Budget preparation involves hard choices concerning competing demands and policy agendas. How can this financial management tool be formulated to ensure policy priorities are met, given limited resources? How are expenditure levels determined and managed?
A paper from the Asian Development Bank examines the fundamental processes in budget preparation. Effective public expenditure management involves consideration of, (1) policies necessary to meet determined fiscal targets, (2) spending limits and, (3) a concern with cost-efficient operations. In countries with poor financial discipline, improving budget formulation can enhance budget implementation. Better budget preparation will also advance appropriate resource allocation and expenditure control.
The process must begin with a macroeconomic framework, with realistic fiscal targets and potential financial constraints included from the outset. This will enable suitable expenditure targets to be identified. Furthermore, it permits continuous monitoring to ensure the budget is formulated correctly and is being delivered effectively. Other conclusions are:
- It is essential the budget enables fiscal targets to be met cost effectively, with resources allocated between sectors according to policy objectives
- If budget allocation decisions are not taken early, demands for funds will continue up to budget execution. Resources may not be allocated efficiently and programme implementation is disrupted
- Specifying spending limits early helps sectors decide between programmes and plan their programmes more effectively. Time is also allowed for negotiations between the Finance Ministry and line agencies before final drafts of the budget are required
- The budget and public policies must be mutually reinforcing. Before finalising policy decisions it is important to assess (1) impact on resources of a policy change, (2) implications for meeting fiscal targets and, (3) required budget adjustments
- Publishing economic forecasts and fiscal targets compels governments to meet budget commitments.
Departments responsible for planning different parts of the budget must coordinate their activities at every stage of budget preparation. To further improve budget preparation, policy needs include:
- Deciding spending priorities early. Strict spending limits should be specified to help agencies plan expenditure dependent on funds available to them, not on their demands.
- Considering all expenditure and revenue needs together, to prioritise demands. This should be done transparently. Budget decisions made through political bargaining disregard efficient allocation of resources and postpone difficult spending decisions.
- Expenditure projections, used within a macroeconomic framework help ensure (1) actual and proposed aggregate spending, (2) policy objectives, and (3) fiscal targets, are compatible and sustainable.
- Using a medium-term perspective (three to five years) in budget preparation, to ensure fiscal targets are suitable and sustainable. Build administrative and technical capacity to improve forecasting and enable planning of longer-term investments.
- Budget formulation and operation must be subject to examination by elected representatives and civil society to ensure political and societal needs are met appropriately. Participation in budget decisions is distinguished from allowing lobbies excessive influence.
- Holding programme implementers and designers accountable for operating efficiently and adhering to spending ceilings negotiated with the Finance Ministry.
