R. O. Khalid
Efforts to coordinate long-term plans and annual budgets made common cause under the popular banner of cost benefit and systems analysis. The basic idea behind these analytic techniques is to focus attention and debate on objectives, programs, program alternatives, output measurements, inputs, and alternative ways to do a given job. The application of the techniques also makes it possible to cope with the enormous burden of data analysis imposed by development planning and the sheer growth of governmental activities and expenditure. The new techniques furnish a methodology for analysis of alternatives and thereby expand the range of decision making in planning and budgeting. In many developing countries, however, the new analytic techniques are not used to their best advantage. The argument pursued in this article is that this is often an administrative problem that could be resolved through the implementation of the operational framework presented in this article. The framework is followed in some form or another in India, Indonesia, and Malaysia, among others. It would therefore seem worthwhile for other developing countries to consider such an approach.
The processes of formulating the annual plan, evolving the budget, and ensuring a substantial degree of conformity between these and the medium-term development plan are intimately interlinked with the structure of the planning machinery and the administrative organization and processes of the finance agency in individual countries. Although each country may have its own distinctive approach to both planning and budget formulation, certain common features are easily identifiable.
Both budgets and national plans have processes of their own. Budgeting ideally involves (1) the appraisal of various governmental activities in terms of their contributions to national objectives; (2) the projection of government activities over an adequate time period; (3) the determination of how these objectives can be attained with minimum resources; and (4) the revision of the budget in the light of changing circumstances and experiences. In its end product, the budgetary process represents the problems, the information relevant for solutions, and the administrative structure through which decisions would be implemented, controlled, monitored, and evaluated. Planning in its simplest form can be defined as organized rational thought that is helpful in the determination of the national objectives. As such it is difficult to separate planning and budgeting. Budgeting without elements of planning would result in “budgets” that lack focus. On the other hand, plans that do not have a realistic recognition of the budgetary constraints would have little functional value.
There are several differences, however, in the organization of the planning and budgeting processes. All budgets are plans, but not all plans are budgets. The concern of budgeting is with the content of the annual plan, the programs to be included, and the resources (financial, human, and material) that are needed for implementing the programs. The methods of analyzing the choices in this process vary. More significantly, the preparation of the budget takes place within a specified, and often brief, period which makes the approaches inductive and detailed. Planning, on the other hand, is done over a longer period and is concerned with medium-term tasks and broad aggregates, and as such the approaches tend to be deductive. Thus, these two should essentially be complementary. In practice, however, there are a number of areas where conflicts arise.
The conflicts stem from a wide variety of factors. First, the planner is often considered as a big spender who would be prepared to spend any amount to achieve the needed rates of growth. The budgeteer is, on the other hand, considered as one who would be more inclined to reduce expenditures. While extremes of these have been assumed in theoretical discussions and straw stereotypes have been erected, in real life the lines are not so clearly drawn. Indeed, the reverse of the situation is experienced in some countries. There is, however, no gainsaying the fact that some conflicts do arise due to the differences in the professional backgrounds of the officials working in these respective areas. Another factor contributing to conflicts is the role of the planning and budgeting agencies in policy formulation. Since both are entrusted with wide policy responsibilities, there is rivalry between the two. What emerges is a struggle over the process by which decisions or policies will be made rather than over their substance. The conflicts are compounded by the fact that budgeting is a relatively well-institutionalized process with time-honored traditions and practices. Planning machinery is comparatively new.
In order to avoid conflict (or, alternatively, contain it), it is often suggested that the two functions should be integrated. However, there are fundamental differences between the perspectives of economists and those oriented to political science or public administration. Economists plead that the two organizations should be merged into a single unit. If that merger is not possible, they argue that policy analysis should be woven into the annual budget cycle. Political scientists contend that an organizational integration would not be feasible and would risk stifling the imagination of the planner by imposing budgetary restraints or would, alternatively, risk developing irresponsible budgeting through the exercise of unrestrained imagination. It is further pointed out that integration of policy analysis with the annual budget cycle would inevitably result in a situation where policy analysis would be lost in routine and ritualistic budget review.
There is, undoubtedly, a good deal of validity in these arguments against merging the two organizations. However, given that in most countries planning and budgeting have a separate existence, it seems more fruitful to devote attention to the development of coordinating devices between the two processes rather than to try to merge them into a monolithic and unwieldy machinery. Such coordinating procedures are needed to synchronize techniques with the administrative and political processes and to integrate the dispersed activities of planning and budgeting.
The design of coordinating procedures requires the breakdown of the budget process into a sequence of stages, depending on the nature of the decision to be taken at each stage, and the technique of operation most appropriate for each of the various stages. The stages are not, of course, definitive—but are formulated taking into account the general experience of developing countries.
Budgeting in stages has certain advantages. First, it is less complicated to solve budget problems in a number of successive steps than to approach them within an integrated system of data. Second, budgeting in stages makes it easy to determine at what points in the process policy decisions relating to the long-term plan or the budget are required. Third, since the planning authority functions in stages, budgeting in stages makes it possible for effective coordination between planning, the operating departments, and the budget office.
The following order of operational procedures in the preparation of the budget would seem the most logical.
• First, the determination of the level of government expenditure for the next budget period.
• Second, the setting of general priorities among and within the various sectors or main fields of government activity by the planning authority.
• Third, the formulation of proposed projects by the operating departments.
• Fourth, the review and selection of projects by the planning authority.
• Fifth, the submission of financial estimates of the projects to the budget office for review and inclusion in the budget.
• Sixth, the establishment of the final form in which the budget estimates will be presented to the legislature.
• Seventh, the discussion and authorization of the budget by the legislature.
Each of these stages calls for different techniques of operation and analysis. This article will not deal with this aspect except in general terms, since these are matters that will have to be determined in the light of individual domestic factors, such as the administrative capacity of the various agencies and the availability of trained personnel. Our primary concern here is to identify in general who is deciding what, and the procedure that should be adopted to enable the various agencies involved in the process to coordinate their decisions, and to control the implementation of the policy on which agreement has been reached. A more general statement of the decision flows is shown in the chart.
A rational point of departure in budgeting is a tentative decision as to the level of government expenditure that would best contribute to the attainment of development objectives and economic stability. Of course, it would not be feasible to make a definite decision on this problem without adequate information on the expenditure needs of the various sectors (stage 2) and of various projects (stage 3), the general economic conditions of the country, and, more important, the resources available or likely to be available in the next budget period. Establishing a tentative total, however, should be the starting point for budget preparation for operational reasons.
At the beginning of the budget preparation period the planning authority should decide on an initial target for the development plan outlays. The figure could be the current year’s budget, adjusted for inflation. This tentative figure would allow the budget process to start early and to proceed without the risk of major changes in the estimates being made by the planning authority in stage 2, and by the operating departments in stage 3. The final decision on the ceiling should rest with national councils where all the parties concerned are represented.
Once the tentative figure for the following year’s budget is decided, the next step is to apportion it more exactly among the main fields of government activity in the various sectors, and perhaps by regions. It is of paramount importance at this stage to decide upon the priorities to be set among and within the major fields of government activity. Adjustments in the relative weight to be accorded to the various sectors should be left for the planning authority to work out later. At this stage, the operating departments and the budget office may have to accept the priorities of the sectors as given. In practice, however, the continuation of existing projects will greatly influence the distribution of available funds among the sectors. The ceiling allocated to the different sectors within the tentative total should be regarded at this juncture by the operating departments as formal, and they should prepare their projects under stage 3 on this basis. Only if this is done will the budget process acquire a stable basis and avoid time-consuming and unnecessary adjustments reflecting pressures from spending departments.
Development budget decision flows and sequences
After deciding on the sectoral priorities, the planning authority will issue general directives to all government departments and agencies, inviting them to submit projects for inclusion in the forthcoming budget within the ceiling fixed for their sector.
For operational reasons, the directives concerning the sectors and main fields of government activity must be fairly detailed to accord with the general organizational structure of the government. It is not sufficient to establish a ceiling for a broad sector, such as education, for instance, without indicating the priorities to be given to primary, secondary, and higher education. The directive should identify in a narrative statement the areas of major program emphasis within each sector and by departments. It may even suggest the location of projects which the planning authority thinks desirable. The directive should also lay down specific guidelines and policies for the preparation of projects by departments, to ensure orderly presentation and the inclusion of such data as is necessary for adequate review by the planning authority and the budget office at stages 4 and 5. In this connection, it would be useful if the annual directive could provide a common framework for the presentation of data relating to the projects. The common data required may, for example, cover the following essential information:
• Identification, timetable, and summary description of the project (what is to be done, where, and when).
• Capacity and/or output of the project where relevant (what will be the result or product of the project, by when, and what is the estimated value of the output).
• The impact on foreign trade—export promotion and import substitution—and on employment.
• The budget implications: (1) total cost of the project by major categories of expenditure over the budget years, and (2) current expenses after completion.
• The proportion of foreign exchange and local currency components of the financial costs.
• The source of financing of projects, such as the origin and type of project aid, bank financing, internal resources, and budget resources.
Project preparation and selection
The preparation of projects is a highly technical matter which involves more than mere budgetary and financial considerations. In principle, the operating departments must prepare their own projects within the limits set by the general directives and submit their findings to the planning authority in the manner indicated. The planning authority’s task should be to review the proposals put forward by the departments and to select the projects to be included in the forthcoming budget. However, if the departments have no experience in this field, the planning authority should take an active role in guiding and training departmental officials in the preparation of their projects, to ensure that the projects are well prepared before they are officially submitted. At this point it is necessary to stress that the initiative of departments in project preparation should always be encouraged. Only in this way can departments grow to be full partners in the budget process and take responsibility for the preparation of projects and their implementation.
Copies of the data described earlier should be sent by departments to the planning authority and the budget office simultaneously. Before the planning authority decides on whether a proposed project should be included in the budget, it must examine its technical and economic feasibility. At the same time, the budget office should review the financial costs of the various projects and their implications for operational expenditure in the forthcoming years, and prepare a memorandum on this to the planning authority.
A serious attempt should also be made at this stage to estimate the financial resources likely to be available in the coming year. This estimate should perhaps be made by a joint board consisting of representatives of the ministry of finance, the planning authority, and the central bank. The board should try to estimate the amount of development finance that can be expected from foreign aid, public savings, and the rate of exchange that should govern the calculations.
It is the responsibility of the planning authority to collate all this information and to prepare a memorandum for the national council, so that a final decision can be taken regarding both total expenditure and sectoral ceilings.
The council, or the cabinet, on the basis of the memorandum submitted by the planning authority and on other relevant information on economic conditions and financial resources, would consider two basic questions in fixing the ceilings: (1) whether the accepted structural policy set out in the plan should be maintained, modified, or changed temporarily; and (2) whether the current economic situation demands changes in the form of either accelerated or delayed spending, increases or decreases in taxation and other sources of government revenues, or the adjustment of credit policies to suit anticipated developments in the private sector.
The final selection of individual projects for the forthcoming budget will be based upon, apart from the ceilings, such factors as consistency with the planning target, indirect and secondary effects, interdependence of projects, employment, gestation period, and impact on current operational expenditures.
When the selection of projects is complete, the planning authority should inform the departments and issue a list of “accepted projects,” which are forwarded to the budget office.
At this stage, the budget office is concerned with the detailed scrutiny of the financial estimates of accepted projects. This involves the examination of project costs by objects of expenditure—labor, machinery and equipment, materials and other supplies, land, and so on—in order to ensure economy and avoid waste. In this connection, it might be worthwhile for the budget office, in consultation with the public works department, to prepare and distribute to all departments common standards to be used in estimating the cost of government buildings and other public works.
The budget office is concerned with providing a means of securing accounting information necessary for control of operations. There should be a total ban on the inclusion of lump sum estimates. Only in this way can the common practice of piecemeal post-budget scrutiny of expenditure and, therefore, delays and frustrations be avoided.
In reviewing the financial estimates, budget examiners should bring to their assignment a background of experience that will enable them to pinpoint weaknesses in the data, unrealistic estimates, or nonconformity with government policies regarding such matters as procurement and contracts. The budget office should, on its own initiative, schedule meetings with departments to review and reconcile any differences. It may also happen that as a result of this scrutiny the total cost of accepted projects may be found to be larger or less than the funds made available in the initial stages. The planning authority would then be asked to pinpoint projects that could be added to or deleted from the initial list.
The final budget
After the estimates have been reviewed, the budget office should recast them in final form. There are two general principles to be observed in presenting the budget. The first is that it should be presented in such a way as to bring out clearly its relation to the plan. Second, it should contain sufficient information to allow proper financial and operational control. It is perhaps advisable that the appropriations should be shown in terms of specific projects. The appropriation relating to each project should show the project’s name, its location, the sector, the department responsible for execution, and a brief general description of the results to be attained by the end of the fiscal year.
After clearance by the cabinet, the budget in its final form will be presented to the legislature. At this stage it might, however, be worthwhile for the planning authority and the ministry of finance to consider the preparation of a “budget-in-brief” to accompany the main document for the benefit of the public, as well as others. This summary should describe the salient features of the budget, both routine and development, show the distribution of resources between the various sectors and their relation to the long-term plan, and explain major changes compared with last year’s budget.
Authorization and execution
The authorization of the budget by the legislature is, in effect, a directive for the attainment of certain objectives through clearly defined projects and activities. Since the essence of budget execution is to obtain certain objectives within prescribed cost limits, it is fitting that the budget authority should concern itself with both expenditure and performance. In controlling expenditure, it has to consider the authorization given by the budget office not as an instruction to spend the total amount of money, but as providing the wherewithal to obtain certain ends. However, the procedures through which it hopes to discharge its duty of linking money provisions to work accomplished must also ensure that disbursements are made without delay, and never withheld from departments unnecessarily.
Funds may be allotted quarterly to projects on the basis of the scheduled phases of work and actual accomplishments. While the budget estimates are proceeding through the legislature, departments should submit to the planning authority and to the budget office the planned program of expenditure and work to be accomplished in the first quarter for each of their projects. On the basis of this information the budget office will make the first quarterly allocations.
Requests for subsequent allocations will be made in conjunction with a progress report on expenditure and physical accomplishments, addressed to the planning authority with a copy to the budget office. The planning authority will examine the reports and note any deviations from work plans, trace the reasons, and advise on remedies. Meanwhile, the budget office may withhold or reduce allotments on the basis of the information given in the quarterly progress report on actual expenditure and physical accomplishments.