Introduction
Due to scholars pushing for a centralized executive management style, line budgeting was established. Notably, this style of budgeting was made executive centered. This allowed the Accounting Office to inform the congress of the technical capabilities, thus contributing to budget decision-making (Mikesell, 2013). According to Gibran and Sekwat (2009), this form of budgeting facilitated the breakdown of government expenditure into finely detailed items. It was seen to provide the government with the ability to control costs and improve efficiency.
The scholars also believed establishing line budgeting would facilitate a top-down budgeting method, thus placing the executive at the top tier. As much as this method seemed practical, its primary focus was on items of expenditure rather than the purpose of the spending (Gibran & Sekwat, 2009). Line budgeting did not focus on allocating resources. Also, as a result of its implementation, the actions of the budget participants were not essentially explained, thus not incorporating predictive value. After some time, this approach was found not to generate information on program goals and achievement.
Effect of Program Budgeting on the budgetary process
Program form of budgeting replaced performance budgeting. It was formed on the notion that the goals and output of the government should form the basis of budgetary decisions and not the inputs from the produced government goods and services. It was more sophisticated compared to the other budgeting techniques. It relied highly on program forecasting and system analysis, as disclosed by Gibran and Sekwat (2009). This technique was crucial since it majorly focused on the objectives set by the government on its spending (Mikesell, 2013). Compared to the other methods, it also focused on improving rationality in budgetary decision-making. However, this method had some demerits. For instance, it could lead to increased spending if the budget was initiated incorrectly.
Effects of Performance Budgeting on the budgetary process
The adoption of performance budgeting was a result of the inconveniences of line budgeting. This method of budgeting was focused on the functions of as well as activities performed by the government during its implementation of policies. According to the reformers, this budgeting technique seemed practical since it enhanced the election of officials and citizens by the agency heads and program managers to facilitate the identification of costs associated with government activities (Mikesell, 2013). It ensured that the government-controlled prices for operational efficiency were significantly improved. However, this method also resembled line budgeting in ignoring Key’s question. Its focus was only on the theoretical part of achieving specific goals but gave little attention to the broader context of the process of budgetary.
How Political, Economic, and Social Constraints affect the Budgetary Process
Economic Constraints
Economic and political decisions usually result in budget deficits during the budgetary process. This calls for the government to consider the previous level of the structural deficit and the emergent economic conditions, including prices and employment terms, to consolidate a budget successfully. The most significant constraint that affects a government during the budget composition process is the accumulated debt (Mulas-Granados, 2003). The government must allocate interest payments on public expenditures when deficits increase.
Economic decisions are mandatory when governments cannot control and regulate the public debt. Therefore, when a country’s structural deficit is higher and more persistent, it becomes difficult for the government to generate structural surpluses in pursuit of avoiding debts. This is the “snowball effect” and is impactful since it diminishes the alternatives usually evident to governments (Postula & Raczkowski, 2020). According to Mulas-Granados (2003), when the effect of the budget’s interest payments is discounted, the remaining structural balance is crucial when forecasting a monetary change to ensure survival.
Social constraints
High population: The amount of resources allocated for a specific area depends on its population. A high population constrains the amount of money to be issued in the budget process.
High rates of unemployment: With low rates of people employed, the income in the tax collection becomes difficult as the population cannot manage to pay the taxes leading to a strain of resources affecting the budget process.
Age: Suppose the majority of the population comprises older adults. A young population can provide the human resources to generate income that will help in the collection of taxes that will help in the budget process. In that case, the budget process will be affected by the allocation of funds that will help the elderly receive pension services and health benefits.
Political Constraints
Cabinets are crucial in formulating and implementing fiscal policies and modification strategies. The cabinets constitute politicians from the same or different political parties. They usually exhibit distinct ideologies, and they are all dependent on electoral results to continue in office. Numerous scholars have focused on the barriers toward successful consolidation in efforts to solve the problem of public deficit. All these studies revolve around the idea that expenditure control fragmentation in decision-making does not add up.
This is because the majority group can push expenditure. It only covers a small fragment of costs and distortions in increasing revenue that is essential for equilibrating the budget (Caiden, 1994). Regarding these theories, it is evident that larger cabinets and coalitions are primarily associated with higher expenditures, not forgetting benefits. Also, the majority political party that takes control of the government usually exhibits distinct ideologies concerning the country’s economy.
As per the assumption of fiscal illusion, it is assumed that voters overestimate the benefits associated with present modes of spending and estimate future taxes. In many cases, the tax burden is underestimated and misused to allocate resources to current expenditures (Rubin, 2008). In addition, when the long-term impacts are realized, it becomes challenging to make the misinformed voters comprehend the public budget consumption details (Rubin, 2008). The politicians also depend on how popular their policies are to retain their offices. The guidelines also may launch a fiscal expansion that may result in increased GDP growth and the employment level. These policies also affect newly elected governments. Therefore, when the policies are not well, they affect the budgetary process of the next government in the long run.
Impact of Economic Factors
Economic constraints are often associated with changes in the budget such that there could be a shortage or abundance. Mulas-Granados, (2003) contends that the automatic stabilization of an economic cycle has pronounced effects on that tax revenue usually decreases if a recession exists. The employment benefits raise the general expenditures. The impact of unemployment benefits is more significant in generous welfare systems in that when the rate of unemployment increases, it increases the public resources used to cater to all registered unemployment assistances. Consequently, it becomes tougher to enhance fiscal adjustments associated with spending cuts as the population to be catered for increases.
Empirical evidence of political and economic constaints
For testing the effectiveness of both the political and economic factors on the public budget in the adjustment and non-adjustment years, a regression is made in 31 years since 1970 in 15 European Member states. Fixed effects in this regression model are used because there exist variations in more variations in the variables across the units than over time (Albuquerque, Koskinen, and Zhang, 2019). The specifications used in this regression model are similar to those used by the Kontopoulus and Perotti. Variables are used because they capture the reaction function of those making policy while implementing the countercyclical procedures.
Impact of Major Impacts of Stakeholders
Internal stakeholders effects
The internal stakeholders in government organizations are directly involved in managing the latter’s activities. They equally play a crucial role in the budgetary process of government organizations. The stakeholders can affect the successful endeavors of the government organizations and can also be affected by these endeavors. Internal stakeholders are also referred to as primary stakeholders. They provide their services to the organization, and they are significantly influenced by the decisions, outcomes, and the organization’s performance. They are usually aware of all the internal issues in the respective government organization.
Participation of the internal stakeholders affects the process of budgeting in government organizations. Since they are aware of the issues with the organization’s budget and operation, they help improve the decisions made by the managers in formulating budgets for the organization. This is done by pointing out where the improvements to be made exist. This is following the organization’s operations, such as distributing its services and goods, managing its supply chain, and paying salaries to different employees. Internal stakeholders also pointed out the challenges with the previous budgets and thus contributed effectively to successful budget consolidation.
Stakeholders can also affect the successful budgetary process negatively. Some scholars argue that the participation of internal stakeholders in budgetary processes can impact efficiency. They say that this process is time-consuming, involves considerable administrative cost, and can result in policy systems conflicts. Also, the decision-making process is complicated and also results to decision delays. The decision outcome costs can also be increased as some of the stakeholders who are impactful during the decision-making process may lack knowledge on complex issues, thus resulting in poor decisions. They may also formulate policies that satisfy their needs in the budget and accordingly alter the whole process by increasing budget costs. Internal stakeholders, considering their influence on the budget process in a government organization, positively and negatively change the decisions reached. This affects the outcome of what is finally implemented during the process.
Impacts of External Stakeholders
External stakeholders include individuals that are not in the organization. However, their participation is crucial to government organizations. Numerous studies contend that stakeholder participation enhances efficiency. This is so since the stakeholders are given a chance to suggest new ideas that help reduce wasteful projects, save costs and streamline duplicated administrative processes (Caiden, 1994). Public input is essential since helpful information can be obtained that can help managers improve general efficiency. This can be allocative efficiency, whereby resources are allocated effectively, or managerial efficiency, whereby the information can enhance the process of public service provision. External stakeholder participation is significant because the governments can avoid costs associated with civil litigation against the government (Gibran & Sekwat, 2009). Since citizens’ resistance is reduced, the government can successfully improve implementation efficiency.
Participation from the external stakeholders also leads to accountability pressures. These pressures impact the leaders in government organizations in that they become concerned with effectiveness issues and thus provide what the stakeholders desire. When initiating specific processes for the organization, external stakeholders can identify excellent and destructive features associated with particular policies and, therefore, analyze them and give their view on how to attend to them to maximize efficiency (Saliterer et al., 2018). They can do so by expressing their perspectives and objections concerning the policies set. With that, accountability in organizations when initiating budgetary processes is realized, thus leading to better decisions.
External stakeholders, through their participation in organizations’ processes, enhance equity. Equity is the distribution of benefits and service costs among different groups in society in a fair way. It is a crucial democratic but has not been examined effectively in empirical public administration literature. External stakeholders must facilitate different societal groups’ access to bureaucracy to empower and enrich the groups. While the participation of external stakeholders results in more equitable public service outcomes, their participation is questioned. Some scholars believe their involvement decreases social equality since particular groups may be favored while others may be disadvantaged (Ho, 2018). As a result, it boosts inequality.
Public Budgeting obligation in Handling Public Sector Institutions and their impacts
Domestically
The government controls the public sector as part of the economy. Services from the public sector include healthcare for all people, infrastructure, the police, public education, public transit, and defense agencies. These services are all included in the government’s annual budgeting process. Budgeting in the public sector exhibits various impacts. Sometimes the budgetary decisions end up affecting the diverse domestic organization. For instance, when the government ceases the allocation of funds for highways and infrastructure, positive and negative impacts are realized in the respective regions.
The positive effect on the government part is the financial cuts in that area as the government is not required to spend money on these programs. However, the negative impacts affect many. For instance, the companies that manufacture and trade the construction equipment and workers that work on the construction remain jobless and unable to provide for their families. Under these circumstances, the suppliers of the materials for highway construction and many others are in the same chain. Thus, the decision of this type of financial cut negatively affects all social facets.
Likewise, the government’s decision to subsidize different industries like agriculture positively impacts society, especially after availing of improved technology to boost yields. However, the previous farmers are negatively affected because their yields lose value in the market. The positive impacts are felt by many, while it is only the government finances that are affected negatively. Some groups that are affected positively include the farmers who receive funds to improve their yields, companies producing seeds, the soil companies that sell their services and goods to improve products, and many others. Also, more employment opportunities arise for skilled technological and farming personnel. In the long run, food prices may be lowered for the consumers. Thus, budgetary decisions affect the public sector positively and negatively impact the government and the public.
Internationally
Public budgeting can also alter the performance of the organizations in the country operating internationally. Companies that provide goods and services must adhere to government regulations (Rickard & Caraway, 2019). This includes terms of operation and the tax they must adhere to. Some of these regulations, when favorable, enable these organizations to conduct their operations internationally hence gaining a broader market effectively.
The budgetary process usually plans for the costs of exporting and importing goods into the country, making the companies whose supply chains run internationally dependent on whatever policies are set. For instance, a company that obtains its raw materials from other countries may be affected when the government decides to raise the taxes on importing these materials. The company may be forced to spend more on production and earn less from the produced goods. On the other hand, when these taxes are reduced significantly, the government may suffer financially, but this is merit to the companies importing the products. This is also the case with the companies that export their products.
In addition, budgetary decisions may also cause revenue drop in the country when many organizations operate internationally. For instance, companies’ operations may be significantly affected when the government increases import and export taxes (Menifield, 2020). They will no longer be able to supply their goods internationally and may end up collapsing. As a result, the country gains little or no revenue from the respective companies. Not only the company will be affected but also the entire chain associated with the company’s activities. This includes the customers and the employees.
The customer will not be able to acquire the goods, and thus the government will not also receive the revenue from the products. Local and international employees will also not obtain a source of income, which does not solve the poverty situation in the country but instead increases it. Thus, when the government makes decisions without considering the effects of their decision, the country’s economic well-being is drastically affected.
The budgetary process in the public sector, when altered, can affect the economy of the company, and this may cause the latter to be less competitive in the international market. For instance, when the companies that contribute to improving the economy when affected by budgetary decisions may affect the demand for the country’s products. This will thus decrease competitiveness hence involving its economy. Other emergent economies will replace them, and the chance of recovery may be minimal (Thom, 2019). Considering these impacts, public budgeting decisions should be effectively formulated to improve the public sector.
References
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Caiden, N. (1994). Budgeting in historical and comparative perspective. Public Budgeting & Finance, 14(1), 44–57.
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Ho, A. T. K. (2018). From performance budgeting to performance budget management: Theory and practice. Public Administration Review, 78(5), 748-758.
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Rubin, I. (2008). Public Budgeting: Policy. Process, and Politics, New York: ME Sharpe Inc.
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Thom, M. (2019). Teaching public financial management: an integrated approach to a critical subject. Teaching Public Administration, 37(1), 92-106.