The public sector budgetary process

By Benjamin Chitege



BUDGETS are an integral process in any organisation’s strategic planning activities. It is therefore important that organisation’s develo

p a sound appreciation of general budgeting principles, as well as the relevance of budgeting in the current Zimbabwe environment


In the context of this article, a budget is defined as an accounting plan which normally serves the purpose of quantifying the objectives of the organisation for an agreed period and provides a consistent basis for control and performance evaluation. The purpose of a budget is therefore to reflect in monetary terms a shared vision on how the operational and capital activities or the agreed strategy for a specific period will be carried out. It is also a way of communicating to all interested parties where the organisational priorities lie for the duration of the budget. The budget is irrelevant if it does not address and provide a basis for instituting control over revenue generation and spending.


The budgeting process


There are two main types of budgeting, the traditional incremental approach where by if the salaries bill is X this year, and inflation is Y and we are planning on appointing Z additional staff then the salary budget is established by applying inflation, known/anticipated changes in grades and the projected costs of new employees.


Under this approach there is no attempt to justify the continued requirement to retain each of the existing employees. There is also no attempt to identify special talent and review their pay position for the purpose of convincing them that the organisation values them and would like to retain them.


On the other extreme of the budgeting systems is the zero based budgeting. This is based on the assumption that the past has no relevance to tomorrow and therefore a budget should start on a clean slate and every item that is provided for has to be justified. While there are other variances between these two extremes, it suffice to say that none of these two are adequate for all situations. While incrementalism has served most people well, mostly because of its simplicity, there are situations requiring a more radical approach. Under incremental budgeting, there is not much room for radical change or turnaround.


On the other hand, there is no point in starting the budget process by asking whether the organisation needs people. The reality generally is that there are elements of both principles in most budget decisions. For an example, if an organisation has established through a review of its marketing plan that it will deliver to its customers using its own transport then it would be pointless to debate the requirement for a driver. What may still need to be debated is whether a full time driver is required.


Budget assumptions


Given that the dictionary describes a budget as an “estimate” it must follow that a budget is based on assumptions. The quality of each budget cannot be divorced from the quality of assumptions made about the budget. In our current environment for example, assumptions on the rate of inflation and foreign currency exchange rate are key. Equally important is the assumption on how frequently the budget needs to be reviewed given the rate at which these two are changing. Other routine budget assumptions would cover such issues as the market, human skills availability, and access to other key resources. The usefulness of the budget as a control tool is greatly enhanced where the original assumptions were robust.


Budgetary control is a process where by the generation of revenue is planned and monitored while expenditure is controlled and reviewed regularly by comparing the actual with the estimates. The review entails investigating all material variances, positive or negative. The review process is undertaken in order for management to institute corrective measures. Occasionally, they may notice that the circumstance under which the budget was made have changed so radically that the assumptions upon which it was based have become irrelevant and inapplicable. In such circumstances, it is unavoidable to continue to try and control your financial process through a budget but to rather revisit the budget process and the assumption.


This process is of limited value if it is regarded as an exercise by accountants, the accountants’ monthly ritual. While the accountants will provide the monthly numbers the actual value is in the explanations provided by the operational units on the variances. Equally important is what these operational managers propose to do about the variances particularly the negative variances. Interestingly, where operational units do not participate fully in the budget review exercise, the explanations for variances tend to be unrealistic and inadequate. It cannot be overemphasised that while the accountant plays a critical role in coordinating the process, the budget is not the accountant’s budget.


Recent changes in the Zimbabwe economic numbers, driven by the current level of inflation, have prompted comments like, “who” needs a budget? The emotions behind this reaction and the genuine concerns about the relevancy of budgeting are both ease to understand and appreciate. One can appreciate the additional things that managers have to deal with in this environment; things that they used to take for granted or delegate and can further appreciate the reluctance to review budgets that are by and large meaningless.


Perhaps the answer lies in budgeting in a currency that has more stability than the Zimbabwe dollar is at the moment. The more difficult the circumstance the more one needs to focus and a budget is one way of assisting in remaining focused.


How does Government increase its Expenditure budget?


Government can and does increase inflows through donations, grants and loans. If an American foundation donates for example road making equipment to the Ministry of Transport, this has the effect of increasing public capital expenditure. It will also increase recurrent expenditure through maintenance costs, fuel, etc. The fact that Government has not paid for the equipment should be reflected in the national accounts and budget through an annual report on gifts and donations. Where a development partner decides to grant funds to a particular Ministry, it will also be reflected in the national budget under grants. At some point in time one might have come across loan agreements tabled in Parliament for ratification. This process ensures transparency in the borrowing process and increases Government’s cash inflows.


How do you increase inflows? At a personal or business level you increase income or revenue through identifying additional sources of revenue through marketing, price increases or the double edged sword of inflation. You can also identify new lines of business. How then does Government increase revenue? This is done through one of two methods, a statutory instrument or a mini-budget. For reasonably small changes to taxation measures, Government can introduce these through a statutory instrument. Where significant shortfalls are forecast, the Minister responsible for Finance is required to address Parliament on the issue and submit a new set of revenue measures for meeting the shortfalls. A majority of us are familiar with changes to taxation announced during the year through Parliament; those that invariably impact consumers of beer, wine and cigarettes. The size of the mini-budget will depend on the projected cash/revenue shortfall Government seeks to cover.


Where Government’s original expenditure budget is inadequate for meeting its objectives, there are various options that are available in the budget law to allow for increased levels of expenditure. The most common option is the tabling in Parliament of a supplementary appropriation/budget. This is a budget that is formulated mid-way the financial period because the original budget had been depleted and in order for the Government to function through out the year. Implied in the term supplementary budget is that Government’s objectives have not really changed but for some reason or another, the money is inadequate. Also implied is that when and as the need arises, Parliament is in session and can debate and approve the proposed increase. What then happens when Parliament is not in session? The law allows the Minister responsible for Finance to approach the President and apply for a Presidential warrant. Once signed by the President, the warrant becomes part of the budget for that year.


There will still be, however, the legal requirement for Parliament to approve in retrospect this extra expenditure. This is achieved through an “additional appropriation” a form of condonation on by Parliament, on what has already been spent by the Executive. There are legally no limits to supplementary and additional appropriations but invariably Zimbabwe has tended to go through one or two of these every year.


* Benjamin Chitege is an Advisory Consultant (Transformation).


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Disclaimer: This publication contains information in summary form and is therefore intended for guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgement.