BUDGET PROCESSES: BANGLADESH PERSPECTIVE
What is Budget?
A budget is a financial document or an action plan which is prepared and used to project future income and expenses. It can also include non-monetary information with monetary information.
What are Budget characteristics?
Some Characteristics of Budget in Bangladesh.
- It is expressed in quantitative or monetary terms
- It is prepared for a fixed period of time. It is prepared before the period in which it commences
- It spells out the objects and the policies to be pursued in order to achieve the objective of the organization
- Many people are involved in drawing up a budget
- Flexible enough to allow changes in the changing environment
- Prepared on the basis of established standards of performance
- Analysis of cost and revenues
- On the basis of budget report performance of the organization is constantly monitored
- It is effective during a financial year starting from July 1 and ending on June 30, next year
- Budget is divided into Revenue Budget, Capital Budget and Development Budget
- The government budgeting is done on a cash basis
- Both receipts and expenditures are shown in cash terms
- Foreign loans are reflected on a gross receipt basis showing total disbursement;
Budgeting Concepts:
- Revenue = Tax + Non-tax
- Expenditure = Revenue + Development
- Deficit= Expenditure – receipts
- Deficit Financing requires Borrowing
- From External Sources
- Loans, Grants, project Aid
- From Domestic Sources
- Loans from Banks
- Loans from Non-Banking sources
Basis of Budget:
- Budgets have an economic, political and technical basis.
- Unlike a pure economic budget, they are not entirely designed to allocate scarce resources for the best economic use.
- They also have a political basis wherein different interests push and pull in an attempt to obtain benefits and avoid burdens.
- The technical element is the forecast of the likely levels of revenues and expenses.
Government budget:
A government budget is a legal document that is often passed by the legislature and approved by the chief executive or president.
The two basic elements:
i) Revenues and
ii) Expenses.
Revenues are derived from taxes and non-tax revenue. Government expenses include spending on current goods and services, which economists call government consumption. Government investment expenditures such as infrastructure investment or research expenditure; and transfer payments like unemployment or retirement benefits, Social Safety nets, any subsidies etc.
Government Budgets contain the strategies for mobilization, allocation and disbursement of public money by means of fiscal and monetary operations with due consideration of political, economic, and bureaucratic decision-making processes. Bangladesh uses the term 'Annual Financial Statement', which shows the estimated receipts and expenditures of the government for a particular financial year.
Government budget in the country has two parts: Revenue and Development. The former is concerned with current revenues and expenditures, concerning the maintenance of normal priority and essential services, while the latter is prepared for development activities.
Types of Government Budget:
i) Balance Budget
ii) Unbalanced Budget
-Surplus Budget
-Deficit Budget
Accounting Systems:
Accounting systems record financial transactions. The two major accounting systems are
i) cash accounting and
ii) Accrual accounting.
Cash accounting systems recognize transactions and events when cash is received or paid. Accrual accounting systems record payments and receipts when parties enter into a commitment, not when cash changes hands.
Capital Expenditure:
A government’s assets could be financial (e.g. investments, loans/ advances given, equities) or physical (factories, bridges, school buildings, hospital buildings), government’s liabilities are financial and they are amounts owed to other parties (e.g. borrowings and advances received by the government). Capital Expenditure incurred by any government is usually meant for increasing the government’s assets or reducing its liabilities.
Debt:
Government debt is the outstanding amount that the government owes to private lenders at any given point in time. Governments borrow when they run deficits, but reduce outstanding debt when they run surpluses. Thus debt essentially represents the total of all annual deficits, minus any annual surpluses, over the years. Governments can borrow by taking out a loan directly from a financial institution, such as a bank. Governments can also issue bonds that are purchased by domestic and foreign businesses and individuals.
Fiscal Deficit:
Fiscal Deficit of a government is the gap between its “Total Expenditure (including Loans net of Repayments)” and its “Total Receipts (excluding new Debt to be taken)”. Thus, Fiscal Deficit indicates the borrowing to be made by the government in a particular year for which the Budget is meant. If Total Receipts (excluding new Debt) exceed Total Expenditure of the government, then there would be a Surplus for the government, and hence, no need for borrowing.
Fiscal Policy:
Fiscal policy refers to government actions with respect to aggregate levels of revenue and spending, and the resulting surpluses or deficits. Fiscal policy is the primary means by which the government influences the economy.
An “easy” fiscal policy is intended to stimulate short-term economic growth by increasing government spending or reducing revenues. A “tight” fiscal policy restrains short term demand by reducing spending or increasing taxes and is often intended to restrain inflation. The government sets and implements fiscal policy through the budget.
Performance Budgeting:
Performance budgeting refers to a budget process that integrates information about the impact of government spending. In its simplest form, performance budgeting places more emphasis on the outputs and outcomes associated with government expenditure and takes this information into account when setting future funding levels.
Revenue Expenditure:
Revenue Expenditure incurred by the government generally does not have anything to do with the creation of assets or reduction of liabilities of the government. Most kinds of Revenue Expenditures are recurring or current expenditures since the government incurs these expenditures periodically from every Budget. Some examples of Revenue Expenditure:
- Government pays the Interest charges due on a loan from International Monetary Fund (no effect on the size of the original liability of Government)
- Government expenditure on Food Subsidy (no effect on assets/ liabilities)
- Government spending on Salary of its employees
- Government spending on the procurement of medicines for its hospitals
- Government spending on operation and maintenance of its assets.
Development Budget:
Development budget of the government of Bangladesh is a result of a continuous process of identifying new projects, review of project concept papers (PCPs), and vetting of the projects in ministries and in the Executive Committee of the National Economic Council (ECNEC).
Receipts in Bangladesh Budget:
Receipts in revenue budget consist of domestic receipts (tax and non-tax); foreign grants; capital receipts (foreign loans); domestic capital (net of current receipts and expenditures in public accounts); extra-budgetary resources (debenture of autonomous bodies, their self-financing and accumulated balance, and materials at stock); and domestic loans and advances (net). Receipts in the development budget are grouped as
Public and private receipts:
Public receipts are the revenue surplus from revenue budget (revenue receipts minus revenue expenditures), incomes through new measures (such as new taxes), net domestic capital, and extra-budgetary resources. A special form of public receipts is the foreign aid (project aid, counterpart fund from commodity aid and net food aid).
Receipts under the private head for development budget are generated through direct private investment, borrowing from the banking system and foreign private investment.
Budget Cycle:
The budget is the document that includes the government's expenditure and revenue proposals, reflecting its policy priorities and fiscal targets. The Budget Cycle consists of the major events or stages in making decisions about the budget and implementing and assessing those decisions.
i) Budget Preparation: The first phase of the budget cycle involves preparation by the departments/agencies, ministries and finally ministry of Finance
ii) Legislative Approval: Typically, the legislature has the power to approve or reject a proposed budget. They review it and vote. If approved, it moves into the implementation phase.
iii) Implementation and Execution: It is the duty of the executive branch - primarily involves distributing the budgeted resources to their designated recipients within the government and spending it as planned.
iv) Audit and Review: Finally, a budget is typically audited and reviewed the following implementation to evaluate the efficiency and effectiveness in order to guide future budgeting decisions.
Different Types of Budget:
1) Zero-based budgeting
2) Performance-based budgeting
3) Medium Term Budget
4) Program budgeting
5) Sales budget
6) Production budget
7) Capital budget
8) Cash flow/cash budget
9) Conditional budgeting
10) Marketing budget
11) Project budget
12) Revenue budget
13) Expenditure budget
14) Flexibility budget
15) Appropriation budget
16) Performance budget
17) Personal budget
Institutional Framework:
The Ministry of Finance in Bangladesh is the nodal agency responsible for resource mobilization, budget formulation and management of the economy (including economic relations) in the country. Institutions Influencing Budget Formulation and Implementation. Ministry of Finance is mainly responsible to prepare and place the budget before the parliament. 3 divisions involved:
1. Finance Division
2. Economic Relations Division
3. Internal Resources Division (National Board of Revenue)
Other Ministries/Agencies:
-Planning Commission
-Line Ministry/Division/ Agencies
Planning Commission (PC):
The Bangladesh Planning Commission was established in January 1972. The Bangladesh Planning Commission is the central planning organization of the country. It determines objectives, goals and strategies of medium and short-term plans within the framework of long-term perspective and formulates policy measures for the achievement of planned goals and targets. Its main activities include the following elements of development planning Policy Planning: determination of goals, objectives, priorities, strategies and policy measures for development plans.
National Economic Council (NEC):
The National Economic Council (NEC) is the highest economic policy-making body of the nation. Functions of the NEC:
- To provide overall guidance at the stage of the formulation of Five Year Plans, Annual Development Programs and Economic Policies,
- To finalize and approve plans, programs and policies,
-To review the progress of implementation of the development program,
- To take such others decisions and actions as may be considered necessary for socio-economic development,
- To appoint such committees as deemed fit to assist the NEC in the due discharge of its responsibilities,
-Meeting of NEC will be held every month and can be held earlier if required.
ERD (Economic Relations Division):
ERD is one of the important Divisions of the Government of Bangladesh which mobilizes external resources for socio-economic development of the country. ERD leads as the focal point of the Government for interfacing with the development partners as well as for coordination of all external assistance inflows into the country.
Development and Budget Division (DBD):
Development and Budget Division (DBD) is responsible for coordinating the formulation of the government's recurrent and development budgets, control of the use of budgetary resources, public debt management, cash flow analysis and reporting, financial administration of loss of cash and stores, unserviceable and obsolete stores and government motor vehicle accidents surcharges and assisting Ministries to identify cost recovery areas. SUB-DIVISIONS:
-Development Programs,
-Budget Administration
Core Budget Documents Placed before the parliament:
1) Budget Speech:
It is an introductory speech consisting of two parts. Part I deals with the overall financial and economic conditions prevailing in the country, government economic performance during the last one year and government economic plans and programs and the budgetary allocation. Part II deals with taxation measures.
2) Annual Financial Statement:
3) Contents of Annual Financial Statement:
The document provides an overview of all aspects of revenue and capital resources and development and non-development expenditure of the government.
4) Contents of Budget in Brief Budget at a Glance Graph:
5) Consolidated Fund Receipts:
The document provides details of receipts in the Consolidated Fund of Bangladesh for all Ministries and Divisions.
6) Medium Term Budget Framework (MTBF):
The MTBF consists of two parts. Under the MBF Ministries/Divisions lay down their medium-term strategy linking policies and priorities with resource allocation and resource allocation with the performance of departments and agencies.
7) Bangladesh Economic Review:
8) Macro Chapters:
9) Annual Development Programme (ADP):
The ADP details the financial allocations of sectoral development projects to be undertaken by the government in a financial year and their financing pattern in terms of, amount of resources available locally and amount of project aid.
10)Monthly Fiscal Report:
Monthly Fiscal Reports provide details of the revenue targets achieved, revenue expenditure incurred on all sectors, development expenditure incurred across sectors and overall balance of the budget till the reporting month.
11) ADP Utilization Report:
12) Budget Implementation Status:
13) Poverty & Budgets:
The document shows allocation on poverty alleviation from the National Budget across all Ministries/Divisions of the government.
14) ADP Implementation Status:
Conclusion:
Budget is a complex issue dealt with by the Finance people and always kept away from the general mass. Discarded old incremental budget-making process having no connection to plan and performance. Ministries/Divisions have more control over resource allocation and determining priorities.
Supti Saha
Session: 2016-17
Department of Accounting
