Public Budgeting and Fiscal Administration Research Paper

Budgeting is a process of allocation of suitable funds to different departments of government or companies. It allows the company to regulate and control their spending and to avoid any over and wasteful spending. Wisely planned budgets would enhance the use of assets and investments. The budget must be flexible enough to accommodate any rising change according to the change in the surrounding environment or situation. There are different models and types of the budget proposed.

Incremental budget

This type of budgeting is based on the previous year’s budget. A model of the budget of the previous year is taken as a model to design the budget for the current year. In this context, it is a more conservative form of budgeting. It seeks to save money, which may otherwise be wasted or used upon any risky project. It allows easy allocation of budget in the projects that are underway; spending may be increased or decreased in any part depending upon its feasibility when planning incremental budget. As is evident from the working of this budgeting system it only seeks to ensure continuity of projects that are based on long-term planning requiring many years for their completion, so incremental budget allows to make necessary changes as per requirement. There are no urgent changes in it, this attribute directly allows the budgeting system to be stable over a period of time, allowing projects to be completed without distractions in a linear fashion. “Incrementalism averts risk, provides an adequate rationale for decision-making, reinforces an existing equilibrium of political forces (potentially upset by a shift in the party in either the executive or the legislative branch), averts intense and destabilizing conflict, and is easily understood by all.” (Hayes, 2001)

An incremental budget allocates resources according to the evaluation of the project, and it determines how much budget should be spent on it allowing the extra budget to be used on other activities of interest. This determines in principle “spending up to the budget.”, and in limits of resources.

Specifics of the budget are given by:

Advantages

“Incremental Budget is steady in nature, characterized by gradual changes. The changes introduced in an Incremental Budget are easily visible. With an Incremental Budget, it is easy to synchronize between different other budgetary documents. The total concept of Incremental Budgeting is simple and easily comprehendible, hence operation-friendly in nature. Incremental Budgeting helps the managerial level officials to operate consistently in their individual departments” (EconomyWatch).

1. Change: As the budget is spent on a regular basis, in incremental design; palpable benefits of this can be seen in due course of time. To take an example, if the state has to spend on the uplift of education for poor people, then a portion of the budget may be allocated to it and at the end of the budgetary period, depending upon evaluation; how speedily the work was carried out; and how much additional resource may be added to it may be thought over while planning next incremental budget. This pattern of budget help do away with short term urgencies, which may be aroused by the anti-political forces which seek to disrupt the credibility of working government to their advantage, so that, a stable working model will accrue benefits and the policy of the government is ensured over a long span of time. Secondly, it establishes a policy principle in which all necessary action is taken.
2. As the project requires continuous monitoring due to noting of any changes that take place in it; determining permanency, and any other record-keeping deemed as work of a manager, so that on a departmental level liaison may be carried out. It is, in part, due to the fact, that the same pattern of the record is being maintained over time with minor variation at the time of new budget planning. Whereas, in zero-based budgeting, regular and timely training of the manager becomes necessary because such type of adventuresome budget requires it to clearly comprehend before it is successful at all levels.
3. In comparison to a zero-based budget, in which, an exhaustive list of subunits and exhaustive analysis and comprehension is required for each new budget session, incremental budget is well defined and preplanned, therefore team efforts are more regulated and systematic.
4. Chances of conflict may be minimized if all parties know beforehand allocation of resources, and jumpy decisions may be avoided; since these may create problems and many coordinating units may be in great turmoil if sudden changes in budgets are made or the project is stopped all at once. The scenario is well-matched if, for example, the executive or administrative chief is changed. In this setting, it seeks to continuity of the project. If not, any bargaining, termination of the budget may be effected when the government change or if they are forced.
5. The most important reason for carrying out incremental budget is that there are many components of budget planning viz education, agriculture, industry, and a long list of priority issues. Therefore, it can not be the work of a single person to do planning for all of these issues; a great number of people is needed to plan relevant portions of the budget. Additionally, it requires a systematic step-by-step approach to formulate a budget, whereas, time available for the budgeting process is quite limited so that many complicated procedures will consume all-time in budget making, and the year will pass by to implement it. When it is implemented, necessary changes, its utility may be evaluated. Which may need revamping, and conflicting interests of the different parties will complicate the matter even more. Keeping all of these issues in mind, the only possible solution seems to be an incremental planning budget, which solves all of these difficulties. It is the only tool to deal with the complexity of the budgeting process to reach a workable budgeting model. In this way, we can divide our rational use of the certain project in a certain frame of time.
6. Incremental budgeting is a product of the realization of past unworkable budgeting models, causing it to retain centralization and rationalization in one piece.
7. Inherent in the system of the incremental budget is proper decision making; allowing only a few new projects to be included in the list of the many ongoing projects. So that new budget projects added are allocated properly and revised according to possible indicators of budgeting.

Disadvantages

“Incremental Budgeting encourages a “spend it or lose it” attitude, which makes it difficult to maintain the terms and conditions of the budgetary document. The failure of the Incremental Budgeting approach lies in not considering the changing economic circumstances. Previously, the managers were habituated to overestimating their needs, to make an Incremental Budget all the more user-friendly in nature. These yielded favorable outcomes. An Incremental Budget tends to become obsolete quickly when it does not associate with the existing work type or activity level.” (EconomyWatch)

1. It presupposes that all budgets and their subunits will go in the same direction as the budget is allocated for them. It does not give heed to those factors where radical changes may be taken. Especially when the political opinion of people is in favor of the change, and there is a clear-cut mandate for this as indicated by outstanding victory in the election. Additionally, there is a risk of inefficient allocation of resources based on which items are needed more than the others. This advantage is apparent is zero based budget.
2. For efficient budget to be; there is need of incorporating emerging ideas keeping track of changing times and challenges. This is not possible in this system. In zero based budget, it is possible to gauge if any item is unduly given more weight age. This exaggerated part of the budget may be excised in it allowing unnecessary wastage of resources.
3. The budget may no longer be up to the required level of activity; since it is to be spent up to the budget without giving regard to needs and benefits as may be achieved in zero based budget.
4. During the course of budget session, priorities of the budget may have changed.
5. The budget is such that managers can overestimate their requirements to achieve the budget in which they can work into, which extends them undue favor.
6. In zero based budget managers are given more proactive roles, they are required to initiate an activity with their training; they feel more responsible to take decisions. But in incremental budget this benefit is denied as working becomes more monotonous and regular which dulls their faculties thereby rendering them inefficient.

Rational choice theory

This theory is used to understand social and economic behavior and ways and means to proper to model it. It has well established in microeconomics, political science, and philosophy.

Rational choice means taking appropriate action in any given circumstances which are full of alternatives and limitations. Rational choice theory is also known as rational behavior. Rationality involves analysis between different choices. “Rational choice models change uncertainly into risk, convert risk from a constraint that paralyzes action to a set of opportunities that encourages decision, measure decisions taken against presumably more “rational” options, and provide a baseline to determine how well politicians maximize their preferences or those of constituents.” (Pious, 1999).

Underlying assumption of this theory is that people having different set of behaviors shows their choices which are aimed at increasing benefits and avoiding extra costs. We can say they compare costs and benefits of each situation and they act in preference to them. This is specifically seen in microeconomics where people make different choices with respect to cost and benefits. So their aim is combination of useful result with minimum of cost. Therefore people will compare prices of same things and buy only those which are of any utility to them. “Prescriptively, rational choice assumes that maximizing or satisfying individual game payoffs ultimately maximizes the public good because solutions that are more efficient for the parties also increase the payoffs for the society at large.” (Pious, 1999).

There are two main assumptions of rational choice theory:

1. Completeness:- That all actions are given by in order of preference
2. Transitivity:- a person can move from one choice to another for example, if for a given person, apple is better than a banana, and apple is better than orange, then it is possible that banana is better than orange to the same person.

These two assumptions result into many choices a person can make, and the choices he makes are specific to him only.

But a person can have strict preference. In the example mentioned above a person can only prefer apple over banana but may not prefer banana over apple. This preference can be weak, in which case a person may prefer one thing over the other, and vice versa. Sometimes, there may be indifference to either of these things.

Any individual can claim to have complete information about what will happen if he chose a certain choice; he has time to ponder over the alternative choices. Sometimes this type of calculation could only be probable.

It should be noted that preferences are due to their utility. Taking same example, apple is better than banana; banana is better than orange; orange is better than being empty handed.

Assumptions and behavioral predictions are source of criticism. Some people argue that bounded rationality is more psychologically reasonable. It does not exclude idea that reason lies behind every decision making. There is also another criticism that rational choice theory lacks empirical basis. Experimental economics and experimental game theory suggest that some human behaviors continuously deviate from rational choice. Green and Sapiro argue that empirical outputs of rational choice theory have been limited. They argue that this is especially true about workable literature of political science. So rational choice theory has not provided enough information about political interactions.

Schram and Caterino (2006) argue that fundamental methodological model of natural science is only methodology even in sphere of social sciences.

“What can presidential scholars learn from rational choice methodology? Its champions claim that it will take over the field because generational demographics favor it (a nice way of saying that eventually the old fogies will depart) and because presidential scholarship lacks methodological rigor.(1) Its critics reply that rational choice methodology is to rational decision making as military music is to music, because the mathematics are trivial and the logic of inquiry wrongheaded.(2)” (Pious, 1999)

It does not mean that rational choice theory is wholly baseless or without use: two major uses of are important in social sciences; one, that is assuming human decisions are based upon reason and preferences gives us information that these can be changed or modeled, moreover, decisions about their future actions may be deduced from it. Second, mathematical formulations of rational choice help social scientists to reach at results from which predictions can be made and conclusions may be derived.

Researchers such as Kenneth J. Arrow used studies of rational choice theory in many presidential administrations. It used this model to derive tax structures, in educational field, and in health services which it was privatized to be accessed by many people. Recently, Condoleezza Rice provided justification using this theory to increase defense spending.

Different models of change have been proposed. Methods and approaches used for change can be adopted in budgeting as well. The empirical-rational model is based on the fact that “individuals are rational and will follow their rational self-esteem. A good change will be adopted by only those who have good intentions.” This method stresses on fixing the part, that is the communication itself and making new ways for developing communication skills to bring the change. The power-coercive method of change would also not be suitable for change in communication in budgeting as it uses power or force to make change. In this method individuals are forced to adopt change. In this method the rules and regulations will be imposed on the staff, “that’s how they have to communicate and behave” to make a change in the current environment. However, this method has brought very few changes as seen from the history and is very less productive.

The most appropriate and long last change can be brought through normative-re-educative approach. Everything that is accepted does not come passively but individual struggles to get it. Changes are brought through actions of people who are in charge of it by improving their thinking at personal level. The individuals who are in charge of it are educated, trained, and guided. In addition, individuals adopt change by understanding and re-educating themselves. In this method the work is done collaboratively with clients, agents and other team workers to bring a change.

Zero-based budgeting

Zero-based budgeting does not employ previous framework. But it involves in making new plans and decisions for new budget according to current trends. The previous budget has to be changed and modified according to the current situation. It involves planning and decision-making that almost reverses the traditional budget. As compared to incremental budget in which there is no change is made to previous budget, but same budget is used while only increments are made as compared to previous years. Incremental budgeting is rigid and does not fit into the current changing environment though budget making becomes very easy as no additional work or efforts are needed to implement it.

As compared to incremental budgeting, zero-based budget is very comprehensive. In this each and every part, section and department is reviewed thoroughly and changes are made according to the current needs. It does not rely only on the increments but all other expenditures are estimated and incorporated into the new budget. In zero-based budgeting every aspect of budget is detailed and every request has to be elaborated and justified. Hence the name implies “zero-based” as everything is made and justified from the scratch, not using the elements from the previous budget. In some way it’s just the opposite of incremental budgeting.

In zero based budgeting, every aspect is financed in such a way that every dollar which earned or lost is adjusted in some way to increase or decrease the new budget. Its benefits and advantages is that first of all it is adjusted to the current environment and conditions. It employs best resources in an efficient way to meet the needs of current situation. It is cost effective and improves the budget to fit into the current circumstances.

It not only improves the operations but also eliminates any obsolete methods to avoid any additional expenditure. It needs a lot of efforts to prepare a new budget.

Hence, different types of budgeting would help control budget according to different circumstances.

References

1. Arrow, Kenneth J. ([1987] 1989). “Economic theory and the hypothesis of rationality,” The New Palgrave: Utility and Probability, Page-arrow viewable: p. 25-39.
2. Becker, Gary S. (1978). The Economic Approach to Human Behavior. University of Chicago Press.
3. Bicchieri, Cristina (1993). Rationality and Coordination. Cambridge University Press
4. Bicchieri, Cristina (2003). “Rationality and Game Theory”, in The Handbook of Rationality, The Oxford Reference Library of Philosophy, Oxford University Press.
5. Coleman, James S. (1990). Foundations of Social Theory Economy Watch.
6. Green, Donald P.; Shapiro, Ian. (1994). Pathologies of Rational Choice Theory: A Critique of Applications in Political Science. Yale University Press.
7. Hayes, W. (2001)
8. Schram, Sanford F. and Brian Caterino (2006eds.). Making Political Science Matter: Debating Knowledge, Research, and Method. New York and London: New York University Press.
9. Sen, Amartya (1987). “Rational behaviour,” The New Palgrave: A Dictionary of Economics, v. 3, pp. 68-76.