- A. Premchand
- Published Date:
- March 1989
© 1989 International Monetary Fund
Fourth Printing, July 1994
The International Monetary Fund publishes, from time to time, the research work of its staff members in book form with a view to making it available to a wider public and as a contribution to the discussion on the subject.
This book has two principal concerns—resources allocation in government and the effective use of those resources, and is addressed to policymakers, administrators, and students of public finance and public administration.
The views expressed in the book are those of the author and should not be construed as representing the views of the Fund.
The character of budgeting and the tasks of government have changed radically since the turn of the century. Although the traditional protective role of the state has continued, following World War II the tasks relating to reconstruction and development have become increasingly important. Over the years, the growing involvement of the state in the provision of social services and welfare programs, state ownership in industrial, manufacturing, and trading activities, and, more recently, concerns of demand management have added to the burdens of the government in budgeting and financial management.
Traditional studies on governmental budgeting have focused on detailed descriptions of government budgetary and accounting systems and on the working of the legislature and its supportive agencies, such as audit. Stourm's study of the French system, Durell's work on the British parliamentary system, and Willoughby's book on the U.S. system belong to this genre. During the 1920s and 1930s, literature on budgeting dealt at length with the administrative processes, with the relationships between the budgetary and financial agencies and the spending departments, and with issues of autonomy and delegation between the executive and the legislative branches and within the executive branch. The focus of research shifted somewhat during the interwar period, when budgeting began to be analyzed in terms of the economic functions for which it was responsible. Later approaches to the study of budgeting were influenced by the growth of national accounts, emphasizing the importance of formulating budgets within a macroeconomic framework. The adoption of formal development planning implied that greater attention was needed on the measurement of costs and on evolving budget structures that would better reflect the developmental activities. These imposed on budgeting new tasks and burdens that were in due course reflected in the reforms carried out by industrial and developing countries, as well as in the official and academic literature.
Since the 1960s, more efforts were directed toward the implementation of comprehensive budget reforms benefiting from the lessons learned from experience in such implementation. In analyzing the new budgetary issues and the responses of the systems, however, it appears that each discipline took a rather compartmentalized view of the working of the budgetary and financial institutions. Political science-oriented research studies were primarily drawn from or addressed to conditions in the United States and usually dealt with the political problems of control and strategies adopted in the context of congressional approval of budgets. Later, with the introduction of Planning, Programming, and Budgeting Systems (PPBS), these studies devoted more attention to conflicts between the executive and the legislative branches and the difficulties of obtaining political approval for systems that implied, in some measure, a shift of control from the legislature to the executive. Public administration studies, which hitherto had dwelt largely on the normative aspects of ideal organizations, were devoted to an analysis of the features of PPB systems, their antecedents, their operational implications, and their limitations.
Economists, for their part, concentrated their energies in the early 1950s and 1960s on developing appropriate criteria for the determination of public expenditures that, in practical terms, were limited to new investments on major projects. They achieved a major breakthrough in imparting an allocative bias to budgetary decision making through the PPB systems. These systems, which aimed at achieving allocative efficiency by integrating economic analysis, medium-term financial forecasts, and techniques of appraisal of expenditure with the normal budget cycle, reflected an ideal solution to the economist's concern for the role of government in resource allocation. With the premature “demise” of the system, or its inadequate implementation, however, economists turned their attention from institutional aspects to the continued study of tax policies, tax incidence, and the search for patterns of regularity to explain the determinants of public expenditure. Frequently, their attention is also devoted to the study of subsidies, transfers, growth in current expenditure, and its implications for public saving. By and large, economists as a group appear to have resigned themselves to a self-imposed martyrdom and to have disassociated themselves, during recent years, from the study of budgetary systems. Although, with the advent of public choice as a separate field of inquiry, attention is being devoted to the economics of political issues, the study of systems continues to be neglected.
The tasks of budgeting (and thus of budgeteers) have meanwhile become more complex and seemingly intractable. The concerns of the budgeteer are economic, political, social, and administrative in nature. His daily tasks constitute a mosaic that includes an element from each of these disciplines. His activity is the central point at which the disciplines merge, providing an empirical art form familiar to practitioners but novel to students. His concern goes beyond an administrative technique or an economic aspect and his contribution to policymaking is expected to provide a financial dimension that reflects economic realities as well as the goals of political leadership. His statesmanship lies not merely in providing solutions to immediate problems but also in a precise anticipation of the likely shape of things to come and in providing for a flexibility in policies. Since no other activity of government touches every member of society as does finance, he is expected to reflect the sensitivity of the common man. He also needs the imagination to convince his colleagues in government on every aspect of policy. He cannot be revolutionary, impulsive, or intuitive; he has to act in a gradual, rational, and, to a large extent, quantitative manner. These qualities demand understanding, patience, vision, courage, leadership, and a certain expertise in the dynamics of government. Obviously, no individual can combine all these elements within himself, but he must recognize that the interplay of the various forces is vital for the survival and effective functioning of the budgetary system.
Ideally, if the financial rules, regulations, and procedures of every government were implemented, there should be little problem in financial management. In practice, however, their implementation in the budget process reveals several problem areas. This book examines these issues that are at the heart of public policymaking. It discusses in detail the economic and administrative aspects of budgeting and their interplay. Formulation of economic policies without recognition of the institutional constraints is an open invitation to failure; emphasis on administrative aspects without recognition of the economic basis and purposes of policy is counterproductive. The chapters of this book delineate the role of each of these aspects of budgeting and their mutual supporting roles, while considering the theories, practices, and problems that arise in regard to them.
The book covers developments in budgeting and expenditure controls in industrial and developing countries, discusses the efficacy of budget reforms that have been introduced, and analyzes successes or failures and the current state of these reforms. Although the economic status of the two groups of countries differs widely, the concerns of budgetary policy and budgetary management of both the industrial and developing countries are the same. They relate to the utilization of budgets as instruments of national economic management, communicating the resource constraints to spending departments, reducing gaps between planned and actual expenditures, and achieving better control of open-ended transfers. The ramifications of these areas are considered in terms of the policy objectives, areas to be controlled, methods of control, checks and balances of the systems, and related aspects.
The book is divided into three parts. Part I considers the theoretical and practical aspects of budgeting, using a predominantly economic approach. The first chapter, which provides the background for the role and objectives of fiscal policy, is followed by a discussion of the nature of budgeting, determinants of public expenditure, functional aspects of budgeting, measurement of the impact of budget, approaches to decision making, and the problem areas of budgeting. Separate chapters discuss more specifically development planning and budgeting, expenditure planning and forecasting, budgeting for inflation, and short-term aspects of public expenditure adjustment. Part II, which deals with structures, systems, and financial management, is more administrative in its approach. Its four chapters cover budget structures, budget innovations, budget execution and cash management, and government accounting. Part III discusses budgetary relationships between the government and enterprises, and between the central government, and state or local governments. It illustrates the problems of multilevel decision making. Although some of these areas deserve more extensive treatment in their own right (and have indeed been so treated in the literature), the book aims at examining them only from the vantage point of government budgeting and, therefore, must treat some subjects in summary form. No effort is made to analyze the role of audit or to examine the aspects of legislative accountability, for they form independent areas of inquiry.
The gap between theory and practice reveals the shortcomings of both—each in its own way. Similarly, the lack of identification or understanding of the precise nature and magnitude of the problems—or the hesitant reaction, time-lapsed responses, and associated features—may suggest a degree of pessimism on the future of budgeting and its adequacy. The purpose of the book is not to present alternative systems but to consider the alternatives available and to assess their relevance. It should lead to greater understanding of budgeting for interested readers and should guide the practitioner toward better budget management.
The gaps in implementation and the practical problems discussed in the text, except where specifically indicated, are drawn from a composite picture of the experiences of industrial and developing countries. Although every effort has been made to provide documentation, it should be noted, however, that the statements are based on direct observation, personal experience, and casual empiricism.
Some terms used in the text have more specific or varying connotations in some countries. General terms are therefore preferred: for example, the terms administrative agencies, departments, spending ministries, and bureaus are used interchangeably. It is to be noted that the institutional features discussed in the text refer to the situation up to and during 1980–81. The principal emphasis is on examination of the broad institutional framework and of its capabilities for implementing fiscal policies.
In the course of writing this book, the author became deeply indebted to many friends and officials. Although the book in its present form was written during a sabbatical leave from the International Monetary Fund, when the author was a Visiting Fellow of Nuffield College and Queen Elizabeth House, Oxford University, some of the material had previously been presented to seminars conducted at the American Society of Public Administration, the Asian Development Institute (Bangkok), the Economic Development Institute (Washington, D.C.), the IMF Institute (Washington, D.C.), the German Foundation for International Development (Berlin), and the International Center for Public Enterprises in Developing Countries (Ljubljana), and had been published in the journals Economic and Political Weekly, Finance and Development, and Public Budgeting & Finance. Specific parts had also been presented to the First and Second Seminars on Budgeting and Expenditure Control, organized by the International Monetary Fund in Washington during 1980 and 1982. The author is grateful to the seminar participants, who have contributed a great deal to the making of this book. Thanks are also due to the International Monetary Fund for granting sabbatical leave and for providing numerous professional opportunities and challenges. The views expressed in the book are those of the author and should not in any way be attributed to the Fund. Richard Goode, then Director of the IMF Fiscal Affairs Department, and Vito Tanzi, Director of the Fiscal Affairs Department provided much encouragement. The Wardens of Nuffield College and Queen Elizabeth House kindly made available their facilities, and Lady Hicks, I.M.D. Little, and Maurice Scott at Oxford University were sources of encouragement.
The draft of this book was read by Richard Bird, Jesse Burkhead, Richard Goode, Allen Schick, and Vito Tanzi, and their detailed comments proved very helpful in improving the text. Mrs. Ella H. Wright edited a few chapters of the first draft. Miss O. Mary Price edited the major part of the first draft and the entire final draft. Mrs. Joan Ireton typed some chapters of the first draft. Mrs. Sonia A. Piccinini kindly undertook the typing of the manuscript through its various stages, including the final draft. Miss Judith Crillo prepared the index. I would also like to thank the Graphics Section of the Fund, in particular Mr, Hördur Karlsson, who designed the cover, and Mr. Alva Madairy and his associates for their contribution.