MindMap Chapter 5
Government Budget

5.5 - Politicization of the budget

5.3 - Cost-Benefit-Analysis (CBA with regard to Budgetary Decisions)

  • valueable tools for evaluating the net benefits of proposed government projects.
  • represents a practical techniques for determining the relative merits of alternative government projects over time.
  • CBA is not a new tool. Been used in US since 1900

Steps involved in CBA

  1. Brainstorm costs and benefits
  • all the costs and benefits associated with the project or policy are identified.
  • Example: For a manufacturing company considering the implementation of a new technology, the costs may include the initial investment in the technology, training costs, and ongoing maintenance expenses. The benefits may include increased productivity, reduced errors, and potential cost savings.
  1. Evaluate all costs and benefits in Ringgit/Dollar terms.
  • a monetary value is assigned to each cost and benefit identified in step 1.
  • Example: Assigning a monetary value involves converting all costs and benefits into a common currency. For instance, if the cost of employee turnover is being considered, it can be quantified by calculating the recruitment costs, training costs, and lost productivity due to the vacant position.
  1. Compare costs and benefits.
  • the total costs are compared to the total benefits to determine whether the benefits outweigh the costs or vice versa.
  • Example: After assigning monetary values to costs and benefits, a comparison is made to determine whether the benefits outweigh the costs. If the total benefits exceed the total costs, the project or policy is considered economically viable.

Parties involved in budgetary

Public

Civil servants / Goverment machinery

Legislators

Administrators

Interest Group

Factors influencing goverment budgeting.

Leardership

Preventing errors in CBA

  1. Omission error
  • This occurs when an impact is excluded from the CBA. To avoid this error, all direct and indirect causal effects of a proposed action should be considered, and monetary and non-monetary items should be accounted for to ensure the analysis is complete and accurate.
  1. Forecasting error.
  • This error is related to the prediction of impacts over time. To avoid this error, it is important to use reliable data and assumptions, and to consider the uncertainty and variability of the data
  1. Valuation error
  • This error occurs when there is an inaccurate estimation of the prices used in the CBA. To avoid this error, it is important to use reliable data and assumptions, and to consider the uncertainty and variability of the data

Decision making/ policy model

Current trend

  1. Data entry error.
  • This error occurs when there are mistakes in entering data into the accounting system. To prevent this error, it is important to be careful with financial information, put practices in place to detect and correct errors, and work with experts who can ensure that items are properly classified and entered correctly on the books

Political factor

Economic condition

Globalisation, the emergence of modern information and communication technologies, new technologies, new pandemics, natural calamities, and so on.


For example, the government intends to invest more than RM2 billion on repairing and refurbishing roads, bridges, slopes, and buildings damaged or destroyed by the recent flood (Malaysian Reserve, April 8, 2015).

Malaysia Plans, Industrial Malaysia Plans, National Action Plans, and so on are examples of key policies. Tunku Abdul Razak has implemented a New Economic Policy to alleviate poverty and correct racial economic imbalances. MARA and FELDA were established.

Influenced by the PM's vision or his preferences
For example, in Vision 2020, Tun Dr. Mahathir budgeted RM69 billion in RMK5, of which 89% is for socioeconomic expenditure to assure development and attain the status of Developed

The implement BR1M’s policy, government have to allocate RM4.6 billion which expected to benefit 7.9million recipient as promised in PRU13’s manifesto

Inflation, unemployment, the exchange rate, and so on.
For example, in Budget 2013, the Prime Minister provided RM440 million to give loans for trainees to complete skills training in order to improve the necessary skills and knowledge that are in line with the job market in order to tackle unemployment problems.

The Cabinet (PM,DPM, Treasury) – primary policy makers

Parliament (House of Reps & Senates, PAC) – legislative authority to pass various laws involving public finance

Controlling Officer, Auditor General, Accountant General, Central Agencies etc – government machinery

Citizens from all walks of life with various needs, demands, interests & expectations from the government

NGO, OKU, Pensioners, Trade Union, Religious Groups, Activists etc.

5.1 Definition of Budget


Budget is a detailed plan, expressed in quantitative terms that specify how resources will be acquired and used during a specified period of time (Hilton, 2009)


Otto Eckstein – A detail statement of government expected expenditures and revenues.


Learner (1984)-A statement containing a forecast revenues and expenditures for a period of time

5.1 Budget Roles

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Policy Tool

Management tool

Control tool

Political tool

Statement of government expenditures

Performance measurement tools

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5.2.1 Line-Item Budgeting System (LIBS)

Characteristics of LIBS

Advantages of LIBS

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Focused on items/objects of expenditure

Concerned with financial input than the output of its activities

Not concerned with the attainments of policy objectives and their relationship to costs

The presentation of the budget is on organizational basis (ministry or department) rather than looking at expenditures of a particular program.

Less concerned with the performance

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Information presented from this budgeting system can easily be incorporated into the accounting system. This is because, transactions are categorized based on object of expenditure that is similar to the government accounting system.

Budgeted and actual revenues and expenditure ensures detailed comparisons to be made

This is a simple budgeting system and can be easily understood by the users. Hence, facilitate the users in preparation of the budget.

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Drawbacks of LIBS

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Data provided is useful primarily for short-term planning only.

Information presented in the budget expenditure does not state clearly the purpose of the current and future utilization of resources.

As a result, the long run goals of the organization may be jeopardized.

It is oriented more towards providing a framework of financial information that complies with legal requirements rather than providing useful management-type information.

Emphasized “what the government bought and not on what the government did”.

It did not give sufficient information to legislators and the public on why the government bought those particular items.

It did not give the managers freedom/power/authority to adjust allocation according to the needs or situation.

Input orientation which leads to ineffective budget allocation.


Budget document are too bulky and long because they comprise all detail information of what they have bought for all categories.

The performance of the budget is measured only from the financial aspect that is on actual expenditure incurred. Thus, the information on the effects, outcomes and benefits of the programs and activities undertaken are not emphasized

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5.4 Pricing of Public Services -Challenges

Public Demand

Economic Conditions

Limited Resources

Political Factors

Cost Overruns

Unforeseen expenses in public service projects:Unexpected costs can arise during the implementation of public projects, impacting the budget and potentially delaying the completion of essential services.

Inflation and its impact on project costs:Inflation can erode the purchasing power of budgeted funds, affecting the feasibility and success of public service projects.

Scarce funding for essential services: Governments may face challenges when there's not enough money allocated to crucial public services, leading to difficulties in providing necessary resources like healthcare, education, and infrastructure.

Competing priorities within the budget: The government must juggle various needs such as defense, social services, and infrastructure, making it challenging to allocate funds optimally.

Increased expectations for service quality: As public expectations rise, governments face the challenge of meeting higher standards in public services while staying within budget constraints.

Balancing public needs with budget constraints: Governments must navigate the delicate balance of addressing the diverse needs of the public while managing limited financial resources.

Economic downturns affecting revenue: During economic downturns, tax revenue may decrease, putting pressure on the budget and limiting the funds available for public services.

Fiscal policies influencing budget allocations: Government fiscal policies can impact how budgets are allocated to different sectors, affecting public service pricing and availability.

Short-term focus versus long-term sustainability: Political cycles sometimes emphasize short-term gains, posing challenges for sustaining long-term projects with enduring benefits.

5.2.2 Performance-Based Budgeting System (PBBS)

Fundamentals of PBBS

Identifying objectives

Programs planning and structuring

Developing performance indicator

Performance evaluation

Changing political priorities: Shifting political agendas may result in changes to budget priorities, affecting the funding and pricing of public services.

Characteristics of PBBS in Malaysia

It focuses on overall agency objectives.

Emphasizes programs/activities to meet the objectives.

Emphasizes objectives of spending.

The main thrust is to evaluate performance and to ensure various agency/departments attain the objectives. (Evaluation of success)

It is management-oriented. Use the principle ‘let managers manage’.

Involved Performance Evaluating

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Advantages of PBBS

PBBS determine the government’s objectives

Determine programming structure

Emphasized on sources effectiveness

Provides better information on management effectiveness

Systematic & continuous performance evaluation furnish information for future planning & decision making

Programs planning & structuring facilitate prioritization

Drawbacks of PBBS

Goals & objectives of individual agencies are not clear

Difficult to develop performance indicator

Difficult to determine appropriate programs

Required too much information and difficult to get

5.2.3 Modified Budgeting System (MBS)

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Objectives of MBS

To improve programs performance in the utilization of funds (improve policy)

To improve on the distribution and allotment of funds according to priorities set

To upgrade on accountability especially amongst lower officers.

To improve public sector accountability through Program Agreements and Exemption Reports (to avoid fraudulent activities)

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Characteristics of MBS

Expenditure Target

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Programs Agreement & Exceptions Reports

Cycle of Program Evaluations

More generalized approach to expenditure control

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Expenditure Target

Limit or ceiling imposed on an agency in the implementation of expenditure. The ceiling will be decided upon by both the Treasury and agency. For example: if the expenditure limit is RM30million for an agency for a particular financial year, the agency should not exceed the limit without due cause.

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Consist of :

Existing Policy - Refers to programs that have already been approved by Law, the Cabinet, the Ministry, the Treasury or any other authority and are still being implemented in the current year and would continue to be implemented in the following year.

New Policy – refers to programmes planned to be implemented in the next budget period. They are also extension or enlargement of existing policy. (Add up to existing policy, introduction of new courses, establishment of new departments or units)

One-Off – refers to the unavoidable expenditure, non-annual or non-recurrent expenditure. It is considered as one-time purchase

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Advantages

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Central Budget Level

Improve identification of priority expenditure in budget submission

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Reduce paperwork in the preparation of budget submissions and in the conduct of budget examination


Allow more time to discuss new policy proposal and its modification

To provide the Budget Management Division with better information on programs performance

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Departmental Headquarters Level

Increase the department’s opportunity to use strategic planning as the basis for budget preparation

Enable more top-down approach to budgeting

Improve communications of top management priorities to lower level managers and staff

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Line-Management Level

To improve motivation among line managers through increasing awareness and understanding of top management priorities through programs agreement

Greater flexibility in the deployment of resources within aggregate constraints

To enable the financial plans regarding input, output and impact to be used as a management tool

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5.2.4 Outcome Based Budgwting System

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Objectives

Structural mechanism to translate the national transformation policy into effective outcomes of a programme

More authority to the managers

To increase accountability through enhancement of governance framework.

Spending based on “value for money”

It also emphasized on programmes and projects with high multiplier effects.

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Outcome Based Planning

5 years planning need to be prepared based on outcome to be achieved

Planning begins with development of result framework by setting the agreed output and expected outcome

The combination of expected performance, programme and activity levels will form ministry result framework (MRF)

Ministries have to determine outcomes and identify programmes and activities that contribute to the national outcome under NRF

The focus on outcome is to enable programmes to be planned while maximising the utilisation of resources

The top management has to be actively involved in planning and consultancy

Planning process requires expected results to be coordinated so that it is aligned with the NRF

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Advantages of OBB

Sets clear priorities at national, ministry, programme and activity levels

Integration of DE and OE will provide a holistic view of national priorities

Provides a framework for eliminating overlapping programmes

It give better focus on results especially on the outcomes

Allow for the online budget preparation and submission

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Challenges of OBB

The level of acceptance and understanding on OB is still low

The development of OBB requires commitment from top management of ministries and agencies

The qualities of information need to be improved in providing better information and to increase opportunity to use strategic planning as basis for budget preparation

The government need to review the existing structure of programmes to adapt to the OBB

The structure of OBB requires more work and more commitment from the officer