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Budgeting in Public Sector

Revised : March 2013 Semester 2 Year 2012/2013. Budgeting in Public Sector. Week 4 – Seminar 1. Public Sector Accounting. Sigit Pamungkas, SE., MCom. Budgeting in Public Sector.

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Budgeting in Public Sector

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  1. Revised : March 2013 Semester 2 Year 2012/2013 Budgeting in Public Sector Week 4 – Seminar 1 Public Sector Accounting Sigit Pamungkas, SE., MCom

  2. Budgeting in Public Sector • Budget represents the short-term plan of public sector organisationthat is expressed using financial forms. • Budgets in public sector organisations(particularly in government), are represented in APBN (AnggaranPendapatandanBelanja Negara) and APBD (AnggaranPendapatandanBelanja Daerah). • Budget describes the future financial plan of the government, by stating the amount of revenue, expenditure, surplus/deficit, the financing, and the work plan and activities to be carried out.

  3. Budgeting in Public Sector • Budget in the public sector is not a type of secret document (as in the private sector), but it is a public document that should be able to accessed by the public in a transparent manner, and even allow the public to participate in giving feedback, criticize and debating. • Public sector budget should be participatory, means involving the community in the budget planning process (through socialization and public hearings), so that the public needs and aspirations can be accommodated in the budget plan. • Budget is a blue print of an organisation that describes the annual work plan to be carried out and is part of the long-term development plan to be realized (according to the strategic plan).

  4. Budget Definition “Anggarandapatdiinterpretasisebagaipaketpernyataan yang berisiperkiraanpenerimaandanpengeluaran yang diharapkanakanterjadidalamsatuataubeberapaperiodemendatang” (Indra Bastian, 2001) “…rencanaoperasikeuangan, yang mencakupestimasipengeluaran yang diusulkan, dansumberpendapatan yang diharapkanuntukmembiayainyadalamperiodewaktutertentu” (General Accounting Standards Board) “Anggaranmerupakanpedomantindakan yang akandilaksanakanpemerintahmeliputirencanapendapatan, belanja, transfer, danpembiayaan yang diukurdalamsatuan rupiah, yang disusunmenurutklasifikasitertentusecarasistematisuntuksatuperiode” (PP No.71 Tahun 2010 tentangStandarAkuntansiPemerintahan)

  5. Budget Functions in Public Sector

  6. Budget Functions in Public Sector • 1. Planning tool • A budget is a planning tool to achieve organizational goals. Public sector budget is to plan what action will be taken by the government, how much it costs, and how the results obtained from government spending. The budget as a planning tool used to: • Formulate goals and policy objectives to fit with the vision and mission. • Planning a variety of programs and activities to achieve organizational goals and to plan alternative source of financing. • Allocate funds to the various programs and activities that have been arranged. • Determining the level of achievement, performance indicators and strategies.

  7. Budget Functions in Public Sector 2. Controlling tool As a means of control, the budget provides a detailed plan for revenues and expenditures so that expenditures made accountable to the public. Without a budget, the government can not control the dissipations on government spending. 3. Fiscal policy tool Budget as a tool of government fiscal policy which used to stabilize the economy and promote economic growth. Through the public budget we can identify the government fiscal policy directions, so businesses can make necessary predictions and estimate the economic growth.

  8. Budget Functions in Public Sector 4. Political Tool The budget is used to decide the priorities and financial needs to fulfill those priorities. In the public sector, the budget is a political document, representing a commitment between the executive and legislative in using the public funds for public welfare purposes. 5. Coordination and communication tool Each unit of government involved in the budgeting process. Public budget is a means of coordination among parts (working units) in the government. A well-prepared public budgets will be able to detect the inconsistency (goal conflict) of a working-unit in achieving organizational goals (goal congruence).

  9. Budget Functions in Public Sector 6. Performance assessment tool A budget is a commitment form of the budget holder (executive) to the authority (legislative). The Executive performance will be assessed based on the achievement of budget targets and the efficiency of budget implementation. Performance of public managers is measured by the success he/she achieved in meeting the targets and programs, and its relation to the budget usage. 7. Motivational tool The budget can be used as a tool to motivate managers and staff to work economically, effectively and efficiently to achieve organizational goals and objectives which have been determined.

  10. Characteristics of Public Sector Budget • The budget is expressed in monetary units. • The budget generally covers a specific period of time, could be annual (one year) or more. • The budget contains a commitment or management's ability to achieve the determined goals. • Proposed budgets are reviewed and approved by the higher authority. • Once drafted, the budget can be changed only under certain conditions.

  11. Principles of Budgeting in Public Sector Comprehensive Accurate Authorisation by Legislative Nondiscretionary Appropriation Integrity of the budget Open to Public Periodical Clear

  12. Principles of Budgeting in Public Sector • Authorisation by Legislature. Public budgets must obtain authorization from the legislature (DPR/DPRD) before the executive (PemerintahPusat/Daerah) can use the budget • Comprehensive. The public budget must show all government revenues and expenditures plan. Therefore, the emergence of non-budgetary funds basically violate the comprehensive principle in public budget. • Integrity of the budget. All government revenues and expenditures should be collected and presented in general fund.

  13. Principles of Budgeting in Public Sector • Nondiscretionary appropriation. The total budget approved by the legislature should be used economically, efficiently and effectively • Periodical. The budget is a periodic process, can be annual or multi-annual basis • Accurate.Budget estimates should not include hidden reserves (over budget), which can lead to budget waste and inefficiency and can also lead to inappropriate budget estimation (underestimate revenues and overestimate expenditures) • Clear & Understandable.Budget should be simple, understandable and not confusing people • Open to the public (Transparency).Budget should be informed to the public

  14. Type of Public Sector Budget Public Sector Budget Operational Budget Capital/ Investment Budget

  15. Operational Budget • Operational budget is used to plan the day-to-day necessities which are required to run the government functions. • Government spending which can be categorized in operational budget is called as routine expenditures (belanjarutin). • Routine expenditures are the expenditures that benefit only for one fiscal year and their use can not increase the value of assets or property of the government. • So-called "routine" because the nature of these expenditures are repetitive (always budgeted every year). • In general, the expenditures which can be categorized as operational budgets include general administration expenditures and operations and maintenance expenditures.

  16. Capital/Investment Budget • Capital budget shows a long-term agenda and expenditure plan on fixed assets such as buildings, equipment, vehicles, furniture, and so on. • Substantial capital expenditure plan is usually done using a loan. • Investment/capital expenditure benefits are likely to exceed one fiscal year and will increase government assets or properties, and will further increase the regular budget for the operational and maintenance costs. • Due to the prominence of public services which related to infrastructure development/large capital usage, the budget serves as a political tool used to decide priorities and financial needs.

  17. Planning, Controlling & Budgeting • Planning and controlling are two things that can not be separated. • Planning looks at the future in determining what action should be taken to realisecertain goals. • Controlling see what happened in the past, which is assessing what has been produced and compared with the plans that have been prepared. • Budget is a major component of financial planning for the future, includes strategies and actions to achieve goals

  18. Planning, Controlling & Budgeting Planning Controlling Strategic Plan Monitoring actual activities Long-term Goals Comparing the actual results with the planned goals/expectations Short-term Goals Short-term Plan Investigation Budget Corrective actions Implementation & Results Feedback

  19. BUDGET PROCESS Data collection, review of data, measurement of economic feasibility, constraints, assumptions and other inputs Determination of objectives, targets & policies Reporting & monitoring program (making adjustment & evaluation) Long-term, medium and short-term program development Projections and forecasts, formulate criteria for selecting the program, as well as select the supporting programs Measurement & Evaluation Assignment of special responsibility: Achievement of targets within a specific time/cost requirements Long-term, medium and short-term financial planning Identification, preparation & project appraisal Budget implementation Resources allocation Economic, financial and program analysis, comparisons between the physical and financial aspects, etc. Short-term changes in the budget, and relocation of resources

  20. Budget Arrangement Process Budget Planning Reporting & Evaluation Ratification Implementation

  21. Budget Arrangement Process • Planning • Top down vs. Bottom up approach • Compile the list of budget implementation plan (DaftarIsianPelaksanaanAnggaran/DIPA) • Ratification • Discussion and approval by the legislature as part of the implementation of the budget right • Implementation • Administration to propose budget disbursement based on DIPA • Perform accounting functions to record the use of budget funds • Reporting & Evaluation • Preparing the Budget Realization Report (LaporanRealisasiAnggaran) and the Report of Operations (LaporanOperasional) • Responsible for the implementation of the budget to the legislative council and the public

  22. Public Sector Budget Types • Traditional/Conventional Budget • Line Item Budgeting • Incremental Budgeting • Budget using New Public Management (NPM) approach (focus on performance) • Planning Programming Budgeting System (PPBS) • Zero Based Budgeting • Performance Budgeting

  23. Traditional Budget vs. Public Budget Using NPM Approach

  24. Line Item & Incremental Budgeting • Line item is a budget system that presents the budget expenditures based on its input or resources being used. • Line item budget focus on measuring the amount of budget uptake (economy aspect) but does not measure the effectiveness and efficiency of the organisation’s performance • Incremental budget is a budget system that simply reducing the amount of the budget by comparing it with the amount of the previous year's budget as a basis to prepare the current/upcoming budget. • Incremental budget may be useful to draw up an operational budget that covers routine expenditures, but this not system may not appropriate for capital/investment budget.

  25. Planning, Programming, Budgeting System (PPBS) • Planning, Programming, Budgeting System (PPBS) or also called as Program Budgeting should lead to better managerial planning and control because resources could be allocated more precisely to specific activities, and actual achievements could be monitored more effectively. • Program budgeting emphasizes on planning, and it also embraces control and management functions. • Program budgeting seeks measures of program output, or achievement of objectives, that can be related directly to the increments of input, or cost.

  26. Zero Based Budgeting System (ZBB) • ZBB is a budget system to start from scratch, or make each budgeting year as the basis for a new budget preparation, without using previous budget as a benchmark for preparing the new budget. • Advantages of using ZBB system is that the budget can be prepared by calculating the real requirements of each activity/program to be run. • Weakness of using ZBB is associated with the complex preparation of the budget and difficulty in its implementation, because the program which will be implemented by the government is not necessarily a new program, or starting from scratch

  27. Performance Budget • Performance Budgetis a budget system that takes into account the relationship between the budget (input), output and outcome achievements. • Budgeting system is structured by associating each budget activity / program with performance targets, performance indicators, performance outcomes, standard of unit price (standarsatuanharga), expenditure standard analysis (analisisstandarbelanja), and minimum service standards (standarpelayanan minimum)

  28. Brief Review & Pre Mid-Term Exam Preparation

  29. Pre mid-term exam components Topics that will be covered in this exam include: • Public Sector Environment • Characteristics of Public Sector • The Concept of New Public Management (NPM) • Value for Money (VFM) concepts • Public Sector Management Accounting • Budgeting in Public Sector

  30. Pre mid-term exam components • Total 5 questions (total mark 100 points, this exam weighs 15% of total final grade): • 3 short-answered questions (one question weighs 20 points, and two questions weighing 15 points for each) • 2 essay questions (25 points for each) • Duration 90 mins; closed book exam • One essay question will be related to the article written by I WayanMonoyasa, “Mewujudkan Good Governance di Era OtonomiDaerah”

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