(Government
Budgeting)
In the
proceeding/previous unit, fiscal policy was taken to refer to that part of
government policy concerning
the raising of
revenue through taxation and other means and deciding on the level and pattern
of expenditure
for the purpose of
attaining some desirable marco-economic goals. Such fiscal policy can be used
for allocation
stabilization and
distribution.
In essence, a primary
objective of official policy is to balance the use of resources of the public
and private
sectors and by so
doing to avoid inflation unemployment balance of payments presents and income
inequality.
Budgeting can be seen
as setting of expenditures priorities and the weighing of alternatives. It is a
system
of resources
allocation hence it implies looking ahead and planning since decisions involved
in the process are
of future
orientation.
In this sense,
budgeting involves the converting of the multi-year plan of operations into
more exact short-term
installments of inputs and outputs usually for the year ahead. It is no wonder
it is taken
a part of the
managerial cycle of planning executing learning and applying the lessons to
plan, execute, learn
and so on. The
national Budget or Government budget itself is the financial statement of the
government’s
proposed expenditure
and expected revenue during a particular period of time, usually a year. Such
budgets
are usually employed
to attain the objectives of full employment in the economy, price stability,
rising growth
in National output
balance of payments equilibrium and equity in income distribution.
To attain these
objectives, the budget must be seen as exhibiting certain features. It is a
plan (a financial
plan) of Operation,
it is for a fixed period, it must be an authorization to collect revenue and
incur expenditure.
It must be a
mechanism of control of both revenue and expenditure and it must be objectives
oriented.
On a broader basic,
therefore, the budget is not only an instrument of economic and social policy
but also
as planning tool
instrument for co-ordination and an instrument for communication.
Therefore, a good
budget requires comprehensiveness, a meaningful presentation of the state of
budgetary
balance and an
appropriate grouping of expenditure items
A budget is an
estimate of the expected revenue and expenditure of individual, group,
organization or government for a seated period of time, usually one year.
Put in another way, a
budget is schedule of all the revenues and expenditures that an individual,
group,
organization or
government expects to receive and plans to spend during some future time
period, usually the
following year.
Budget ranges from
very simple and casual one like the typical family budget, to extremely complex
and
sophisticated one
like the Federal Government Budget.
The Government Budget
The government budget
shows clearly the expected incomes and proposal expenditure of the government
for
the coming year. It
contains estimates of anticipated revenues from sales, taxes, gifts and it
specifies what
expenditures are
planned during the time period. If revenues exceed expenditures, a budget
surplus is expected.
If on the other
hands, expenses are expected to be greater than revenues, a budget deficit must
be
confronted and some
methods of financing it must be planned.
A budget is usually
used to control the allocation of revenues so that spending is rational. It is
an
important instrument
in the planning and control of the financial matters of a country.
The Federal
Government’s budget is usually prepared by the ministry of finance. The
Ministry of Finance
requires other
ministries to submit their expenditure proposals to it before the budget is
prepared. The expenditure
proposals by
different ministries may be adjusted or pruned depending on government policy
and
the resources
available.
It is important to unit
the four stages that are involved in the budget of a Federal Government. The
four
states are as
follows:
(1) The formulation
of the National Budget by the Director of Budget.
(2) The appraisal of
the National Budget by the National assembly.
(3) The
implementation of the content of the approved budget by the Executive arm of
the government.
(4) The auditing of
the budgeted revenue mapped out for expenditure in the process of the execution
of the
content of the
budget.
Budget Preparation
The preparation of
the budget begins before the end of the present fiscal year. Each ministry
sends its own
expenditure proposal
to the Ministry of Finance and goes there to defend it. After each department
of
ministry has
successfully defended its proposals, the revised or amended proposals made in
the budget are
presented to the
National Assembly for deliberation. The debate on the budget is expected to be
completed
before the end of the
present fiscal year. After all the debates and amendments, the budget is
finally sent to
the president for
final approval and the remaining conflicts within the various departmental
claims are to be
resolved by the
president.
Budget Presentation
It is important to unit
that there are various forms of budget presentation today in Nigeria. Only two
parts in
the presentation of
the budget will be discussed here.
(a) The Presidential
budget speech which is usually on the last day of the old fiscal year. In the
Presidential
budget speech, the
major points contained in the budget are summarized by the President.
(b) Analysis of some
selected aspects by the Minister of Finance: The second part is the careful
analysis of
some selected aspect
of the budget. This is usually done by the Minister of Finance. During this
analysis,
the general public,
especially the business, the institution, the ministries and the parastalas are
invited and questions
raised by them are responded by the minister.
It is important to
emphasis again that in the budget, the means of raising revenue will be stated
and any
new tax proposed or
any loan expected will be clearly stated. Normally, a country will try to cover
all the
items of the
recurrent expenditure from revenues from taxation and other recurrent sources.
If possible, it
will aim at a surplus
of such revenue over recurrent expenditure in order to have fund available for
the capital
projects.
A budget has two
sides - the expenditure and the revenue. Every government tries to balance the
two
sides. This means
that the expected revenue income is made equal to proposed expenditure. In some
cases,
the expenditure is
greater than the revenue and in other cases, the revenue is greater. This is
why the term
budget deficit and
budget surplus are used.
Budget Deficit
In any budget
whenever the expenditure of the government is greater than the revenue, it is
usually referred
to as budget deficit.
In most cases, the government spends more than what it collects in form of
revenue. The
excess of expenditure
over revenue can be covered by loans from outside the country. In most cases
the
deficit is usually
covered by government borrowing either from the public or financial
institutions.
Although no
individual or business firm can incure deficit over an indefinite period, some
economists
believe that the
Federal Government is in a different category and that budget deficits for some
years are
acceptable and
sometimes recommendable. They point out that a balance budget is instabilising
in recession,
aggravating the
effects of a drop in national income. They suggest instead a deliberate
unbalancing of the
budget to create a
deficit.
The deficit according
to them will increase total spending, which in turn will increase national
income.
Because of the
operation of the national income multiplier, the increase in the income will be
larger than the
deficit. The budget
deficit can be achieved by lowering taxes, raising government expenditure or by
adopting both
measures. Although an increase in government spending may be more effective in
raising national
income. Since it has a higher income multiplier, a tax cut may be preferable,
since it can
be made effective
more quickly.
If the total revenue
of the government in a fiscal year is N250 billion, and the expenditure for the
same
period is N275
billion, then there is a deficit of N25 billion. Again, budget deficit is
usually used to increase
government
expenditure so as to generate more economic activities and increase employment.
Budget Surplus
Budget surplus occurs
when the government revenue is greater than expenditure. This means that the
government
collects more revenue
than what it spends. Budget surplus can be used to reduce inflation because
the surplus may come
from taxation which will reduce the disposable incomes of individuals and as a
result
reduce their
purchasing power. The use of the government budget surplus is an important part
of countercyclical
fiscal policy. During
periods of inflation, it is desirable to reduce total spending in the economy,
diminishing the
excess demand which is forcing up prices. At such times, the government budget
can be
adjusted to produce a
surplus and achieve the desired lowering of income.
The budget surplus
may be accomplished by lowering government expenditure, raising taxes or
adopting
both measures. The
reduction of government expenditures is more effective than a tax increase as
an antiinflationary
measure, since its
negative income multiplier is greater, but it is generally harder to put into
effect, especially
when the budget consists of many large items. It has to be noted that for the
budget
surplus to be
effective, the surplus money must not find its way back into the spending
stream. The surplus
funds may be used to
retire part of the outstanding debt of the Federal Government or build up the
balance
of the Treasury
account. If debt retirement is undertaken, the purchase of government bonds
held by
banks has a greater
anti- inflationary effect than the refunding of bond held by citizens and
non-financial
business firms. But
budget surplus can lead to lower economic activities and increased
unemployment.
Four Main Roles of the Budget
There are four main
roles of the budget and these include:
(1) The Authorisation Function
As soon as the budget
is approved, it constitutes an authority for implementation. The budget
normally
contains a break down
for the limit of expenditure that could be made on each expenditure head during
the budget period and
once approved, it constitutes the authority limit within which expenditure
could be
made. However, any
required expenditure beyond such limit will require approval by higher
authority.
(2) Directional
Function
One of the roles of
the budget is to provide a guide as to the intended direction of the economy
during
the budget period in
terms of priority, focus and attention. The budget is therefore expected to
influence
individuals, organization
s or institutions along the desired direction.
(3) Control Function
Control function is
the most important role of the budget. This is the proper monitoring of the
budget
and it helps to
inject discipline in the Chief Executive of each unit as regards fund
management. This
helps to ensure
optimum use of resources.
(4) Development
Function
The budget makes
provision for development. The capital expenditure of the budget is, therefore,
linked
to the development
plan and integrates the budget with the plan. The budget then serves as the
medium
for the actual
implementation and actualisation of development plans.
Steps in Presentation of National Budget
In the present
Nigeria, the government budget involves the following steps:
(1) An appraisal of
the economy for the past budgeting period showing achievement, failures and
things
that posed as
problems during the period.
(2) The appraisal of
the economy in the past budget period is followed by an analysis of the present
day
situation in economy,
stating problem and prospects in the present budget periods.
(3) The budget then
specifies the national objectives in the budgeting period and the various
policies
aimed at achieving
them. In some of the budgets, specific targets are set and efforts are directed
toward achieving
them.
(4) The budget then
forecasts the future economic trend over the given period.
(5) Finally, the
budget gives an outlay of expected revenue and intended expenditure over the
budget
period. This involves
an analysis of the expected government resources during the budget period and
the way the resources
will be utilized to ensure justice and equity.
Note
In most cases, the
government bases the current year budget on the figures in the previous year
budget and
this system is
normally referred to as incremental system of budgets.
State and Local Government Budget
Like the Federal
Government, the state and local governments prepare and present their own
budgets almost
in the same manner as
the Federal government. The only difference is that each tier of the government
prepares its own
budget according to its own resources
As already mentioned
the Federal government presents its budget on the last day of previous fiscal
year.
As the fiscal year in
Nigeria runs from 1st of January to 31st of December, the Federal government
budget is
usually presented on
31st day of December each year. This will be followed by presentation of
budgets by
different state
Governors. The presentation of State budget has no specific date like that of
Federal Government.
In preparing the
budget, each state takes into account its resources, peculiarities and
priorities. The
revenues generated
from the state are meant to argument the state’s share of the ‘Federation
Account’. The
presentation of the
state budget is done by the state chief executives. This is followed by
detailed analysis of
the budget by the
Commissioner of Finance during which he answers questions from the general
public.
It has to be noted
that the implementation of the approved budget is usually carried out by the
executive
arm of the government
whether it is Federal or State. The budgeted revenue mapped out for expenditure
in
the process of the
execution of the content of the budget is later audited. This is to ensure that
the approved
money is spent in the
project for which it is meant or in other words to avoid the diversion of fund
from the
project it is meant
for to another and less important project.
The local government
as the third-tier of the government presents its budget last after the State.
The order
in the presentation
is so because the local government that presents last expects some amount from
both the
Federal and State
Governments to make up what it will generate by herself. The expenditure of the
local
government is mostly
directed towards meeting the recurrent expenditure of the local government as
well as
developing the
resources of the local government.
The Budget as an Instrument of Economic Policy
The budget can be
used as an instrument of economic policy. This is why we have balanced budget,
budget
deficit or budget
surplus. Each of these three type of budgets has its own advantages as well as
disadvantages.
Each one plays a good
role in the economy.
The classical
economists believed that the budget must be balanced and they saw an unbalanced
budget as
an unhealthy
phenomenon. Much is sometimes made of the need for balanced budgets to ensure a
healthy
economy even in the
recent past. But even if optimum amount of government transfers and purchases
occur,
balanced budgets do
not necessarily prevent inflation or solve any other economic problem. Instead
with a
balanced budget,
total customer spending may be so high that inflation or shortages occur, or so
low that there
is unemployment.
Budget deficits were
no longer to be viewed as extraordinary and potentially dangerous acceptable
only as
temporary expedient
during recessions. Instead they were to be viewed as just another tool of
economic
policy. Some
economists at present argue that if budget deficit are needed to provide the
additional spending
required to ensure a
full employment economy, then such deficit should be encouraged in expansionary
period
as well as in
recessions. These economists suggest that annual deficits in most years might
be required as the
price of economic
growth.
The following are
some of the main ways in which the budget can be used as an instrument of
economic
policy.
1 . To Stimulate
Recovery from a Recession
In the later years of
the Great Depression, it was suggested that the budget should be deliberately
unbalanced, a policy
known as deficit financing in order to promote recovery. This worked
successfully during
the period and also during a period of serious slump, it is necessary, but in
he case
of recession, it may
be sufficient simply to reduce taxation.
2 . To Check
Inflation
The aim of an
anti-inflationary budget is to reduce the amount of purchasing power in the
hands of the
consumers, and this
is done by increasing the rate of taxation so that a substantial surplus is
achieved.
So during the time of
inflation, governments should increase tax rate so as to reduce the disposable
income of the
consumers which will help to reduce the inflation rate.
3 . To Reduce
Inequality of Incomes
In a country where
great inequality of incomes exist, attempt should be made in the budget to
introduce
progressive tax
system. This will make the high income group to pay more proportion of their
income or
wealth as tax than
the low income group. Again inequality of incomes can still be reduced by the
provision of some
social services which, though available to everybody are generally of most
benefit to
people in the lower
income group.
4 . To improve the
Balance of Payment Position
Duties on particular
imports may be imposed or increased for the purpose of curtailing the demand
for
these goods, thereby
reducing imports. Again duties on export goods can be reduced to encourage
export which will
equally improve the balance of payment position.
5 . It is Used as a
Means of Raising Revenue
This was the original
role of the budget. Through the budget, the government plans to raise enough
money to finance the
cost of national emergency such as war or disaster. It is also used as a means
of
raising revenue for
the various development projects of the government. This is true because in the
budget, the
government sets out how it plans to raise its revenue.
6 . Budget is Used as
a Tool of Economic Planning
Through the budget,
the government assesses the economic performance of the various sectors of the
economy during the
previous year. Sectors which require special attention i.e. priority areas are
identified
and carefully
enumerated.
Disposing of Surplus Revenue in the Budget
Whenever a budget is
not a balanced one, it would either be budget surplus or a budget deficit. Care
must,
therefore, be taken
in handling either of the two. When there is a surplus budget giving rise to
surplus revenue
due to increase in
taxation or decrease in government expenditure, the government must be very
careful to
handle this surplus
in a way that will not offset the intended deflationary effect. The government
must
withdraw the money
form circular flow and not allow it to creep back into the circular flow.
One way by which to
accomplish this goal is to actually destroy the money i.e. to burn the bills.
An
alternative to this
is to hold the money in idle treasury deposits. The third option is to use the
money to retire
some portion of the
public debt.
Ordinarily, when
holders of government bonds cash in their holdings, the government simply
issues new
bonds, selling the
same amount of bonds to some different bondholders so that the amount of
national debt
remains constant. But
when the government has a surplus, it can elect to pay off the old bondholders
without
selling new bonds
thus retiring the debt.
However, there is a
risk that some of this money will find its way back into the circular flow. But
for the
most part, the money,
that the households and business have invested in government bonds is intended
to be
saved. Receivers of
the money are, therefore, most likely to reinvest it in other form of
saving-stocks in
private industry,
savings account or other securities.
Financing a Deficit in the Budget
It has already been
stated that whenever the government expenditure is greater then the revenue
collected
deficit will accrue.
How can this deficit be financed? There are many ways through which such
deficit can
be financed.
In the first place,
the government may choose to meet the deficit by increasing the supply of
money; that
is the government
will simply print up new bills in the amount equal to the deficit. Under
certain circum122
stances, this is a
satisfactory solution but in some cases it may be inflationary. The inflation
which is the
reduction in the
purchasing power of the currency may be acceptable or even beneficial with
certain limits.
However it carries
with it potential dangers for the economy.
Historically, many
cases of hyperinflation were either started or fed by the printing of new money
to meet
budget deficit. So in
some cases, the governments are somehow hesitant about making extensive use of
this
method of financing.
But the introduction of certain amount of new money is often a sound economic
policy.
In fact the
relationship between the supply and value of money and the stability of the
economy is an
important monetary
policy, The other way that government can finance a budget deficit is by
selling bonds i.e
borrowing money from
households and businesses. One possible drawback to this method of financing
deficit
is that it may take
from households money that would otherwise be spent or from the business money
that
would otherwise be
invested in capital goods. Any such decline in spending or investment would of
course
offset the basic goal
of an expansionary fiscal policy.
Conclusion
A budget may be
simply defined as a document indicating the total and composition of government
expenditures
and the sources from
which such expenditure are expected to be financed in the course of the year.
When a government
plans its annual expenditure and revenue in such a way that both are equal, the
budget
is said to be
balanced. Where annual expenditures and tax revenues are planned in such a way
that the
expected revenue
exceed expenditure then the budget is referred to as a surplus budget, however,
the total
intended expenditures
for the year exceed the anticipated revenues, then the budget is referred to as
a deficit
budget.
Essentially, the
budget process in Nigeria involves the determination of the expenditure
priorities of the
government together
with the methods of applying the revenues from which these expenditures are
met.
Although they may be
variations among countries, the objectives and functions of a typical budget in
general include the
following.
- The allocation
function
- The distribution
function
- The Stabilization
function
- The control and
management function
- Protection for
local industries.
There are a number of
ways in which the budget deficits may be financed. The popular ways include:
- Raising loans from
members of the public
- Raising the level
of taxation
- Borrowing from the
commercial banks
- Printing of more
currency units.
A typical annual
budget composition in terms of expenditure is made up of recurrent and capital
expenditure.
The revenue items
includes petroleum profit tax, mining company income tax, PAYE, import duties,
export
duties, exercise
duties, interest and repayment of loans, fines, penalties, sales of goods and
services, rents,
fees and charges,
etc.
Summary
In this unit, we have
usefully interpreted the term budget in several ways thereby analysing in one
conceptual
issues like
objectives goods of national budget, functions of budget, kinds of budget,
budgeting system,
deficit budget,
financing, capital and recurrent expenditures.
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