THE FORM in which a government’s budget is presented reflects to some extent official attitudes toward the various components of receipts and expenditures, and it also influences popular interpretations of the government’s program. In this respect the treatment of capital receipts and expenditures is especially important. A number of countries maintain separate capital and current budgets, and other countries accord special treatment by other means to at least a part of capital items. The advisability of introducing a capital budget has recently been under public discussion in several countries that have not used the device. At the same time, there have been indications that in some countries with established capital budgets the financial implications of the system are being reconsidered.
This paper explores the economic implications of a dual government budget system involving separate capital and current budgets. It reviews the purposes that such systems appear to be intended to serve and criteria for distinguishing between capital and current items. The influence of a dual budget system on the amount and composition of government expenditures and means of financing is examined. Attention is also given to the problem of measuring government expenditures, receipts, and surplus or deficit when a separate capital budget is employed.1
Mr. Goode, Chief of the Finance Division, was educated at Baylor University, the University of Kentucky, and the University of Wisconsin. Formerly economist at the U.S. Bureau of the Budget and the U.S. Treasury and a member of the faculty of the University of Chicago, he is the author of several articles in various economic journals.
Mr. Birnbaum, economist in the Finance Division, was educated at Ohio State University and the George Washington University. As a member of the Fund’s Statistics Division, he was formerly responsible for the statistics on government finance published in International Financial Statistics.
In its original form this paper included a series of notes describing the budget and accounting systems of Sweden, the Netherlands, Ecuador, the Union of South Africa, India, the United Kingdom, Canada, and the United States. The notes also contain some discussion of the significance that appears to be attached in official policy statements to the form of the budget. Mimeographed copies of the notes may be obtained from the Secretary, International Monetary Fund, Washington 25, D.C.
State trading or industrial enterprises usually employ commercial accounting methods, involving capital accounts, regardless of whether a separate capital budget is maintained by the administrative departments of the general government.
The terms “operations budget,” “current budget,” and “revenue budget” are often used interchangeably, and this practice is followed in the present paper.
An analogous procedure has been followed for power-generating facilities. The full construction costs of many projects, however, are still included in the budget when incurred.
For a discussion arguing that commercial accounting principles have only a limited relevance to government accounting, see Committee on the Form of Government Accounts, Final Report (London, Cmd. 7969, June 1950), pp. 74–76.
The analogy between a government and a household, of course, should not be pressed too far. Decisions concerning the amount of economic resources over which the government will attempt to gain command in any period are based on considerations and opportunities fundamentally different from those presented to a household.
This procedure involves asset accounting, but it carries no necessary implication that the capitalized cost exactly represents the “value” of the item or the future benefits from it.
Strictly speaking, interest costs on invested capital or a time discount for future benefits should also be imputed, but this refinement has usually been neglected.
Provided annual outlays for new capital had been constant for a period of years equal to the average depreciable life of the assets.
For preparation of a comprehensive estimate of net capital formation in the government sector, it would be necessary to take a complete inventory of state property at the time when a capital budget was adopted, and to make estimates of annual depreciation of the old items as well as to recognize the depreciation allowances set up for new assets.
This point has been stressed by James A. Maxwell in “The Capital Budget,” The Quarterly Journal of Economics (Cambridge, Mass.), Vol. 57 (1942–43), pp. 450–65.
As often stated, the rule holds that the maturity of the debt should ordinarily be approximately equal to the expected life of the assets. For many capital investments, this implies long-term borrowing.
The method of financing, of course, may have some future effects on capital supply and productivity.
To be sure, the policy involves proportionately large changes in private investment, but the division of national product between total consumption and total investment (including private and government items in both magnitudes) may be regarded as more fundamental.
Short-term securities are more liquid than long-term securities; hence their sale to the public and the banks is likely to bring about a smaller contraction of private expenditures.
United Nations, Department of Economic Affairs, Manual for the Classification of Government Accounts (New York, preliminary, July 1954), p. 127.
When stocks are acquired in connection with a government price-support program, their value may be somewhat problematical.
Provision of road services could be regarded as analogous to a government enterprise with user tax receipts being assigned directly to the road administration and the general government accounts reflecting only transfers between the treasury and the road administration; or receipts from user taxes could be first entered in general receipts and then transferred to the road administration on the assumption that they are roughly equivalent to amortization and maintenance of roads.
The first two items are often considered means of financing a deficit in the capital budget rather than capital budget receipts in the strict sense.
United Nations, Department of Economic Affairs, Budgetary Structure and Classification of Government Accounts (New York, February 1951), p. 12.
The Minister stated that increased reliance on taxation was justified by the greater maturity of the economy and suggested that, in deciding the extent to which capital outlays should be covered by current revenue, the country should be guided by the availability of voluntary private savings and the degree of inflationary pressure (Union of South Africa, Budget Statements, 1954–55 (Cape Town, 1954), pp. 12–13).
A. C. Pigou, A Study in Public Finance (London, 3rd ed., 1949), p. 36. Pigouconcedes that loan finance may also be appropriate for certain other nonrecurrentor irregular expenditures, but he does not suggest that any special attention should be given to the question whether they are capital items.
A peacetime example is the system introduced in the Union of South Africain the 1953–54 budget and abolished in the 1954–55 budget.
This is the practice followed by the International Monetary Fund in its International Financial Statistics, and by the United Nations in the compilation of statistics on “cash operations” published in its Statistical Yearbook. In the latter source, the difference between receipts and expenditures is called “balance.”
See, for example, Nederlandsche Bank, Report for the Year 1953 (Amsterdam, 1954), pp. 58–59, and Government of India, Planning Commission, The First Five Year Plan (New Delhi, 1952), pp. 59–60.
For a discussion favoring this definition over others, especially for underdeveloped countries, see K. N. Raj, “Definition and Measurement of Deficit Financing,” Indian Economic Review (Delhi), August 1954, pp. 34–51.
It is not intended to deal comprehensively here with questions relating to the scope of government budget accounts; hence no suggestions are offered on such questions as the adjustments necessary to incorporate properly the transactions of social security funds or other funds frequently unconsolidated in government budget accounts.