[Economy] Budget

Budget is an estimate of income and expenditure for a set period of time in India's case it is of a year. It is the detailed implementation plan of the fiscal policy of the State in hard figures and facts and activities to be pursued for executing and implementing the same for socio-economic development of a country by the executive. It is defined as a series of goals with price tags attached. Where a line item is detailed and a price/cost is mentioned next to it.


UTILITY AND IMPORTANCE OF A BUDGET:

1) As a tool of financial control of the legislature over the executive.

2) As a tool of administration for carrying out its functions as per specified and approved budget.
3) An instrument of Public Policy for development and welfare as well as economic and social growth and development.
4) As a tool of accountability for the legislature over the executive.
5) Budget helps getting five year plans into action.


TYPES AND FORMS OF BUDGETS:



1) Short term - annual - long term Budget : If a Budgetary proposal happens to be for less than a year then it is considered to be a short term budget. Proposal for a year is classified as an Annual Budget and proposals for more than a year are classified as long term budgets.



2) Surplus - Balanced - Deficit : A proposal is considered to be a surplus budget if revenues in a year exceed the expenditure of the same year. A balanced budget is that where both the sides are equal. And a deficit budget is one where the expenditures for the year exceed the revenue for that year.



3) Cash Budget - Revenue Budget : That form of budget where the proposals are based on cash that means in terms of actuals and not based on accruals (increasing or projected increase). It is in practice in India,U.K and USA. Under this type of budget there is a 'rule of lapse' which means that once the validity of the budget appropriation is over,all remaining or unutilised funds will lapse and a fresh proposal will have to be put forward to the legislation for receiving further grants. This kind of budget is considered suitable because it allows re-prioritization of activities of the executive and is a more comprehensive format.



Revenue budget refers to that form of budgeting where proposals are based on accruals and appropriation for their authorization are linked to the completion of the activities and not the validity or life cycle of the budget.



4) Lumpsum Budget: It is a proposal where expenditures are not provided heading wise rather an overall estimate is presented for the approval of the legislature. It is considered useful when funds are required to be appropriated for some unspecified or unclear activity/area which is in the process of determination.



5) Line - Item Budget: It is considered as one of the most popular format as it is simple in approach as well as in understanding. It is that technique of budgeting where every item has a dedicated separate line and column for its complete description along with its rate and the total quantity required as well as the funds required for it are clearly specified. It helps in more accountability of the executive as well.

The drawback of this technique is that it fails to link expenditure with performance after such expenditure as the focus is totally on the expenditure and all the detailing goes into that. It is not comprehensive in its outlook.


6) Performance Budget: A result of the First Hoover Commission in 1949 ( refer - http://en.wikipedia.org/wiki/Hoover_Commission ) it was first applied for federal budgeting in 1950 by President Truman. It is a technique under which allocation of funds are based on functional classification. It specifies the demands with the heading as well as the objective that demand wants to achieve. Thus the legislature has total control over the executive actions and knows what it is to expect at the end of the Budget life cycle and can evaluate it and hold them accountable. This type of budget shows a clear relation between inputs and outputs. It helps the legislature hold the executive accountable in a better manner,helps head of departments of administration as communication for activities is clear from top to bottom and they find it easier to direct subordinates and achieve the specified goals,it helps the auditor as well as he has a clear idea of each and every detail as mentioned above. This technique was first recommended by the Estimates Committee in 1956,however,it was introduced in Parliament for the first time in 1968-69 on recommendation of the first Administrative Reforms Commission.



The limitations to this technique are:


i) Difficult to measure performance of various activities of govt./executive for it is quite vague and cannot be directly measured.

ii) Expenditure made by govt. under number of heads do not present themselves in the form of results that are objective enough to be directly measured.
iii) For various govt. activities,it is not easy to determine the unit cost of such activities.
iv) Not easy to establish links between development heads and accounting heads.



7) Planning Programming Budgeting System (PPBS) :


This system was first developed by General Motors in 1920's for managing financial matters and then implemented in the department of defense. Impressed by the results it was first introduced into political fray for Federal budgeting in 1966 by President Johnson of USA as a replacement for the shortcomings of the Performance Budget system.

It incorporates planning function where basic goals of the organisation are determined along with the selection of programmes that are best suitable to achieve them. Programming encompasses the scheduling and execution of those programmes efficiently through clearly defined projects.Budgeting then takes over to convert the goals,programmes and projects into monetary estimates for a review of the administrative heads and then to be presented to the legislature for appropriation. This technique thus seeks to incorporate all functions of Planning, Decision Making and Budgeting of government goals and objectives/policies.


Limitations of this technique are :


i) Tries to incorporate different departments and agencies work together thus making the process cumbersome.

ii) Periodic reviews and evaluations needed to check its effectiveness along with good and clear coordination between different agencies like planning,bureaucracy,accounting/finance ministries and departments,etc.
iii) Analytical in nature and not practical.
iv) Socio economic objectives are difficult to follow in a calculated manner as a lot of variables come into play.


8) Zero Based Budgeting : This technique was developed at the Texas Instrument Company in USA by Peter Phyrr and adopted for the Federal Budget calculation in 1977 by President Carter.


It is an evaluation of all programmes and expenditures of every year requiring each manager/administrator/executive head to justify his entire budget request in detail.


Evaluation of operational activities are done in terms of costs and benefits. It is based on a comprehensive analysis of priorities,goals and objectives making it more realistic and practical. Targets are specified through efficient planning and control functions.It helps enable better communication and personnel development in organisations.


Limitations are:


i) Effective administration and communication is necessary to implement this technique.

ii) Requires a lot of investment and updated infrastructure and properly trained personnel.
iii) Large data processing and making.
iv) Human biasedness in selection of decisions cannot be overlooked.

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