I. Fiscal Policy and Economic Stability

As already indicated, a major function of government transactions is their contribution to the stabilization of aggregate demand in order to counteract general inflationary or deflationary tendencies. Such a policy would involve forecasting of the way in which the principal aggregates of the national income can be expected to change during the financial year in the absence of changes in tax structure and government expenditure. Depending on the multiplier effect of a change in the various types of government receipts and expenditure, a budgetary measure necessary to attain a specific result could then be determined. However, the selection of specific budgetary measures for stabilization purposes in developing countries must have regard to the nature of economic instability in these countries, and to their probable impact on economic development. In other words, if we think of development as well as stability, we must concern ourselves not only with the size of aggregate demand but more specifically with the kind of demand, consumption or investment, public or private, and in what areas. We need, therefore, information that would make it possible for us to consider and to coordinate as much as possible both the stabilization effect and the development effect of government expenditure and receipts.

Although the goal of economic development is closely akin to what has come to be considered a primary goal of economic policy in advanced countries, in the developing countries the objective of economic development probably enjoys a greater priority than is assigned to the aim of creating full employment in the more advanced countries. This, plus the fact that in developed countries certain flexibility in government expenditure and other policy instruments exist which make it possible to meet the demands of contracyclical policy without impairing long-run policies, means that the conflicting nature of the objectives is much more serious in less developed countries.

Before recommending a design of budgetary information that would facilitate the coordination of stabilization and development policies, it might be useful to review in brief the nature of economic fluctuations and their effects on a developing economy.

In the industrial countries, business fluctuations are largely a “homemade” phenomenon, with the volume of private investment at the root of the problem. In primary producing, less developed economies, private investment is much less of a disturbing factor, as it constitutes a small part of total national income. The most important autonomous force and the leading component in the economic instability of primary producing countries are the fluctuations in the export proceeds of these countries. One might also add that the terms of trade of these countries fluctuate in such a way as to make real the movements in the money value of their exports. The terms of exchange between primary products and manufactured goods oscillate, of course, around a long-run trend. Whether this long-run trend itself has been deteriorating or not is a subject of considerable controversy among economists, but suffice it to say that the demand for raw materials tends to grow at a much slower rate than industrial output and the growth of real income in developed countries.⁴

The cyclical fluctuations in export proceeds are not, of course, confined to the export sector but through the multiplier process are transmitted throughout the economy. Meanwhile, the struggle for economic development is bound to be frustrated by the downward movements in income and demand and not less by the disturbances caused by inflationary pressures.

In boom periods, when the export earnings are high, most of the increased income will be spent, if no counterpolicies are pursued, on consumer goods. The increased demand will make itself felt not only on the market for domestically produced goods but also for higher imports. Since the greatest part of domestic production in these countries consists of agricultural products from small-scale farming, the supply is inelastic in the short run, and even somewhat in the long run too, because of the archaic methods of production and the lack of sufficient storage facilities and processing industries. Small-scale or light industries, which might be available in such countries, are likewise inadequately equipped to increase their production by employing idle resources in response to increased demand; and the situation is rendered even more difficult by the shortage of skilled labor. For the same reasons induced investments, except perhaps in the export sector, will remain small. As prices of domestically produced goods rise, their competitive position is thus weakened, and the demand for imports increases.

A serious disadvantage of these oscillations in income and demand in developing countries is that they tend to disrupt the development effort of the country and to create an inflation-prone economy. Government revenues derived for the large part, directly or indirectly, from exports and imports strengthen the pressures for increased public expenditure during boom periods; and since public expenditures, especially current expenditures, have a way of maintaining their levels, it becomes difficult to effect decreases when export earnings decline, thus leading either to deficit spending, in order to finance continuing or essential development projects, or to curtailment of the development budget. Apart from capital losses and the possible political repercussions to a policy of retrenchment in the development budget, such a policy will obviously tend to undermine any sustained effort for the development of the economy.

It follows from the above discussion that policies directed toward the elimination of cyclical fluctuations in developing countries should be concerned first of all with the underlying causes of the instability, namely, (1) the fluctuation in raw material markets and (2) the natural causes, such as weather and soil erosion, which affect the volume of agricultural production. Influencing the terms of trade depends on international action and is well beyond budgetary policies and, therefore, the scope of this paper. The influences of weather can certainly be mitigated by budgetary policies through the construction of irrigation schemes, which may to some extent relieve shortages of water and prevent flooding, and by the development of a transportation system, which would make regional areas less dependent on local production. However, our concern here is how to prevent the fluctuations in export earnings from entering the national economy and influencing domestic expenditure by variations in government expenditure and receipts.⁵

The most obvious characteristics of government expenditure in developing countries in comparison with the industrialized countries are the following: (1) a larger share of total expenditure devoted to investment in economic infrastructure; (2) a lower share of total expenditure consisting of social transfer payments, such as unemployment relief and assistance payments; and (3) a pattern of total expenditure in which the cost of administrative services is fairly high.⁶ There are obviously no built-in stabilizers on the expenditure side,⁷ and the structure as a whole makes the use of contracyclical variations in expenditure difficult to operate. Nevertheless, it would seem that careful management of expenditure, both current and developmental, is the best anticyclical weapon that developing countries have.

The basic principle of expenditure policy that would facilitate both stability and growth in developing countries is to plan carefully the current and capital expenditure with a view to their impact on development, and to shield these levels of expenditure from fluctuating by previously accumulated foreign exchange reserves.

In other words, it is a problem of careful long-term planning and, more important, of well-coordinated annual budgeting. In a subsequent section we deal with possible techniques of coordination. But, apart from the technical problem of coordinating long-term development programs with the annual budgets, such a policy implies two things for the development program and the current budget: (1) the development program must be, as far as possible, flexible with regard to composition in order to enable the government to vary its development expenditure among commodities, time periods, and localities as changes in prices and incomes require or as bottlenecks occur; and (2) the level and composition of current expenditure must always be subjected to rigorous examination to eliminate waste and to ensure their proper growth in relation to the development program. This is emphasized since it would appear that a successful policy of stabilization for economic growth will concentrate first on current expenditure rather than on development expenditure.

A major requirement of development and stabilization policies is, therefore, a careful analysis of the composition of government spending and the shifts in this composition from year to year. The question arises whether tax policy is more adaptable than expenditure policies to short-run stabilization purposes. But here again tax policy cannot ignore the long-run implications for economic and social development. Moreover, the heavy reliance on import duties and the relatively unimportant role of personal income taxes in developing countries suggest that revenue policies cannot be the prime mover in successful stabilization policies. Nevertheless, it should certainly not be permitted to contravene the larger strategy of economic development and stability.

Import duties are, of course, to some extent a built-in stabilizer, albeit a somewhat less reliable and lagging one. Export duties can be varied in proportion to world market prices for primary commodities. If this method is used, it would seem advisable to adopt a sliding scale so as to ensure a kind of built-in stabilizer that is outside the reach of pressure groups. Such a scale should, however, be reasonably mild in order to keep the export sector dynamic and to prevent smuggling or too large sales in the domestic market.⁸

Another important measure on the revenue side is to strengthen tax administration in these countries. The timely collection of direct taxes strengthens their anticyclical significance and facilitates, of course, implementation of the development program.

To summarize, one can say that the general principles in this brief discussion of expenditure and revenue policies for development and economic stability require (1) the building up of foreign exchange reserves during boom periods to be utilized in recessions in order to ensure an uninterrupted implementation of the development program—in this context, the accumulation and use of foreign exchange reserves may, of course, take the form of external borrowing and drawings on the International Monetary Fund during recessions to be repaid out of the high incomes realized in boom periods; (2) long-term expenditure programs to be as flexible as possible; and (3) a careful coordination of annual budgets with the development plan.

II. The Design of Budgetary Accounts for Stabilization and Economic Development

The previous discussion of public finance activities as a means of influencing aggregate demand and economic development lends a special significance to the fiscal accounts of the government. But the traditional budget accounts and format do not provide information that can readily be used to assess the macroeconomic effects of the budget. The reason for this is that the accounts are designed primarily to ensure the accountability of those receiving and spending public money to those authorizing the expenditure. Expenditures and receipts are thus shown according to administrative units of the government and are subdivided into specific items of receipts and objects of expenditure, such as salaries, materials, and transport costs. There is, of course, no question of abandoning this administrative classification or the very important principle of financial control and supervision over government departments. However, if the budget is to fulfill the requirements of economic analysis, the fiscal accounts will need to be reclassified in such a way as to permit the evaluation of government transactions on aggregate domestic demand and the balance of payments, as well as their contribution to economic development.

The impact of the budget on aggregate demand can be estimated at various levels of sophistication. The simplest method is to look at the accounting budget surplus or deficit and to examine its impact on the liquidity of the economy. Our previous remarks about the multiplier effects of various items of expenditure and receipts suggest that this is not a sufficient indicator of the impact of the budget on domestic demand, because it is assumed that all government expenditures have the same expansionary effect and all government receipts have an equivalent deflationary effect. A corollary of this is that an increase in expenditure will have the same effect as an equivalent decrease in taxes. A simple arithmetical example will show that this is hardly the case. If we assume a marginal propensity to consume of 0.75, an increase of $100 in government expenditure on goods and services will lead to an increase of $400, while a reduction in tax yield of $100 will lead to an increase of $300. The reason for this is that the increase in expenditure is used at once to buy goods and services, but a tax reduction does not give direct results in the same way. Consumers will spend only three fourths of their increased income in the first instance to purchase goods and services. In the same way the impact on demand through direct purchases of goods and services will be greater than through transfer payments, and transfer payments will have a greater per dollar impact than taxes. As one must, therefore, evaluate the separate effects of government transactions to arrive at a net positive or negative figure to indicate the inflationary or deflationary impact of the budget, the composition as well as the size of the budget becomes important.

Although it is certainly difficult to quantify the multiplier effects of the various types of transactions, they are too important to be ignored in any evaluation of budgetary policies. For example, if the budget format does not differentiate between expenditure on goods and services and on transfer payments, then those working with the budget categories may tend to think that these two types of expenditure are equivalent in their macroeconomic effects, so that an increase of $1.00 in the former would require a decrease of $1.00 in the latter in order to keep the over-all budget impact the same. Therefore, as a minimum, one should attempt to form an idea of the nature of the impact of a transaction by studying its economic characteristics. In effect, what this means is that all transactions of the government should be regrouped into economic categories whose impact on aggregate demand are approximately the same. For expenditure, one must at least distinguish among current expenditure on goods and services, capital formation, subsidies, interest payments, direct lending (and borrowing), and purchases (and sales) of negotiable financial claims. On the revenue side the difference between the various taxes and other receipts of the government should be carefully drawn. Such a classification would encourage policymakers to think about the macroeconomic effects in evaluating the alternatives between spending money on goods and services, transfer payments, and/or tax changes. It would also permit the construction of various accounts, depending on the purpose to be served and the type transaction to be highlighted. But in order for such information to be of maximum use to budget policy, it should go beyond the aggregative approach of national income accounts. Also, whenever possible, the transactions should be shown according to the economic sector with which they are made, e.g., public corporations, local authorities, and the private sector.

To isolate the effect of government transactions on the balance of payments from their effect on domestically produced goods and services, it is also important to distinguish between cash flows to and from abroad, and cash flows to and from the domestic economy. The balance of payments effects of government transactions can then be estimated by taking into account the direct imports and exports of the government reflected in its foreign exchange expenditure and receipts and the marginal propensity to import resulting from a change in income induced by government transactions. The combined effect of these two factors will reduce the impact of government transactions on domestic demand.

An implication of the impact of government transactions on the balance of payments to developing countries, where the marginal propensity to import and the foreign exchange component of government expenditures are high, is that an expansionary fiscal policy for stabilization purposes will generally have less effect on domestic employment and output than on the balance of payments, particularly if the fall in income is caused by a decline in exports.⁹ The reason for this is that a decline in real income owing to a crop failure or a deterioration in the terms of trade does not cause unemployment, and hence does not free resources that can be called into productive use in the short run by more spending. Government expenditure and tax reductions, which may be intended to offset the decline in domestic money income, would therefore create inflationary pressures and accentuate the balance of payments problems. The difficulties in expanding output, owing to the lack of certain productive factors, and the obstacles to rapid changes in output also mean that a policy of deficit financing for development purposes cannot be pursued without running into serious balance of payments difficulties and/or depletion of foreign exchange reserves.

Table 1 presents a simple design of budgetary accounts for stabilization purposes.¹⁰ It should be noted that budgetary transactions are frequently recorded in separate accounts, such as ordinary and extraordinary accounts, general and development accounts, and current and capital accounts. In many instances the division reflects institutional arrangements, and in some it may reflect policy considerations. Thus, the distinction between a current and a capital account is sometimes linked to the effect of budget transactions on the net worth position of the government and to rules of financing capital expenditures. Whatever the reason for this fragmentary approach, the budget accounts for stabilization purposes would seem to require a consolidated statement, including current and capital transactions, for all public agencies whose activities can be controlled by the central political authorities to influence aggregate demand.

Table 1.

Consolidated Central Government Accounts for Stabilization ¹

^1/If the scope of the government sector is defined to exclude trading and production activities, and to cover only agencies carrying out activities of “general government” nature, items 7 and 8 would be replaced by an item showing only the share of profits transferred to the government.

^2/Enterprises and agencies keeping commercial accounts. Since item 7 is net of depreciation, item 8 is included to indicate the actual cash flow to the government sector.

Table 1.

Consolidated Central Government Accounts for Stabilization ¹

A. FISCAL ACCOUNTS
Expenditure	Receipts
1. Government expenditure on goods and services current expenditure capital formation 2. Interest payments 3. Transfer payments to households local authorities other domestic sectors abroad 4. Subsidies	6. Sales and charges 7. Net profits from trading enterprises2 8. Provision for depreciation of fixed assets of trading enterprises 2 9. Interest and other income from ownership of property 10. Direct taxes households corporations 11. Social security contributions 12. Taxes on production and expenditure import taxes export taxes sales and turnover taxes surplus of fiscal monopolies … 13. Transfers from local authorities private sector abroad
5. Government expenditure	14. Government receipts
15. Over-all surplus or deficit
B. Financial accounts
16. Net domestic loans and advances short term long term 17. Net foreign loans and advances short term long term	15. Over-all surplus or deficit 19. Net domestic borrowing a. central bank short term long term b. commercial banks short term long term c. other sectors 20. Net borrowing from abroad private public 21. Sales less purchases of existing financial assets
18. Total net lending	22. Over-all surplus or deficit, net borrowing, and liquidation of assets
23. Net increase in cash holdings

^1/If the scope of the government sector is defined to exclude trading and production activities, and to cover only agencies carrying out activities of “general government” nature, items 7 and 8 would be replaced by an item showing only the share of profits transferred to the government.

^2/Enterprises and agencies keeping commercial accounts. Since item 7 is net of depreciation, item 8 is included to indicate the actual cash flow to the government sector.

View Table

Table 1.

Consolidated Central Government Accounts for Stabilization ¹

A. FISCAL ACCOUNTS
Expenditure	Receipts
1. Government expenditure on goods and services current expenditure capital formation 2. Interest payments 3. Transfer payments to households local authorities other domestic sectors abroad 4. Subsidies	6. Sales and charges 7. Net profits from trading enterprises2 8. Provision for depreciation of fixed assets of trading enterprises 2 9. Interest and other income from ownership of property 10. Direct taxes households corporations 11. Social security contributions 12. Taxes on production and expenditure import taxes export taxes sales and turnover taxes surplus of fiscal monopolies … 13. Transfers from local authorities private sector abroad
5. Government expenditure	14. Government receipts
15. Over-all surplus or deficit
B. Financial accounts
16. Net domestic loans and advances short term long term 17. Net foreign loans and advances short term long term	15. Over-all surplus or deficit 19. Net domestic borrowing a. central bank short term long term b. commercial banks short term long term c. other sectors 20. Net borrowing from abroad private public 21. Sales less purchases of existing financial assets
18. Total net lending	22. Over-all surplus or deficit, net borrowing, and liquidation of assets
23. Net increase in cash holdings

^1/If the scope of the government sector is defined to exclude trading and production activities, and to cover only agencies carrying out activities of “general government” nature, items 7 and 8 would be replaced by an item showing only the share of profits transferred to the government.

^2/Enterprises and agencies keeping commercial accounts. Since item 7 is net of depreciation, item 8 is included to indicate the actual cash flow to the government sector.

The data for the preparation of Table 1 can be obtained directly from the main budget accounts and, where necessary, from other special accounts. Since our interest is in the over-all cash surplus or deficit, no imputation of such items as rent of government-owned buildings and depreciation of fixed assets of general government agencies are included. Transactions within the central government sector are, of course, omitted, but transfer payments to local authorities and other public agencies should be shown. Also, whenever possible, transactions in foreign currencies should be identified. The table also shows the effect of a surplus or a deficit on the structure of financial transactions and thus on the liquidity of the economy.

For the analysis of relationships between government transactions and economic development, the identification of economic categories as shown in Table 1 is not sufficient. While much of current expenditure on goods and services may not have a significant impact upon the economy’s capacity to expand, clearly certain types, such as agricultural extension services and technical training institutes, do. Also, not all government investments contribute significantly to a country’s ability to produce. Moreover, the contribution of the government to national savings is of a special significance to development efforts. An appropriate design of budgetary accounts for the analysis of the development impact of government transactions would rearrange Table 1 to highlight current savings, and would add two new concepts to the classification: (1) development expenditure and (2) functional classification showing the distribution of development expenditure among the various sectors of the economy. (See Table 2.)

Table 2.

Consolidated Central Government Accounts for Development Analysis

Table 2.

Consolidated Central Government Accounts for Development Analysis

A. CURRENT ACCOUNT
Expenditure	Receipts
1. Current expenditure on goods and services 2. Interest payments 3. Current transfer payments to households local authorities other domestic sectors abroad 4. Subsidies	6. Sales and charges 7. Net profits from trading enterprises 8. Provision for depreciation of fixed assets of trading enterprises 9. Income from ownership of property 10. Direct taxes 11. Social security contributions 12. Taxes on production and expenditure 13. Current transfers from local authorities private sector abroad
5. Current expenditure	14. Current receipts
15. Current account surplus
B. development account
16. Fixed capital formation 17. Other development expenditure 18. Capital and development transfers local authorities public corporations other enterprises household 19. Capital transfers abroad 20. Net direct loans and advances 21. Purchase of existing assets	15. Current account surplus 23. Taxes from capital 24. Capital transfers from abroad 15. Net borrowine at home abroad 26. Other capital receipts and payments (net)
22. Capital and development expenditure	27. Current account surplus, capital receipts, and net borrowing
28. Changes in cash balances

View Table

Table 2.

Consolidated Central Government Accounts for Development Analysis

A. CURRENT ACCOUNT
Expenditure	Receipts
1. Current expenditure on goods and services 2. Interest payments 3. Current transfer payments to households local authorities other domestic sectors abroad 4. Subsidies	6. Sales and charges 7. Net profits from trading enterprises 8. Provision for depreciation of fixed assets of trading enterprises 9. Income from ownership of property 10. Direct taxes 11. Social security contributions 12. Taxes on production and expenditure 13. Current transfers from local authorities private sector abroad
5. Current expenditure	14. Current receipts
15. Current account surplus
B. development account
16. Fixed capital formation 17. Other development expenditure 18. Capital and development transfers local authorities public corporations other enterprises household 19. Capital transfers abroad 20. Net direct loans and advances 21. Purchase of existing assets	15. Current account surplus 23. Taxes from capital 24. Capital transfers from abroad 15. Net borrowine at home abroad 26. Other capital receipts and payments (net)
22. Capital and development expenditure	27. Current account surplus, capital receipts, and net borrowing
28. Changes in cash balances

Development expenditures may be defined as expenditures that increase the productive capacity of the country, that is, all growth-inducing expenditures that would be misleading to consider as simple consumption. If this approach is adopted, fixed capital formation will be retained only as a special type of development expenditure. This is not merely a problem of definition from a narrow statistical point of view. In recent years the theory of economic growth has overemphasized the role of fixed capital formation in development, which led a number of countries to devote a considerable proportion of their resources to accumulate physical assets at the expense of the so-called current budget. The result was imbalance and lack of funds to utilize additional capacity created by new investments. An awareness of this problem is particularly important for a well-coordinated budget policy for economic development.¹¹

“A function may be defined as a major division of the total organized effort of government—the purpose of which is to provide a distinct and separate public service such as national defence, education, public health, or agriculture.” ¹² Such functional categories properly identified and set forth in relation to the organizations responsible for their execution are extremely useful for the budget process. They will not only provide general information on the nature of government responsibilities and the services rendered but, by showing the share of development expenditure devoted to each particular purpose, they will greatly improve the distribution of government resources between consumption and development purposes, and among the various sectors of the economy.

In order to establish meaningful functional categories, it is convenient to think first of the broad types of services a government renders and then to distinguish the functional categories in terms of the types to which they relate. In doing this, two sets of criteria seem to stand out, namely, (1) whether the service rendered is to the community as a whole, or to a certain part of the economy, or to individuals, and (2) whether the service in question is “traditional” and normally rendered by a government or in certain circumstances by the private sector. The application of these two criteria led in the UN Manual to the classification of government activities into the following broad groups: ¹³

• (1) General Government Services: Services relating to the organization, administration, and protection of the community, such as justice, defense, and fiscal administration;

• (2) Community Services: Services rendered to the community as a group and consumed collectively, such as fire protection;

• (3) Social Services: Services rendered to members of the community or individually, such as education and health services; and

• (4) Economic Services: Services related to the government role in the production, distribution, and transportation of goods and services.

As some expenditures may not relate to any one of these specific groups, the classification should include a category for unallocable expenditure.

Within each group of services mentioned above, distinct and separate types of services or functional categories, which are significant from the standpoint of the duties and responsibilities of the government as a whole, can be identified. Unlike the economic categories in Table 1, functional categories are not affected by the concepts, definitions, and classifications developed in national income accounting, but it would be desirable if the functional categories were made consistent with the International Standard Industrial Classification of all Economic Activities. The following classification is given as an example of such a scheme of functional categories.

Basic Functional Categories

General Services

• General administration

• Justice and police

• General research and scientific services

• Defense

Social and Community Services

• Education

• Health

• Social security and special welfare

• Housing

• Other community services

Economic Services

• Agricultural and nonmineral resources

• Fuel and power

• Other mineral resources, manufacturing, and construction

• Transport, storage, and communication

• Multipurpose projects

• Other economic services

• Unallocable Expenditure Items

The allocation of government expenditure between development and nondevelopment and among the various functions has, of course, an arbitrary element. It is not easy to agree on what is growth-inducing expenditure and what is consumption expenditure. Moreover, not all expenditure of an agency will fall clearly and unambiguously under one or another of the functions specified. An important part of this category is overhead cost of administration, particularly for a department whose activities fall into more than one functional category, such as the public works department. Ideally, such overhead expenditure should be distributed among the functions so as to identify the full cost of each function. Another alternative is to identify the cost of administration of an agency as a separate program to be included under the functional title “general administration” in the current account. Whatever the difficulties are, the important thing to remember is that the objective of the exercise is to identify the cost of the various services of the government on the most practical basis, and in a form best suited to economic analysis. As the information is not needed for accountability purposes, refinements in the allocation of expenditure among the various sectors or functions should be undertaken only as far as resources permit.

The Current and Development Accounts may then be supplemented by a cross classification of expenditures by function and economic character. The general lines of such a two-way classification are shown schematically in Table 3. Such a table has the advantage of presenting in one statement total government expenditure by economic categories and functions. It can therefore be used to compare changes in government expenditure from year to year, irrespective of changes in the distribution of functions among government agencies and various levels of government authorities. It would also be possible to see at a glance how expenditure on, say, agriculture was allocated among current expenditure, capital formation, subsidies to farmers, loans, etc. Changes owing to price increases from year to year may also to some extent be taken into account by expressing the various categories of expenditure on a certain function as percentages of appropriate national aggregates, such as gross national expenditure, consumption, and capital formation.

Table 3.

Combined Economic Functional Classification of Central Government Expenditure

Table 3.

Combined Economic Functional Classification of Central Government Expenditure

		Current Expenditure				Total Current	Capital and Development Expenditure						Total Capital and Development
	Economic Categories	(1)	(2)	(3)	(4)	(5)	(16)	(17)	(18)	(19)	(20)	(21)	(22)
1. General services
	General administration
	Justice and police
	General research and scientific services
	Defense
2. Social and community services
	Education
	Health
	Social security and special welfare
	Housing
	Other community services
3. Economic services
	Agricultural and nonmineral resources
	Fuel and power
	Other mineral resources, manufacturing, and construction
	Transport, storage, and communication
	Multipurpose projects
	Other economic services
4. Unallocable expenditure items
		Total

View Table

Table 3.

Combined Economic Functional Classification of Central Government Expenditure

		Current Expenditure				Total Current	Capital and Development Expenditure						Total Capital and Development
	Economic Categories	(1)	(2)	(3)	(4)	(5)	(16)	(17)	(18)	(19)	(20)	(21)	(22)
1. General services
	General administration
	Justice and police
	General research and scientific services
	Defense
2. Social and community services
	Education
	Health
	Social security and special welfare
	Housing
	Other community services
3. Economic services
	Agricultural and nonmineral resources
	Fuel and power
	Other mineral resources, manufacturing, and construction
	Transport, storage, and communication
	Multipurpose projects
	Other economic services
4. Unallocable expenditure items
		Total

The presentation of the fiscal accounts along these lines and as a regular part of the budget would answer pertinent questions of budgetary policy, such as the over-all magnitude of government transactions and their distribution among general government, enterprises, and public corporations, the income received and payments made at home and abroad, how expenditures are financed and to what extent they are spent according to established priorities. The Development Account shown in Table 2 could also be supplemented by a set of accounts based on the economic categories to show the derivation of balancing items, such as changes in physical assets, changes in financial assets other than cash (lending transactions), and changes in liabilities (borrowing transactions). Only with such information can government budgeting be based on a careful analysis of its impact on economic development and stability.

III. Development Planning and Annual Budgeting

In the previous parts of this paper we examined the adequacy of traditional accounting forms for macroeconomic analysis. In this part we are concerned with problems of plan-budget coordination and cost-effectiveness analysis. Although the discussion will be presented in the context of a development plan, the relevance of the analysis is not restricted to the adoption of a formal plan or any particular dogma about long-range economic planning.

Long-range planning is usually based on some normative judgments regarding long-term objectives and their possible period of realization. While these objectives are generally expressed in terms of the national product to be attained over a certain period of time, they often contain explicit targets, such as education, health, and consumption standards.

The realization of these objectives will obviously have to be pursued within the constraints of resources—natural, human, and financial—as they become available. While the estimates of these resources over a long period of time are quite tenuous, it has been possible to visualize them broadly over a period of five to seven years. Hence, long-term objectives are phased into medium-term plans reflecting the relative priorities of objectives given the resources that are available and likely to be available. A further advantage of so-called medium-term plans is that they make possible the necessary adjustments to allow for transitional problems or bottlenecks that may arise in the pursuit of long-term objectives, or as a result of a fall in expected resources, e.g., balance of payments problems.

Ultimately, both long-term and medium-term plans concerning the public sector are implemented through the annual budgets. To a greater degree than the medium-term plan, annual budgets can assess the resources available for development. It follows, therefore, that relative priorities and project selection can be made from year to year more realistically in the light of changing resource availability and economic conditions in general. Viewed in this way, the budget is an inseparable part of the planning process.¹⁴

Budgets that are not formulated within the context of a long-range plan can only represent a rationalization of immediate decisions. Their soundness and efficacy in relation to the long-term objectives of the society cannot, therefore, be assured. On the other hand, the broader view and prospects that long-term plans offer are not justified on their own but only insofar as they actually influence immediate actions of the government through the annual budgetary process. The concept of planning should, therefore, be understood to comprise two main instruments or techniques: (1) those that are designed to orient the course of the economy as a whole, and (2) those that are designed to coordinate immediate decisions with long-term objectives and to ensure their execution and control. The former includes what is generally known as comprehensive planning techniques, and the latter refers essentially to budgetary techniques and procedures.

While planning techniques have been improved in many instances, budget practices have remained traditional in their approach and emphasis. To ensure effective implementation of the plan, the budget concept has to be broadened, and its techniques and procedures must be reconciled with those of planning. Given the resources that they feel assured of raising, budgeters must concern themselves with (1) problems of consistency between the budget and the plan and (2) efficiency, including such aspects as rationale of project formulation, optimum choice of projects from year to year, and performance evaluation, as much as they are concerned with propriety and economy.

The preceding discussion of the plan and the budget shows that without coordination between the two it would be impossible to evolve a composite picture of a dynamic situation and effectively direct it toward long-term objectives. The coordination required is that between the techniques of planning and budgeting and among the various institutions engaged in these activities. The following parts of the paper submit a number of propositions by which the coordination may be achieved smoothly and efficiently.

Plan-budget coordination to be effected at the technical level may be achieved through (1) complete coverage of public sector activities, (2) the structuring of the budget in terms of output and assignments, i.e., programs and projects, (3) the use of cost-effectiveness analysis to help to allocate budgetary resources among the various functions, programs, and projects, (4) budgetary controls, and (5) budgetary procedures.

Budget review and analysis

Development plans often indicate targets of output and resource allocation at the sectoral and program level, and even projects are sometimes specified in the plan. Nevertheless, the preparation of the budget as the annual segment of the plan cannot—and should not—be an automatic application of the plan document. It was stressed in the preceding sections that a major difference between the budget and the plan is that the resources available for investment can be estimated more accurately on an annual basis. Accordingly, the projects to be included in the budget must be selected every year in the light of changing resource situations. Current economic conditions—be they inflationary or deflationary—may demand temporary deviations from the approved structural pattern in the form of accelerated or delayed spending. Moreover, it is often necessary to revise the plan in order to take account of errors, omissions, or changes in objectives. The very preparation of the annual budget may force the recognition of the necessity for such revisions.

The macroeconomic function of the budget implies that the first budgetary constraint to be contended with is the size of the budget in the light of prevailing economic conditions. At this early stage of budget preparation, planning and budget authorities must work closely together in deciding upon the budget guidelines and the necessary phasing of projects. Every public agency needs to know well in advance the terms of reference within which it may review its programs and develop its annual budget requests. Specific information may have to be given as regards the scope and character of construction to be permitted in that year, limitations imposed on new activities, and need for economy in certain areas of expenditure.

The problem of choice among functions, programs, and projects is not dealt with here except in very general terms. We may, however, mention that the choice between sectors or functions is determined largely by the existing structure of the economy and the interdependence among its various parts.¹⁷ At this macrolevel, physical and economic constraints,¹⁸ such as shortages of administrative skills, are much more important than financial constraints.

Choice among projects or systems of related projects within a function should be made on the basis of some sort of cost-benefit calculation.¹⁹ The costs to be incurred in constructing and operating a project and the point of time at which expenditure will be made must be carefully identified. The fact that present commitments usually result in a stream of future costs is often neglected. The cost stream has to be met with a similar stream of benefits specifying the time period when they are expected to accrue. The benefits from a project comprise not only the direct output of the project but also its contribution to other objectives of development policy. This obviously makes the task of assigning money values to the benefits more difficult. Moreover, intangible considerations—political, social, psychological—play a dominant role in the decision-making process. Cost-benefit analysis may therefore prove to be, except in a few instances of commercial projects, beyond the reach of practical application. Nevertheless, the logical framework it offers focuses attention of decision makers on the problems involved in project selection by evaluating efficiency in real terms and on the basis of unit costs.²⁰

The cost-benefit streams, where it is possible to calculate them, should then be discounted to the present. The reason for discounting to the present is to allow for the fact that benefits enjoyed in the present are more attractive than those to be enjoyed in the future, while costs that will have to be incurred in the future are easier to bear than those that must be incurred immediately. This is the more so as there may be larger supplies of resources that can be drawn upon in the future.

A crucial question in such an exercise is the determination of the rate of discount²¹ to be used in the calculation of costs and benefits. There is no hard and fast rule in this respect. The rate to be chosen depends on the time preference of the community. In developing countries, where available resources are meager and expectation of life is short, it is reasonable to assume a high social time preference that would favor quick-maturing investments rather than long-term gestation projects. On the other hand, the concern over the long-run interest of the community makes a low rate of discount appropriate. The government will have to strike a balance between the immediate needs of the population and the long-run aspirations of the community.

It is primarily the responsibility of planning agencies to proffer advice on these problems of choice. In reviewing the projects for inclusion in the annual budget, however, certain practical considerations may dictate the sequence of project selection to be included in the budget. A project assigned to a particular year may be one of a sequence of related projects included in previous years, and any change regarding the inclusion of this project in the budget may necessitate adjustment in the whole program. For example, a change in the sequence of a certain educational project may cause disturbances over the whole educational program. Technological considerations also may not permit the phasing of projects, such as the building of dams. But, on the whole, there is a large degree of flexibility in projects to allow for any necessary annual adjustments.

Unlike traditional budget review, which centers attention on cash disbursements and “input” elements of a project, such as pay and allowances, construction, and maintenance, the budget function must now serve as a technique of management, concerned primarily with objectives or “outputs” and with relating these objectives to the costs or “inputs.”

The principal objective of budget review and analysis should be to attain fulfillment of the plan at the lowest possible cost in time and money. It is, therefore, of paramount importance that the concept of unit cost, rough as it may be, must be brought into the center of budget operations. An awareness of the cost elements should be one of the basic qualifications of budget analysts. It may be said that cost consciousness has never really been completely neglected in traditional budget practices. But the important point is that it should be a continuous and a routine matter to have a budget system that would force government departments and public agencies to examine their operations in terms of output, and relate cost to output throughout the execution phase. When the budget is put together, there is little time for rigorous analysis and considered judgment, still less to gather data and to engage in careful review of alternatives.

To allow for such analysis, departmental budget requests must be submitted on project basis and related to programs and functions. Budget requests must provide information on such factors as the objectives of the project; the amount of work to be done; the work schedule; and the quantity of resources required in terms of personnel, supplies, and their costs, including the foreign exchange component of each project. In changing the estimates, factors such as price levels and inability to realize revenue estimates must be specified. The following format for development projects is given as an example of the information required for budgetary analysis.

A Format for Development Projects

• 1. Project and sector

• 2. The Ministry or the organization that has prepared the project

• 3. The Ministry or the organization that will execute the project

• 4. A brief description of the project giving its purpose, its place in the development plan, and the manner in which it will be implemented

• 5. The period required for the execution of the project

• 6. The cost of the project

  1. Foreign exchange expenditure

  2. Local expenditure

  3. Total

• 7. Annual phasing of the expenditure

		Foreign Exchange	Local
		Expenditure	Expenditure	Total
1st year
2nd year
3rd year
4th year
etc.
	Total

View Table

		Foreign Exchange	Local
		Expenditure	Expenditure	Total
1st year
2nd year
3rd year
4th year
etc.
	Total

• 8. Technical feasibility of the project (including material and personnel requirements of the project)

• 9. Benefits to be derived from the project (including revenue on completion of the project)

• 10. For new projects, the proposed date of commencement of work on the project

• 11. For projects under way

  1. The date on which work on the project was started

  2. The present stage of work

  3. The amount spent to this date on the project

			Capital	Other
	Year	Personnel	Expenditure	Expenses	Total
Total

View Table

			Capital	Other
	Year	Personnel	Expenditure	Expenses	Total
Total

• 12. Details of expenditure

  1. Personnel emoluments

  2. Preliminary expenditure on surveys and investigations

  3. Land

  4. Equipment and machinery

  5. Construction charges

  6. Transportation charges

  7. Contractor charges/consultant fees

  8. Other

  9. Total

• 13. Annual recurring expenditure on completion of the project

• 14. Other relevant information

In reviewing the requests, the budget agency must bring to bear on departmental estimates all known facts about the department, including the management and financing of its services. The success of the system depends on budget examiners who are capable of being a source of reliable information and sound judgment on the operations of the various agencies.

IV. Concluding Remarks

In countries where the public sector activities are the most important elements in the plan, it is particularly important to have an efficient system of budget appraisal and control. The techniques and procedures for budget-plan coordination discussed in this paper are essentially illustrative and may be applied by governments in different ways. Not all of them will be effective or even appropriate for every country. Differences in the size of the public sector, availability of trained personnel, political traditions, and popular attitudes may be decisive in determining whether a particular technique or procedure is worth trying; and measures that would be successful if properly adapted to the administrative environment may prove disappointing if transplanted without regard to the special circumstances under which they must operate.

Résumé

Dans cette étude, l’auteur examine quelques-uns des problèmes que pose la coordination des prévisions budgétaires annuelles et de la planification du développement et, d’une manière plus générale, la présentation des comptes budgétaires permettant l’analyse économique. II s’occupe essentiellement des pays en voie de développement, pour lesquels le budget est le plus important instrument de politique économique.

Après une brève introduction, la première partie de l’article étudie la nature des fluctuations économiques et leurs répercussions sur une économie en voie de développement, et conclut en énonçant quelques principes généraux d’une politique financière susceptible d’assurer le développement économique et la stabilité. Dans une deuxième partie, l’auteur étudie l’incidence de ces principes sur les comptes budgétaires et propose une conception de ces comptes qui faciliterait l’analyse des effets des transactions de l’Etat sur la demande globale, la balance des paiements et le développement économique. La troisième partie traite de la coordination de la planification et du budget au niveau de la microéconomie par la rationalisation de la structure du budget, l’analyse des coûts et des béneficés, l’évaluation des résultats et la procédure utilisée pour l’établissement du budget et pour la planification.

Dans la dernière partie de l’étude, l’auteur met en garde contre le danger d’utiliser sans discernement des techniques et des procédures qui peuvent convenir aux pays industriels, mais non aux pays en voie de développement, dont l’armature administrative est insuffisante.

Resumen

Este trabajo trata de algunos de los problemas que se plantean al coordinar los presupuestos oficiales anuales y la planificación del desarrollo y, en sentido más amplio, al proyectar las cuentas fiscales de modo que satisfagan las necesidades del análisis económico. Se ocupa principalmente de los países menos desarrollados ya que en esos países el presupuesto es el instrumento más importante de la política económica.

Tras una breve introducción, la primera parte de este trabajo examina la naturaleza de las fluctuaciones económicas y los efectos de las mismas en una economía en desarrollo, y termina presentando algunos principios generales de política fiscal para el desarrollo y la estabilidad ecónomica. La segunda parte examina lo que esos principios significan para las cuentas fiscales, y sugiere una disposición de las cuentas presupuestarias que facilitaría el análisis del impacto de las transacciones gubernamentales sobre la demanda agregada, la balanza de pagos, y el desarrollo económico. La tercera parte del trabajo se ocupa de la coordination del plan y del presupuesto a nivel microeconómico mediante la rationalizatión de la estructura del presupuesto, análisis costos-beneficios, evaluation de actuaciones, y aspectos de procedimiento de los presupuestos y de la planificación.

La última parte del trabajo es una advertencia contra el uso indiscriminado de técnicas y procedimientos que quizá resulten apropiados para los países desarrollados, pero no para los países menos desarrollados cuya capacidad administrativa es limitada.