BUDGET: CONCEPTS AND FORMS

Financial administration is an important facet of public administration. It operates through the instrument of Budget and encompasses the entire budgetary cycle, that is, formulation of the budget, enactment of the budget, execution of the budget, accounting and auditing.
According to C.P. Bhambhri, “the term ‘budget’ was used in its present sense for the first time in 1773, in a satire entitled ‘Opening the Budget’ directed against Walpole’s financial plan for that year”.

Significance

The popular statements made on the importance of financial administration to the government administration are mentioned below:

• L.D. White: “Every administrative act has its financial implications; either creating a charge on the treasury or making a contribution to it”.

• Gladstone: “Budgets are not merely matters of arithmetic but in a thousand ways go to the root of prosperity of individuals, the relations of classes and the strength of kingdoms”.

• Plowden Committee: “Budget is a process in which the instruments of taxation and the expenditure are used to influence the course of economy”.

• F.A. Nigro: “Financial administration is of special importance today for the simple reason that, while there seems to be no limit to what we may ask of government, there is always a limit to the funds available.”

• Aaron Wildavsky: “Budget is the life blood of the government”.

• Kautilya: “All undertakings depend upon finance. Hence, foremost attention shall be paid to the treasury.”

• Hoover Commission: Financial administration is “at the core of modern government.”

• Willoughby: Budget is “an integral and indispensable tool of administration.” He also observed: “The real significance of the budget system lies in providing for the orderly administration of the financial affairs of a government.”

• Dimock: “Of all the aspects of financial administration, that of budgeting raises the largest number of policy issues.”

• Lloyd George: “Government is Finance.”

• Morstein Marx: “Finance is as universally involved in administration as oxygen is in the atmosphere.”

Meaning

The term ‘Budget’ is derived from an old English word ‘Bougett’ which means a sack or pouch. It was a leather bag from which the British Chancellor of Exchequer extracted his papers to present to the Parliament the government’s financial programme for the ensuing fiscal year. From that association, it came to mean the papers themselves, especially those containing financial proposals.

Some of the definitions of budget are:

• Harlod R. Bruce: “A budget is a financial statement, prepared in advance of the opening of a fiscal year, of the estimated revenues and proposed expenditures of a given organisation for the ensuing fiscal year.”

• Wilne: “Budget is a detail of estimated revenues and expenditures—a comparative chart of revenues and expenditures—and over and above this, it is an authority and direction of the competent authority given for the collection of revenues and expenditure of public money.”

• Rene Gaze: “The budget, in a modern state, is a forecast and an estimate of all public receipts and expenses, and for certain expenses and receipts an authorisation to incur them and collect them.”

• Dimock: “A budget is a financial plan summarizing the financial experience of the past, stating a current plan and projecting it over a specified period of time in future.”

• Munro: “Budget is a plan of financing for the incoming fiscal year. This involves an itemised estimate of all revenues on the one hand and all expenditures on the other.”

• Taylor: “Budget is a financial plan of government for a definite period.”

• Rene Stourm: “Budget is a document containing a preliminary approved plan of public revenue and expenditure.”

• Wildavsky: “A budget is a series of goals with price tags attached.”

• Thomas D. Lynch: “The one common subject in any budget discussion is money. Other subjects are important, but they are mentioned in relationship to money or are translated into money.”

• G Jeze: “Budget is a forecast and an estimate of all the public receipts and expenses and, for certain expenses and receipts, an authorization to incur them and to collect them.”

• Leroy Beaulieu: “A budget is a statement of the estimated receipts and expenditure during a fixed period; it is a comparative table giving the amounts of the receipts to be realized and of the expenses to be incurred.”

• Willoughby: “The Budget is something much more than a mere estimate of revenues and expenditure. It is, or should be, at once a report, an estimate, and a proposal.”

Thus, the budget is a statement of the estimated receipts (revenue or income) and expenditure of the government in respect to a financial year. In other words, it is a financial document of the government as presented to the legislature and as sanctioned by the legislature.

Functions

The following points highlight the functions or purposes of budget:

1. It ensures the financial and legal accountability of the executive to the legislature.

2. It ensures the accountability of subordinates to superiors in the administrative hierarchy.

3. It is an instrument of social and economic policy to serve the functions of allocation, distribution and stabilisation.

4. It facilitates the efficient execution of the functions and services of government.

5. It facilitates administrative management and coordination as it unifies the various activities of the government departments into a single plan.

Principles

The principles of sound budgeting are:

Budget Should be on Annual Basis – This means that the legislature should grant money to the executive for one year only. This principle of annuality of budget is considered ideal because:
(a) A year is the optimum period for which the legislature can afford to give financial authority to the executive.
(b) A year is the minimum period needed by the executive to implement the budget effectively.
(c) A year corresponds with the customary measure of human estimates.
Presently, the financial year in India is from 1st April to 31st March. However, the Administrative Reforms Commission of India (ARC) recommended that the financial year should be from 1st November to 31st October.

Estimates Should be on Departmental Basis – This means that the expenditure and revenue estimates of budget should be prepared by the department directly dealing with them, irrespective of the fact that such expenditure or revenue is on account of another department. This principle is suggested because:
(a) It gives a clear picture of the programmes and activities of every department.
(b) It ensures the financial solvency of every department.
To avoid confusion, the department preparing the estimates should provide footnotes indicating the expenditure or revenue of that department dealt with by another department.

Budget Should be a Balanced One – This means that the estimated expenditure should not exceed the estimated revenue.

• If expenditure = revenue → Balanced Budget.

• If revenue > expenditure → Surplus Budget.

• If revenue < expenditure → Deficit Budget.

Estimates Should be on a Cash Basis – This means that the budget estimates should be prepared on the basis of what is actually expected to be spent or received during the financial year. The opposite is Revenue Budgeting, where estimates are made on a demand and liability basis (including accrued revenues and expenditures).

• India, USA, UK → Cash Budgeting.

• France and others → Revenue Budgeting.
  Cash budgeting facilitates early closure of public accounts, while delayed accounts under revenue budgeting reduce the effectiveness of financial control.

One Budget for all Financial Transactions – This means the government should incorporate all revenues and expenditures into a single budget.

• Single Budget → Reveals the overall financial position of the government (overall surplus or deficit).

• Plural Budget → Department-wise separate budgets.

• UK, USA → Single budget.

• France, Switzerland, Germany → Plural budgets.

• India → Two budgets: General Budget and Railway Budget.

Budgeting Should be Gross and not Net – This means that all transactions of receipts and expenditure should be shown fully and separately, not as net balances. Preparing budget only for net receipts/expenditure reduces legislative control over finances due to incomplete accounts.

Estimating Should be Close – The budget estimates should be as accurate as possible.

• Overestimation → Leads to excessive taxation.

• Underestimation → Leads to ineffective execution of budget.
  Also, close budgeting requires specificity in items of expenditure, avoiding lumpsum grants.

Rule of Lapse – Since the budget is annual, money granted but not spent by the end of the financial year lapses and must be returned to the treasury.

• India, UK → Financial year: 1st April to 31st March.

• USA → 1st July to 30th June.

• France → 1st January to 31st December.
  This ensures legislative control, preventing unauthorized reserve funds. However, it often leads to “March Rush” in India (heavy expenditure at year-end).

Revenue and Capital Portions Should be Separated – The revenue budget (current transactions) should be separated from the capital budget (investment transactions).

• Revenue Budget → Financed by current revenue.

• Capital Budget → Financed by savings and borrowings.
  This distinguishes operational expenditure from investment expenditure.

Form of Estimates Should Correspond to Form of Accounts – The form of budgetary estimates should match the form of accounts to enable effective financial control. For example, in India, the budgetary heads correspond with accounting heads → major head, minor head, subhead, detailed head.