Budgeting entails preparation for the achievement of specific targets and missions within a given duration by calculating the necessary funds together with the funds at hand. The budget is meant for use by the government in putting its policies to work by regulating the money spent by various agencies in the government (Robert & Lynch, 2004).
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There are various methods of budgeting and they are namely line item budgeting, program budgeting, program planning budgeting system, performance based budgeting, zero – based budgeting, program assessment rating tool and priority based budgeting.
There are several models that should be considered before a budget is prepared because they influence the kind of budget to be prepared. Line item budgeting incorporates the government revenue into the government system. This kind of budgeting is usually presented as vague account of returns.
In program budgeting, the funds are distributed to various programs according to their relevance. On the other hand program planning budgeting system considers the possible results that can be achieved by injecting certain volumes of funds and it is most appropriate for capital ventures.
Three principles of public budgeting should be exercised when preparing a budget; they include answerability, effectiveness and value. Arthur and Sheffrin (2003) explain that answerability addresses the flow of funds into a government project thus it is used as a regulatory tool in project management. Effectiveness concentrates on how a given system uses the available funds to generate profits. This principle is usually applied in performance based assignments.
Lastly, value refers to the comparisons of funds injected into a system to the outcomes of a given system by identifying the effects brought by either side. After highlighting the most important aspects of public budgeting, it is important to consider the stages that a budget goes through before it is published. These stages involve funds assessment which is usually done by the ministry of finance or an independent audit organization.
The second stage is known as budget formulation, which entails drafting of the budget and referring to previous budgets with the aim of identifying faults which can be avoided in the current budget. The third stage involves applying the budget as a government strategy by inviting suggestions from head of departments and the public in general. The final stage is the actual verification of the public budget as a valid strategy of government disbursement of funds.
There are two types of public budgets which can be prepared by the government, namely capital and operating budgets (Stiglitz, 2002). Operating budgets refers to documents that explain how government funds are spent in relation to profits earned for a given timeline in order to keep government agencies afloat. Capital budgets describes how an organization will buy goods and services in future and how those particular goods and services will be availed and their modes and durations of payments details.
Robert and Lynch (2004) argue that there are no known public budgets that are a hundred percent effective. However the accuracy must outweigh faults in any given budget. If the budget does not distribute funds fairly there is bound to be conflict in the government.
For instance, the executive drafts the budget which is then verified by the legislature. If the legislature does not approve the budget some government agencies will be grounded because they wont be able to perform their tasks hence they will have to wait until funds are disbursed or until the next financial year.
The intensity of the above mentioned conflict depends on the system of governance and is most likely to occur in a presidential system of governance. If the same problem occurred in a country governed by a parliamentary system the present parliament would be dissolved to allow for fresh elections to take place.
Budgets faults may occur during budgeting formulation. These are referred as shortfall which occurs because of inadequate funds. These faults can be corrected by borrowing money from the public through bonds which come with low interest rates.
Musgrave (2008) states that these faults are also enhanced by abrupt changes in commerce such as decline in economy and taxation which leads to employee retrenchments hence the government is made to pay for these retrenchments that arise when they are least expected hence government expenditure swells.
This may be due to the fact that prior to the drafting of the government budget there were many people who were not employed, which means by then the government was collecting very little taxes from employees hence there was low expenditure.
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To make sure these financial faults do not occur again, it is advisable to establish methods of generating income for the government before preparing a budget. These methods include taxation, government borrowing and non tax revenues such as selling of properties.
Taxes are monetary fees paid by individuals or corporate entities to the government. They may be paid candidly or in some way. Taxes are paid using currency or in form of labor and they are not optional hence they guarantee the availability of money for the government.
The main aim of taxation is to generate income for the government that’s necessary towards completing its tasks. Wolff (2001) insists that taxation also promotes evenness in prosperity and proceeds. Additionally taxation prevents the spillage of money into spending which would lead to increase in commodity prices.
There are several types of taxes and they include stamp duty which is paid for documents, exercise tax which are paid by manufacturers for the production and selling of their products, sales tax which is mostly paid for by consumers when they purchase items and services from service providers and manufacturers, vehicle registration tax, gift tax, taxes on imported items, corporate income tax, assets tax and personal proceeds tax.
The economy is an extension of the government because it can influence the status of the economy by improving it or by declining. The stability of an economy is rated by evaluating several aspects that include stock prices, price of items, exchange rates, inflation, interest rates, unemployment, and circulation of money, government expenditure and foreign trade.
Governments can also borrow money from its individual citizens or foreign agencies like the international monetary fund. Johnson (2007) explains that this money is borrowed with the aim of sustaining government projects. Treasury bills and bonds are used as security for these loans. This money is not included in the government budget because the budget only account for the money at hand.
However borrowing cash comes with its problems. Government bonds are said to have very little risk on the party that is issuing the money. Economists argue that government shields lenders from loss by increasing the amount of money it manufactures to pay back to its lenders. This statement might contradict itself in the event of a coup because the incoming government may fail to pay debts that were incurred by the previous government.
In advanced states seigniorage is used to generate income for the government. This technique relies on how often cash moves from one person to another within a given country. Although the proceeds are very little they are better than if the cash was to lie idle.
Signe (2004) argues that taxation affects an entire nation thus its fairness or unfairness is felt by all people regardless of whether one is self employed or employed. Some governments are used to use taxation to oppress local industries.
This is done by subsidizing tax on imported items whereas these same items are locally available. When tax on imported items goes down the price of that item goes down therefore the local manufacturers of that item incur huge losses because customers will opt to go for the cheapest option hence the local market declines.
Governments that have its locals at heart tend to raise taxes on imported items to favor local manufacturers. This is because the customers’ taste is influenced by the price of an item versus his/her income. For instance if the government subsidized the tax on imported milk the local dairy industry will be operating at a loss because customers will be tempted to buy imported milk because its cost is slightly lower than that of the locally produced milk.
Governments should also consider reducing taxation on basic items that are used on daily basis in homes. By doing so the manufacturers of these items will have to subsidize the cost of these items hence the common man will be survive at ease. Otherwise items that are considered as luxuries such as cigarettes and alcohol should be hiked to compensate for the most important items.
Citizens appreciate a budget that caters for the needs of the majority rather than that meant to benefit a few individuals. The government takes a central role in ensuring that operational and financial budgets are prepared in line with the public expectations and the available funds from taxes or any form of income.
Arthur, S. and Sheffrin, S.M. (2003).Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson Prentice Hall
Johnson, D.C. (2007).Free lunch: How the wealthiest Americans enrich themselves at government expense (and stick you with the bill). New York: Portfolio/Penguin Group.
Musgrave, R.A. (2008).”Public Finance”. The New Palgrave Dictionary of Economics Abstract. New York: Palgrave Macmillan.
Robert, S.W. & Lynch, T.D. (2004). Public Budgeting in America .5th Ed. Upper saddle River, New Jersey: Pearson.
Signe, K. (2004).”Are Corporate Tax burdens racing to the Bottom in European Union?” EPRU Working Paper. 04-04: 43.
Stiglitz, J.E. (2002).Economics of the Public Sector. 3th Ed. New York Norton: MIT Press.
Wolff, E.N. (2001).Top Heavy. 2nd Ed. New York: The New Press.