CHAPTER8 – BUDGET Important, Techniques & Process

CHAPTER8 – BUDGET Important, Techniques & Process • Definition & Important • Budgeting Techniques in Government • Budgeting Process at agency & ministry levels

Definition & Importance • Budget is a plan showing how resources will be acquired and used over a specified time interval. • All government agencies are required to prepare budget every year, as required by: - Articles 99 & 100 of Federal Constitution, - Section 15 of Financial Procedure Act 1957. • The procedure for preparation of budget is given in Treasury Instruction (TI) no. 29-51

Budget is used as an instrument for planning & management of national economic resources to satisfy society’s needs. • Prepared annually to implement socio-economic policies as contained in the 5 years development plans. • Budget in government is not only for planning government administration, but it also plays very important role to influence the economic position of the country & private sector activities.

FUNCTIONS OF BUDGET • Fiscal policy instrument • Allocation function- security, social, economic, administration, etc. • Distribution function –free education, free book, subsidies, etc. • Stabilisation function-zero-inflation, reducing unemployment, improve economic growth. • Management instrument • to manage financial resources-budget ensures objectives are achieved as planned; • budgetary and financial control document information in budget document help management to control cost & use of resources. • instrument for performance evaluation-to compare actual with budget and to see what have gone wrong so that appropriate action can be taken to correct the situation.

COMPONENTS OF BUDGET • National Revenues: • Federal revenues • State Revenues • Local Government Revenues. • National Expenditure • Management Expenditure; - Charged Expenditure - Supply Expenditure • Development Expenditure - large amount - long term - normally finance by loans.

Federal Revenues • Tax Revenues • Non-tax Revenues • Non-revenue receipts • Revenues from Federal territories

State Revenues • Revenues from land, mines & forest; • Revenue from certain licenses • Entertainment duties • as listed in Schedule 10 of the Federal Constitution

Local Government Revenues • Revenue from assessment rate • Revenue from water supply • Rental from properties • Interest from investments • Fines & compounds

BUDGETING TECHNIQUES • Traditional ( Incremental ) system (TBS) • Zero-based budgeting system (ZBB) • Program Performance Budgeting System (PPBS) • Modified Budget System (MBS)

DEVELOPMENT OF BUDGETING • Prior to 1969 TBS was used, • Due to numerous weaknesses of the TBS, a new technique PPBS was introduced in 1969 following the issue of Treasury Circular no.5-1968. • After 20 years of using PPBS, a study was conducted to overcome certain weaknesses of PPBS,

In 1990 Government introduced a new system, a modification of the PPBS, • The new MBS was introduced as pilot project in Ministries of Health, Public Works & Welfare, • Since 1996, the whole government has been using the system.

TRADITIONAL BUDGETING SYSTEM • Takes the last years spending & existing (current year) budget as the basis for next year’s budget, • Analyses the addition to the base for increase in cost of labour & materials, • To add for costs of new projects & programs. • Also known as “Incremental budgeting system”.

Assumptions in TBS • All activities making up last year’s spending: • Were essential to achieve the ongoing objectives, • Activities must be continued during the coming years & are more urgent than newly created programs, • are now being performed well and in most cost-effective manner, • will continue to be cost-effective and necessary in the coming year, • all increase are due to labour & material inflations,

Weaknesses of TBS • vagueness of objectives, • limited analysis to alternatives, • partial costing of programs, • inadequate consideration of future year implications of present decisions, • short review & decision period • emphasis on expenditure control instead of performance, • gap between planning, budgeting & control. • focus on $ expenses based on the previous year, • does not suggest any new method of doing things.

PPBS • started in late 1950s in the US by the US Secretary of Defense, Robert McNamara, • have been used by many developed nations, • is a system to help management make better decisions on the allocation of resources among alternative ways to attain government objectives.

Needs for PPBS • Increasing complexity of modern life • Demands of public for government has increased • Shortage of funds to meet the demands, • Need to determine priorities, design programs & control budgets.

Components of Program & Performance • Program includes: • Functions • Objectives • Activities • Responsibility center. • Performance includes: • appropriateness • adequacy • effectiveness • efficiency

Critical Features of PPBS • Definition of government objectives- as specific as possible, • Determination of programs, alternatives to achieve objectives, • Identification of major issues in the government. • Consideration of full system costs ( capital, current, & future costs ) • Measurement of benefits or effectiveness • Comprehensive presentation.

Elements of PPBS • Identifying objectives, • program planning & structuring, • developing performance indicator, • performance evaluation

Identifying Objectives • Identifying objectives is fundamental to PPBS approach. • Simply it means setting out in clear terms the purposes for which an organisation ( government agency ) exists.

For example: • Objectives of Ministry of Health is to raise health status of Malaysians by providing promotive, preventive health services. • Objectives of Ministry of Education is to educate Malaysians through a national education system to make them knowledgeable & responsible capable of enjoying a comfortable standard of living.

Identification of objectives forms the framework towards a better & meaningful planning; • It also encourages consideration in achieving the objectives; • Also enables managements to avoid duplications of functions of the various organisations within the department; • An efficient management is one which is able to identify & formulate to objectives in a clear, precise & concise manner.

Program Planning & structuring • Program planning involves the selection of best feasible alternative for the purpose of achieving identified objectives & reflecting it in terms of programs. • A program is a set of activities which have common objectives. • Program structuring refers to the hierarchical listing of programs, activities & sub activities which contribute to the achievement of objectives

Examples of Programs ( under ministry of health ): • Medical care service • Dental service • Manpower planning & training • Pharmacies & supplies • Research administration etc.

Examples of activities ( under Medical Care Service Program ) • General patient care • Psychiatry service • Leprosy service • Medical admin. & service.

Developing Performance Indicator • This is to evaluate financial & physical performance, • It involves identification & selection of suitable units of measurement which reflects the output of each activity & program in either qualitative or quantitative terms. • It also involves making comparisons between actual output for a given period with the planned or targeted output, & identifying the cause for any variance between the two.

Result will provide information as to whether programs have been realistically planned & properly managed.

Performance Evaluation • To assess the relevance, results & impact of programs of the agencies. • It is an important element for purposes of revising or modifying plans & involves the asking & answering of several questions: • Are the objectives of the programs realistic & reasonable ? • Has the programs been properly selected, Is it the best alternative for achieving the objectives? • Is it adequate in scope to solve the problems identified ? • Has the programs been properly planned in term of time & adequately provided with the necessary resources? • Has it been efficiently managed & executed. • Has the program been effective in relation to the objectives ?

Advantages of PPBS over TBS • PPBS makes budget as an instrument of expressing government policies through each of its programs. • More useful document to taxpayers & MPs since major emphasis is on programs, activities, work to be completed & costs. • Provide better information to parliament on effectiveness & management of ministry / department / agency. • Require government administrators & managers to think & plan in term of program objectives & the most efficient & economical way of attaining them.

Introduces the valuable element of long range planning on operating & development expenditures. • Improve coordination between economic planning & financial planning. • Systematic & continuing method of evaluating performance. • Facilities setting budget priorities between competing programs

ZERO-BASED BUDGETING SYSTEM • All managers analysis their operations in terms of: • objectives • alternatives • performance measurement • incremental costs / benefits • start from zero

Suitable to organisations with financial crisis • requires managers to decide which activities/functions should be performed; • and to match resources with activities.

ZBB Process • Develop planning assumptions • identify decision units-groups of similar activities, • analysis each decision unit-in term of objectives & current operations.

Review & reallocate resources, • prepare detailed budget • evaluate performance - financial & non-financial

MODIFIED BUDGET SYSTEM • Is the modification of the PPBS • to overcome certain weaknesses of PPBS specially program evaluation stage which could not be implemented in full • its introduction was first announced by government through Treasury Circular no.11, 1988.

Treasury Circular no.8, 1990 announced implementation of MBS pilot project by 3 government ministries. • MBS is based on two fundamental management principles as follows: • managers should be given as much authority / flexibility as possible.

Line managers should be more motivated to produce better output, • more responsive -fewer delays in decision making & implementation. • Authority must match with accountability - simply giving authority without accountability will result in abuses.

Weaknesses in Implementing PPBS • Goals 7 objectives not clear, • budget as an allocation tool not as management tool • performance achievement is not significant, • lack for planning.

Objectives of Modifications • To improve allocation of resources to ministries & programs by streamlining & rationalising the decision process. • To bring about more efficient management of government programs through better management practices. • To facilitate accountability.

Main Elements of the Modification • Expenditure target, • program agreement & exception reports • Cycle of program evaluation, • A more generalised approach to expenditure control

Expenditure Target • E.T. represents Treasury estimate of the base level of resource a ministry/ department/ agency requires to control programs as in the previous year. • Total allocation of funds based on: • expenditure target for existing policy • adjustment for salary increments, inflation & exchange rate,

Plus allocation for approved new policies, • less’ one offs’ ( unavoidable & non annual expenses ) • less efficiency dividend ( efficiency improvement related to learning effect & implementation of improved methods ).

Benefits of Expenditure Target • Immediate recognition of government fiscal position, • financial disciplines are increased by forcing agencies to decide priorities within overall budget constraints,

Budget officers have more time to become involve in matters of program output & performance, • greater opportunity for ministries to take a more top-down approach to budget preparation & to use budget as a management tool.

Program Agreement & Exception Reports • A program agreement is like a contract between a manager & a subordinate manager to whom certain authority has been delegated, • the manager requires the subordinate to be accountable through submission of progress periodic reports.

These reports are prepared on an exception basis, • a program agreement can exist between any two levels of management • provides information on agreed target for the input, output & impact.

Exception Reports • Are the means by which a subordinate manager keeps the boss informed of progress against a program agreement; • ER identify indicators for which performance is inconsistent with the agreement target;

The extent to which such performance is inconsistent, the reasons of inconsistency; • action that are to be taken to remedy the situation,

Benefits from Program Agreement & Exception Reports • Improve accountability at all levels of management through: • compliance with rules & regulations • efficiency & effectiveness of programs • emerging problems can be identified earlier;

Exception reports provides information to the boss of areas where problems may be developing. • Highlight areas of relative strength the & weaknesses to enable management make better decisions.

CHAPTER8 – BUDGET Important, Techniques & Process