels
(such as Districts and Municipalities).
 Some of the approaches that can be used for influencing the budget
drafting stage are given below:

 Costing of proposed policies or legislation: Includes estimating future

needs and resources to support the planning process.

 Marginal Budgeting for Bottlenecks: Utilizes knowledge about the

impact of interventions, identifies implementation constraints, and
estimates the marginal costs of overcoming these constraints.

 Sectorial analysis of budget allocations: Analyses the impact of the

budget on specific sectors or socio‐economic groups.

 Analysis of fiscal policy and revenues: Assesses the distributional

impact of proposed taxes or the sustainability or sufficiency of revenue
proposals to fund proposed expenditures.
 For the budget process to meet its expectations, the executive presentation for
legislative deliberation should:

1. Be comprehensive (i.e., cover all government revenues and expenditures),

2. Be transparent (i.e., present a clear trail from details to aggregate summaries

of revenue and expenditure so that the implications of policy proposals and
operating assumptions are clear),

3. Establish accountability (i.e., clarify who will be responsible for funds, in

what amount, and for what purpose),

4. Avoid revenue dedications (earmarks) or other long-term commitments that

could hinder response to new priorities or problems, and

5. Establish as clearly as possible for what public purpose (i.e., desired result,
not administrative input) the funds will be spent.
 3.2 Legislative Review and Authorization
 In governments with distinct legislative and executive branches, the
budget document is transmitted to the legislature for debate,
consideration and final decision.

 In bicameral legislature budget hearing usually begins in committees of

the lower house of legislature. Agencies may require defending their
proposal.

 The Chief Executor defends the whole budget. The budget is adapted by
legislative processes through a vote. The result of the budget vote is a
budget law in government. The budget law provides the appropriation
information for budget execution in the government financial system.
Cont….

 The budget law developed during formulation creates the

annual budget. The budget typically includes annual spending
limits that are aggregated by organizational unit, fund source,
project and type of expenditure such as capital or recurrent.
 The nature of the authorization granted by the legislature
depends both on the budget system and on the nature of the
expenditure
 The legal basis for appropriations is normally provided in
statutory law
 Appropriations may be grouped into the following broad categories:

 Obligation-based appropriations give rights to make commitments and to make

cash payments according to these commitments, without a predetermined time
limit. Such appropriations have their own life cycle and are not limited to one
year. This system is no longer used for all expenditures, but may be used for
special programs

 Cash-based appropriations give authority to make cash payments over a limited

period of time, generally corresponding to the fiscal year. This system is the
most widespread.

 Accrual-based appropriations cover full costs, Full costs are the goods and
services consumed (as opposed to be acquired) over a period. Therefore,
depreciation for physical assets, variations in inventories and variations in
liabilities are added to actual payments to calculate the full costs of a program.
3.3 Budget Execution/Implementation

 The third stage is disbursement of the approved budget to the

relevant agencies, implementation of planned activities, and
recording expenditure commence with the beginning of the
physical year.
 This is the process of the transfer and spending of the money
which ensures that activities can happen to reach the required
goals.
 During execution, agencies carry out their approved budgets:
appropriations are spent, and services are delivered.
 Budget execution is the phase where resources are used to
implement policies incorporated in the budget.
 It is possible to implement a well formulated budget; it is
not possible to implement well a badly formulated budget.
 Successful budget execution depends on numerous other
factors as well, such as the ability to deal with changes in
the macroeconomic environment, and the implementation
capacities of agencies.,
 Budget execution involves a greater number of players than
budget preparation
 .

 budget execution calls for:

i. Ensuring that the budget will be implemented in conformity

with the authorizations granted in the law, both in the financial
and policy aspects;

ii. Adapting the execution of the budget to significant changes in

the macroeconomic environment;

iii. Resolving problems arising during implementation; and,

iv. Managing the purchase and use of resources efficiently and

effectively.
 The Expenditure Cycle

 The expenditure process entails sequential actions taken by

officials with different responsibilities. The expenditure process
reflects the conf1icting desires in its five parts.

 First, policymakers decide on general expenditure. Second,

central finance officials and line officials communicate
expenditure authority from policymakers to operating officials.
Third, operating officials spend money. Fourth, officials
charged with controlling spending review expenditures. Finally,
treasury officials pay for expenditures; they put the check in the
mail. In actual situations, these activities overlap.
 Stages of the expenditure cycle

1. Communicating Expenditure Authority

 Expenditure authority is originally created by policymakers in a

formal statement.

 Authority to spend is communicated to operating officials,

frequently in a manner specified by standing rules or laws.

 Expenditure authority is incompletely specified in formal

documents. Policymakers provide flexibility to persons making
operating decisions.
 Cont…
 Communicating expenditure authority starts at the top. Usual
participants include the executive and a finance office or
treasury.
 Policymakers decide the broad outlines. Subsequent
communicators of expenditure authority add limits and
directions to those specified by the governing officials.

 These occur through six processes that communicate

expenditure authority: allocation, apportionment, allotment,
special approvals, transfers, and reprogramming. These
processes are widely but not universally used.
 Cont…

 Allocation, Apportionment, and Allotment

 Allocation, apportionment, and allotment are similar

processes and are often confused with one another
because of their similar names. All occur before or at
the beginning of a fiscal year.

 Allocation is the least common and results in a lump

sum of expenditure authority being divided into
expenditure categories.
 Allotment and apportionment differ from allocation in that
some expenditure authority is held and some transferred to
someone else.

 Apportionment is particularly concerned with time periods.

Apportionment is a distribution of expenditure authority by
central officials among major organizational units for particular
time periods by expenditure categories.
Cont….
 A brief recap of the three processes may make it easier to
keep them separate.

 Allocation involves dividing expenditure authority by

expenditure categories.

 Apportionment involves dividing expenditure authority

by time periods and possibly expenditure categories.

 Allotment involves dividing expenditure authority by

administrative superiors to their subordinates.
 Cont…
 Special Approvals

 Special approvals can be routine or a response to special

circumstances, such as budget difficulties or abusive use of
particular expenditures.

 Special approvals typically apply to specific categories, such as

travel, training, personnel, equipment, or large amounts of money.

 Travel and training are controlled for public relations reasons,

whereas personnel, equipment, and large expenditures are
controlled to deal with budget shortfall situations (e.g., a hiring
freeze.)
 Transfers and Reprogramming

 Transfers and reprogramming describe changes from expenditure plans.

 Transfers refer to the movement of expenditure authority between

expenditure categories. In the case of Agency X, a transfer might be
made from Personnel to Equipment.

 Reprogramming refers to changing plans on spending money within

an expenditure category. For example, Agency X might change its plan
to hire an accountant in favor of hiring an MBA graduate.

 Transfers occur between accounts, and reprogramming occurs within

accounts.
2. Spending

 In the private sector, money or a commitment to pay is exchanged for

some good or service.

 In the public sector, all decision making and communication of

expenditure authority are essential to the expenditure process.

 Actual expenditures take place only after operating officials determine

that they are authorized to act, have the money or resources to spend, and
have decided precisely how to proceed, that is, who to hire or what to buy.

 Public-sector organizations spend in three ways: when they make

commitments, when they incur obligations, and when they consume
resources.
3. Reviewing Expenditure Decisions

 Spending is further complicated by reviews. Reviews take place

before, during, and after spending.

 Routine reviews include accounting reports, disbursement reviews,

pre-audits, and post-audits.

 Special review efforts include budget reviews, campaigns to reduce

expenditures, and investigations of expenditures.

 Campaigns to reduce expenditures involve restricting

particular expenditures to assist an organization in
constrained budgetary circumstances. Investigations of
expenditures take place after problems appear.
4. Paying
 Paying money is usually called disbursement or disbursing.
Money takes different forms and so does disbursement.

 A treasury office or officials make most payments, whereas

operating officials make a few. Also, treasuries review
expenditures.
3.4 Audit and Evaluation

 An audit is an examination of records, facilities, systems, and

other evidence to discover or verify desired information. This
is performed by internal and external audits.
 Internal audits are those performed by professionals employed
by the entity being audited; external audits are performed by
outside professionals who are independent of the entity.
 The focus of auditing is to determine whether public funds
have been spent for the purposes which they were designated.
 A well-functioning evaluation system permits managers
to determine how the use of resources is contributing to
the achievement of objectives.
 Well-focused and properly timed evaluation can:
 Provide the information needed to bring about mid-course
corrections in programs and projects;
 Allow for the analysis and resolution of systemic or
policy issues
 Improve the design of future operations; and
 Contribute to strategic policy and program decisions.
 .

Thank you!!!