2. WHAT IS BUDGET ANALYSIS?
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Budgetanalysis is exactly what it sounds like – sitting down with a
budgetand reviewing it in detail. The purpose of budgetanalysis is to
understand how an organization's money is being spent and managed,
and whether the budgetmeets the group's goals. The organization could
be a business,a government, a charity or any other entity that draws up
budgets.
The Role of Budget Analysis
Budgetanalysis helps companies,governments and nonprofit groups
organize their finances. Analysts evaluate budget proposals,see if
money is being spent productively, and recommend increases or
decreasesin funding based on their findings. Analysts don't usually
have the last word on the budget.Their role is to provide information to
the executives or elected officials who do make the call.
Analyst Activities
If you becomea budgetanalyst, your duties will include more than just
adding up figures, such as:
Drawing up the budgetwith program and projectmanagers.
Reviewing managers' budgetproposals:Are they accurate?
Complete? Do theycomplywith the law?
Consolidating all the program budgets into a single document.
Explaining your recommendations.
Finding alternatives if your analysis shows things aren't working.
Tracking spending to see that it stays under budget.
Estimating future financial needs.
3. Analyst Qualifications
Most employers want their analysts to have at least a bachelor's degree.
Some prefera master's.Analysts usually get their degree in fields such
as accounting, finance, public administration or statistics. Courses in
statistics and accounting are valuable no matter what degree you have.
Budgets for mostorganizations are complexand detailed. If you're not
good at managing details, this may not be the right field for you: A good
budgetanalysis looks at every single item, not skipping over anything.
Good communication and writing skills are important, because your work
doesn'texist in a vacuum. You'll have to explain your recommendations
and conclusions in language your audience – politicians, executives, the
public, other stakeholders – can understand, and then answer any
questions.
Pay Scale
The U.S. government's mostrecent figures at time of writing show the
median pay for budgetanalysts ranging from $63,000to $81,500,
depending on the kind of organization they work for. Analysts with
professionaland scientific services did the best. Budgetanalysts
working with states earned the least, exceptfor those working for
schools or hospitals.
Job Prospects
The government projects the number of analyst positions to keep
growing, but slower than the rate of growth for all jobs. However, there's
a lot of turnover as analysts leave their current jobs for better paying,
higher ranked positions.The result is plenty of openings for beginner
budgetanalysts.
Author:
4. Happy Pant
Author can be contacted at happy@cbgaindia.org
This document is for private circulation and is not a priced publication.
Reproduction of this publication for educational and other non-commercial purposes is authorised,
without prior written permission, provided the source is fully acknowledged.
Copyright @2016 Centre for Budget and Governance Accountability
Published by:
Centre for Budget and Governance Accountability (CBGA)
B-7 Extn/110A(Ground Floor) Harsukh Marg
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Designed by: Common Sans,1729, Sector-31,Gurgaon,Haryana
Bus in past revealed that
state government
5. Purpose
Budget analysis can be put toseveral uses. An exercise in analyzing budgets
could lead to thefollowing:
• Influencing budget allocations: by identifying the funding gaps, budget
analysis stimulates theneedtoadvocateforincreased budgetary provisions
for a sector or greater equity in budget allocations.
• Enhancing targeting of funds for disadvantaged groups, including women,
children and Dalits and advisories: budget analysis can help empower
vulnerable groups by giving voice totheir concerns and ensuring that funds
address their needs more closely.
• Wider information sharing and public understanding of the budget: budget
analysis helps to make citizens aware how budget allocations impact their
daily lives. It unpacks the technicalities of budgets, increases their
accessibility, thereby increasing transparency in the budgetary process.
• Initiating debates on sector specific implications of budget allocations: A
thorough analysis of budget allocations can contributetopublic debates on
budget issues and what the governments need to deliver with the use of
scarce public resources.
• Informing revenue policies: By analyzing theimpact of taxes and tax
reform on different groups in society, budget analysis can help ensure
greater equity in revenue collection
Strengths and Challenges ofBudgetAnalysiswork
A good analysis of budget issues requires comprehending the technicalities of
budgets, understanding important provisions in thebudgets, andtheability to
analyses them. All this needs to be handled with political finesse to be able to
put it to a meaningful end. These skills can be developed gradually over time.
While budget analysis is being increasingly used to assess the government's
investment priorities by thosewhohave analytical thinking ability, however, it
is important to keep sight of the challenges this work does confront.
6. Elements ofBudgetAnalysis
The prerequisite for getting involved with Budget analysis work includes
collection, analysis and dissemination of information, mobilisation of public
support, advocacy and negotiating for change. The important elements of this
work can be listed out as:
• Capacity to understand and analyses the budget- You need to understand
budget terminology, methods of topic categorization, standardized
accounting classification, what document to look at for examining the
issues identified. Training and the development of guides and training
materials by the organization conducting budget analysis helps build
specific skills for this.
• An understanding of the Ministry, Department and the functioning of the
government apparatus that cater to theschemes that are being examined.
It is important tobeupdatedon thepolicies and funding mechanism meant
for the schemes.
• Carrying out analysis of
i) budget allocations and declared policy priorities,
ii) trends in budget allocations over time(this helps illustratethe
government's commitment toaddress theissues in agiven sector),
iii) allocations todifferent groups, regions, sectors
• Disseminationofinformation-Animportantcontributionof Budgetanalysis
workin demystifying thebudget technicalities is through producing budget
briefs written in a simple easy to understand format. Working with the
media to disseminate information is a crucial ingredient in a successful
budget analysis work. This includes providing information in a timely
manner and cultivating contacts with journalists/ media outlets.
• Building partnerships-Forging linkages with broadbased organizations and
networks is important to a successful strategy for influencing government
budgets. Such support helps in engaging with like-minded government
officials andparliamentarians. Sharing information with coalition members
increases the reach of your findings. Oversight bodies such as audit
institutions also can be natural, powerful allies, and can serve to open the
doors to participate in budget debates.
7. SIX-STEP FRAMEWORK FOR BUDGET ANALYSIS
Dissemination, General
Step 6
Advocacy,Monitoring
Prepare your report
Step 5
to present the findings
Step 4 Analyse the budgetdata forprogrammes
that are related to issues identified above
Know the way to decoding
Step 3
the structure of budgetary information
Develop an understandingof administrative apparatus ofGovt.for the
Step 2
scheme/ programme to be examined, Alsodesign and functioning of scheme
Step 1 Identify the issues that you want to examine
Step 1
Identify the challenges
facing a given sector. For
example under Education,
find out the underlying
problems that keep children
from going to school and
learning
Step 2
You should understand the
Ministry, department and
administrative apparatus
of govt. dealing with the
scheme. Have an
undersatnding of design of
above schemes
Step 3
Example: if education is code
1, primary education is sub-
head 01, training under
primary education would be
101, which would be further
divided into diverse
expenditure components like
salaries etc.
Step 4
Evaluateavailabilityof
fundsearmarked for that
issue. Also studythefunds
for othercomponentswithin
theeducation sectorfor
example: lookat trendsof
allocation overtime,per
unit allocation etc.
Step 5
Use bar diagrams, pie
charts, graphs, with notes to
highlight main points like-
allocations for the sector,
increase/ decrease in
resources , new items
proposed, old schemes
discontinued etc.
Step 6
Prepare briefs,
highlighting,disseminate
to relevant stakeholders,
Reach out to Legislators
before debatesin the
House,Brief themedia
8. Budget Analysis Focusing on Union Budget
Important Union Budget documents
Union Budget Documents • Key to Budget Documents
• Budget Highlights
Annual Financial Statement • Budget Speech
(A Constitutional requirement
• Budget at aGlance
• Annual Financial Statement
• FinanceBill
Consolidated Fund Contingen cy Fund Public Accounts
• Memorandum(The main Budget of the (For unforeseen
(Government acts as
a
Central Government) expenses) banker only) • Receipt Budget
• ExpenditureBudget
• Customs&Central Excise
Reven ue Budget Capital Budget Receipts Disbursements • TheMacro Economic Framework
Statement
• TheMedium Term Fiscal Policy
Statement
Revenue Revenue Capital Capital
• TheFiscal Policy Strategy
Receipts Expenditures Receipts Expenditures
Statement
• Statement of RevenueForegone
• Implementation ofBudget
Announcements
How to read technical documents in the Union Budget?
The expenditure
proposalsin the
Union Budget
are classified
eitheron the
basis of
Departments
that will
undertakethe
specific
expenditures- for
which thereare
Demand
numbers,or on
thebasis of
specific services
which are
delivered
through a
particular
expenditure-for
which thereare
MajorHeads of
account.
DemandNumbers
The estimatesofexpenditurefor
variousMinistries/Departments
are in theform ofDemandsfor
grants.When a
Ministry/Department ishandling
a numberofdifferent functions,a
separate Demand foreach of its
majorfunctionsissubmitted.
Each Demand forGrant shows
thetotal amount required fora
function during theyearshowing
revenue and capital expenditure
separately.
DemandNo.
Ministry/Department
1 Department of Agriculture
and Cooperation
55 Dept.ofElementary
Education and Literacy
56 Dept.ofSecondary
and HigherEducation
93 Ministry of Tribal Affairs
Major Heads
Major heads are four digit codes, which have
been allotted to specific services deliveredby
the government– following distinct patterns for
revenue receipts, revenue expenditures, capital
receipts and capital expenditures.
If thefirst digit ofthemajorhead is "0" or"1"
theHead of Account willrepresent Revenue
Receipt ,"2" or"3" willrepresent revenue
expenditure,"4" or"5" Capital Account,"6"
or "7" Loansand Advances,and "8" or"9"
Public account.
Examples ofMajor Heads:
0401 Crop Husbandry(RevenueReceipt)
2401 Crop Husbandry(Revenue
Expenditure)
4401 Capital Outlayon Crop Husbandry
(Capital Account)
6401 LoansforCrop Husbandry(Loan and
advancesaccount)
2210 Revenueaccount disbursement for
Medical and Public Health
4210 Capital account disbursementfor
Medical and Public Health
6210 LoansforMedical and Public Health
6
9. A Guide to Using BudgetAnalysis
Various Approaches to BudgetAnalysis
:
• Analysingbudgetpolicies - This would include a thorough scrutiny of the
fiscal and economic assumptions on which the budget proposals of the
government are based. The process helps understand how is the budget
expected to affect the government's deficit targets, as well as such
economic outcomes as inflation, growth, and employment
• Sectoral Analysis - The most common type of analysis undertaken under
budget analysis focuses on a particular sector of the economy. The
assessment usually involves evaluation of the inadequacy of the allocations
made towards the particular sector. This involves a comparison of
allocations made forthatsectorwithinvestmentsin othersectors.Thismay
also take into account a comparison of spending levels across countries.
• Analysis through specific lens - In this, a comprehensive analysis of the
extent to which government is using the budget to deliver socio-economic
rights of different disadvantaged sections of population is done. In India,
government budgets can be assessed from the perspective of a
disadvantaged section of the population such as women, children, Dalits,
Adivasis, disabled, etc. This involves looking at expenditure towards
different programmes and budgetary strategies implemented by the
relevant Government Departments.
• Analysis of trends in budget allocations over time - This type of analysis
illustrates the upward or downward movement of spending levels over a
given period or number of years being made towards covering deficits in a
given sector. Theanalysis may even reveal stagnating levels of expenditure
in that area for several years.
• Revenue analysis - The more commonly carried out budget analysis
focuseson social sector expenditures. Whenundertaking budgetanalysis, it
is important to know that tax policies have an equally important
redistributive impact on the society. Such an analysis that focuses on tax
and revenue aspects of the budget makes a comprehensive assessment of
the impact of tax policies, compares existing level of tax–GDP ratio, and
probes tax exemptions.
10. COMPARATIVE ANALYSIS OF
BUDGETS OF INDIA
2015-16 AND 2016-17
Finance Minister Arun Jaitley presented the FY2016-17 Union budget in the
parliament. Although the income tax slab rates were unchanged, there were
some respite for the common man too. Let’s take a quick look at some of the
highlights of this year’s budget compared with the 2015 one:
Income Tax Slab
Last year, the government had kept the IT slab unchanged. This year too, it
decided to continue with the earlier slab, but gave respite to the salaried person
by raising the ceiling of tax rebate under Section 87A to Rs. 5,000 from Rs
2,000 if taxable income is less than 5 lakhs. Additionally, house rent paid under
section 80 GG has been hiked from 24,000 to 60,000 giving relief to people
living in rented homes
.
Increase in excise duty/service tax:
The FM last year hiked the excised duty on cigarettes, tobacco products,
condensed milk, peanut butter making them expensive. In cigarettes, the excise
duty was hiked by 15% to 25%. However, excise duty for leather footwear
costing above Rs. 1,000 was reduced from 12% to 6% as well as for LED
drivers. This year, the FM has continued with the increase of excise duty by 10-
15% for tobacco products, exceptbidi. Also excise duty of 1% has been
imposed on purchase of goods and services in cash exceeding 2
lakhs. Additionally, excise duty of 2% to 5% on branded garments will
effectively make them dearer. Aerated water and mineral waters will also bear
an excise duty of 18% to 21%. In 2015-16, service tax was increased from
12.3% to 14% making several services including eating out, cabs, mobile, DTH,
beauty parlor charges all expensive. This year, buying car has become
expensive with the introduction of 1% to 4% infrastructure chess depending on
the vehicle.
Surcharge on income of super-rich
Budget 2015-16 had increased surcharge for the super-rich with income of more
than 1 crore to 12%. This year, an additional surcharge of 3% (total of 15%)
has been levied to this category.
New home buyers:
First time home buyers can get an additional deduction of Rs. 50,000 on a
housing loan within 30 lakhs. Service tax exemption has also been given for
11. construction of affordable housing up to 60 sq. m. under state and central
housing schemes.
Corporate Tax:
Budget 2015-16 announced that the corporatetax rate will get reduced from
30% to 25% over a period of 4 years. In keeping with the promise, the
government this year fixed the corporatetax for new manufacturing units at
25% and proposed to lower the corporateIT rate for small companies with
turnover of less than Rest. 5 crores.
SC/ST businesses, women entrepreneurs:
In last year’s budget, the government had announced a Mudra bank to provide
boostto SC/ST entrepreneurs as well as women empowerment. In this budget,
FM Jaitley has allocated Rs. 500 crores under the Stand-Up India scheme
giving boostto the SC/ST and women entrepreneurs.
Tax on withdrawal of EPF deposits:
The Budget 2016 has made 60% of interest earned on employee-contributed
EPF corpus taxable, for all contributions made by employees after 1st April,
2016. This is a major shift from a long-running tradition of exemption at all
stages on EPF and PPF, the latter of which has remained tax-exempt.
Agriculture
In 2015-16, Rs 25, 000 crores were allocated for Rural Infrastructure
Development Bank. To supportMicro Irrigation Programmed, Rest 5300 crore
were separately assigned and farmers’ credit-target was set at of 8.5 lakh
crore. This year, Mr. Jaitley set the agriculture credit target at 9 lakh crore. He
also announced the Paraphragmata Krishi Vikas Yojana to bring 5 lakh acres
under organic farming and committed to bring 28.5 lakh hectares to be brought
under irrigation and to reorganize agricultural policy to double farmer income
in 5 years.
To get an idea of how Budget 2016 will affect your personal budget, here
is: what’s become cheaper and what’s become more expensive with Budget
2016.
12. 2017-18 Highlights of Union Budget
The Budget broadly focused on 10 themes viz. farming sector, rural
population, the youth, the poor to name a few.
The 2017 Union Budget, presented by Finance Minister Arun Jaitley on
Wednesday, was broadly focused on 10 themes — the farming sector, the rural
population, the youth, the poorand underprivileged health care, infrastructure,
the financial sector for stronger institutions, speedy accountability, public
services, prudent fiscal management and tax administration for the honest.
Following are the highlights of Mr. Jaitley's Budget speech:
Demonetization
Demonetization is expected to have a transient impact on the economy.
It will have a great impact on the economy and lives of people.
Demonetization is a bold and decisive measure that will lead to higher GDP
growth.
The effects of demonetization will not spillover to the next fiscal.
Agriculture sector
Sowing farmers should feel secure against natural calamities.
A sum of Rs. 10 lakh crores is allocated as credit to farmers, with 60 days
interest waiver.
NABARD fund will be increased to Rs. 40,000 crores.
Government will set up mini labs in Krishi Vigyan Kendra’s for soil testing.
A dedicated micro irrigation fund will be set up for NABARD with Rs 5,000
crore initial corpus.
Irrigation corpus increased from Rs 20,000 crore to Rs 40,000 crore.
Dairy processing infrastructure fund wlll be initially created with a corpus of
Rs. 2000 crore.
Issuance of soil cards has gained momentum.
A model law on contract farming will be prepared and shared with the States.
Rural population
The government targets to bring 1 crore households out of poverty by 2019.
During 2017-18, five lakh farm ponds will be be taken up under the
MGNREGA.
Over Rs 3 lakh crore will be spent for rural India. MGNREGA to double
farmers' income.
Will take steps to ensure participation of women in MGNREGA up to 55%.
Spacetechnology will be used in a big way to ensure MGNREGA works.
The government proposes to complete 1 crore houses for those without homes.
Will allocate Rs. 19,000 crores for Pradhan Mantri Gram Sadak Yojana in
2017-18.
The country well on way to achieve 100% rural electrification by March 2018.
13. Swachh Bharat mission has made tremendous progress;sanitation coverage has
gone up from 42% in Oct 13 to 60% now.
Foryouth
Will introduce a system of measuring annual learning outcomes and
come out with an innovation fund for secondaryeducation.
Focus will be on 3,479 educationally-backward blocks.
Colleges will be identified based on accreditation.
Skill India mission was launched to maximize potential. Will set up 100 India
International centers across the country.
Courses on foreign languages will be introduced.
Will take steps to create 5000 PG seats per annum.
For the poor and underprivilege health care
Rs. 500 crores allocated for Mahaila Shakthi Kendra’s.
Under a nationwide scheme for pregnant women, Rs. 6000 will be transferred
to each person.
A sum of Rs. 1,84,632 crores allocated for women and children.
Affordable housing will be given infrastructure status.
Owing to surplus liquidity, banks have started reducing lending rates for
housing.
Elimination of tuberculosis by 2025 targeted.
Health sub centers, numbering 1.5 lakh, willl be transformed into health
wellness centers.
Two AIIMS will be set up in Jharkhand and Gujarat.
Will undertake structural transformation of the regulatory framework for
medical education.
Allocation for Scheduled Castes is Rs. 52,393 crores
Aadhaar-based smartcards will be issued to senior citizens to monitor health.
Infrastructure and railways
A total allocation of Rs. 39,61,354 crores has been made for infrastructure.
Total allocation for Railways is Rs. 1,31,000 crores.
No service charge on tickets booked through IRCTC.
Raksha coachwith a corpus ofRs. 1 lakh crore for five years (for passenger
safety).
Unmanned level crossings will be eliminated by 2020.
3,500 km of railway lines to be commissioned this year up from 2,800 km last
year.
SMS-based ''clean my coachservice'' is put in place.
Coachmitral facility will be introduced to register all coach related complaints.
By 2019 all trains will have bio-toilets.
Five-hundred stations will be made differently-abled friendly.
Railways to partner with logistics players for front-end and back-end solutions
for select commodities.
14. Energy sector
A strategic policy for crude reserves will be set up.
Rs. 1.26,000 crore received as energy productionbased investments.
Trade infra export scheme will be launched 2017-18.
Financialsector
FDI policy reforms - more than 90% of FDI inflows are now automated.
Shares of Railway PSElike IRCTC will be listed on stockexchanges.
Bill on resolution of financial firms will be introduced in this sessionof
Parliament.
Foreign Investment Promotion Board will be abolished.
Revised mechanism to ensure time-bound listing of CPSEs.
Computer emergency responseteam for financial sector will be formed.
Pradhan Mantri Mudra Yojana lending target fixed at Rs 2.44 lakh crore for
2017-18.
Digital India - BHIM app will unleash mobile phone revolution. The
government will introduce two schemes to promote BHIM App - referral bonus
for the users and cashback for the traders.
Negotiable Instruments Act might be amended.
DBT to LPG consumers, Chandigarh is kerosene-free, 84 government schemes
are on the DBT platform.
Head postoffice as the central office for rendering passportservice.
Easy online booking system for Army and other defense personnel.
For big-time offences - including economic offenders fleeing India, the
government will introduce legislative change or introduce law to confiscate the
assets of these people within the country.
Fiscalsituation
Total expenditure is Rs. 21, 47,000 crores.
Plan, non-plan expenditure to be abolished; focus will be on capital
expenditure, which will be 25.4 %.
Rs. 3,000 crores under the Department of Economic Affairs for implementing
the Budget announcements.
Expenditure for science and technology is Rs. 37,435 crores.
Total resources transferred to States and Union Territories is Rs 4.11 lakh crore.
Recommended 3% fiscal deficit for three years with a deviation of 0.5% of the
GDP.
Revenue deficit is 1.9 %
Fiscal deficit of 2017-18 pegged at 3.2% of the GDP. Will remain committed to
achieving 3% in the next year.
Funding of political parties
The maximum amount of cash donation for a political party will be Rs. 2,000
from any one source.
Political parties will be entitled to receive donations by cheque or digital mode
from donors.
15. An amendment is being proposed to the RBI Act to enable issuance of electoral
bonds. A donorcan purchase these bonds from banks or postoffices through
chequeen or digital transactions. They can be redeemed only by registered
political parties.
Defense sector
The defense sector gets an allocation of Rs. 2.74,114 crore.
Tax proposals
India’s tax to GDP ratio is not favorable.
Out of 13.14 lakh registered companies, only 5.97 lakh firms have filed returns
for 2016-17.
Proportion of direct tax to indirect tax is not optimal.
Individuals numbering 1.95 crore showed an income between Rs. 2.5 lakh to
Rs. 5 lakhs.
Out of 76 lakh individual assesses declaring income more than Rs. 5 lakh, 56
lakh are salaried.
Only 1.72 lakh people showed income of more than Rs. 50 lakh a year.
Between November 8 to December 30, deposits ranging from Rs. 2 lakhs and
Rs. 80 lakh were made in 1.09 crore accounts.
Net tax revenue of 2013-14 was Rs. 11.38 lakh crore.
Out of 76 lakh individual assesses declaring income more than Rs 5 lakh, 56
lakh are salaried.
1.95 crore individuals showed income between Rs. 2.5 lakh to Rs. 5 lakhs.
Rate of growth of advance tax in Personal I-T is 34.8% in the last three quarters
of this financial year.
Holding period for long term capital gain lowered to two years
Proposalto have a carry-forward of MAT for 15 years.
Capital gains tax to be exempted for persons holding land from which land was
pooled for creation of the state capital of Andhra Pradesh.
Under the corporatetax, in order to make MSME companies more viable, there
is a proposalto reduce tax for small companies with a turnover of up to Rs 50
crore to 25%. About 67 lakh companies fall in this category. Ninety-six % of
companies to get this benefit.
The government proposes to reduce basic customs duty for LNG to 2.5% from
5%.
The Income Tax Act to be amended to ensure that no transaction above Rs 3
lakh is permitted in cash.
The limit of cash donation by charitable trusts is reduced to Rs 2,000 from Rs
10,000.
Net revenue loss in direct tax could be Rs. 20,000 crores.
16. Personalincome tax
Existing rate of tax for individuals between Rs. 2.5- Rs 5 lakh is reduced to 5%
from 10%.
All other categories of tax payers in subsequent brackets will get a benefit of Rs
12,500.
Simple one-page return for people with an annual income of Rs. 5 lakhs other
than business income.
People filing, I-T returns for the first time will not come under any government
scrutiny.
Ten % surcharge on individual income above Rs. 50 lakhs and up to Rs 1 crore
to make up for Rs 15,000 crore loss due to cut in personal I-T rate. 15
surcharges on individual income above Rs. 1 crore to remain.
Income Tax rate
Individual tax payers
Up to Rs 2,50,000 No tax
Rs 2,50,001 to Rs 5,00,000 5%
Rs 5,00,001 – 10,00,000 20%
More than Rs 10,00,000 30%
Senior citizens who are 60 years old and above but less than 80 years
Up to Rs 3,00,000 No tax
Rs 3,00,001 to Rs 5,00,000 5%
Rs 5,00,001 to Rs 10,00,000 20%
More than Rs 10,00,000 30%
Senior Citizens who are 80 years old and above
Up to Rs 5,00,000 No tax
Rs 5,00,001 to Rs 10,00,000 20%
More than Rs 10,00,000 30%
17. BUDGET CIRCULAR 2017-2018
Guidelines for the Ministries/Departments for framing the Revised Estimates
for 2016-2017 and Budget Estimates for 2017-2018 and submission of the same
to the Budget Division are as under: -
Expenditure Budget
1. Introduction
1.1 The annual exercise of budgeting is a means for detailing the roadmap for
efficient use of public resources taking into account the socio-economic and
political priorities. Budgeting involves determination of what is to be done and
achieved, the manner in which it is to be done and the resources required for the
same. It requires the broad objectives of the Government to be broken down
into detailed schemes/projects and work Plans for each unit of the Government
organization. In this context, the budgetary classification of government
expenditure is of immense significance in policy formulation and sectoral
allocations. This classification is intended to allow the Parliament and the
public to appreciate the allocation of resources and purposes ofGovernment
expenditure. It also lays down the basis of accountability for budgetary
compliance and the assessment of the overall economic impact of government
policies. A significant reform initiative in the budgeting process,announced by
the Finance Minister, in his budget speech of 2016-17 is the merger of the Plan
and non-Plan distinction in expenditure budgeting. This is to be implemented
from the budget of 2017-18.
1.2 Plan/Non-Plan Merger: The reform has been initiated in light of the policy
decision to do away with the term 'Plan' while distinguishing expenditure on
socio-economic welfare programmers and schemes in the wake of abolition of
Planning Commission. Besides, a notion has widely gained ground among the
policy-makers and officials across all levels that Plan expenditure is good and
Non-Plan is bad. This bias in favor of Plan expenditure and against Non-Plan
expenditure has led to a situation in which essential Non-Plan expenditure such
as maintenance of assets, recruitment of doctors, teachers etc. is neglected. This
has also led to a motivation for showing higher Plan expenditure and higher
Plan sizes both at Central and State levels. Further, several factors such as shift
of focus of Plan expenditure from capital to revenue expenditure and the
process oftransferring expenditure of old schemes to NonPlan at the end of
each Five Year Plan means, that a clear correspondencecannotbe drawn
between Plan and developmental expenditures.
1.3 The Plan/Non-Plan bifurcation of expenditure has also contributed to a
fragmented view of resource allocation to various programmers/schemes. With
this fragmented distinction, it is difficult not only to ascertain costof delivering
a service but also to link outlays to outcomes. Outcomes and outputs of
18. programmers depend on total expenditure, Plan and Non-Plan put together and
not merely on Plan expenditure. Plan and Non-Plan distinction in the budget is
therefore, neither able to provide a satisfactory classification of developmental
and non-developmental dimensions of Government expenditure nor an
appropriate budgetary framework.
1.4 In the above context, the Government has decided to do away with the
practice of classifying expenditure as ‘Plan' and 'Non-Plan’ in the Budget. With
the removal of this artificial distinction it is expected that the link between
spending and outcomes will improve and become more holistic and focused.
The reclassification of expenditure under accounting heads will start from
Budget 2017-18 and after the 12th Plan period (2012-17) comes to an end.
1.5 With the removal of the Plan and Non-Plan distinction the focus of
budgeting and expenditure classification will shift to revenue and capital
expenditure, as has been envisaged in the Constitution of India. A clear
distinction between capital and revenue expenditures is also essential for
analytical purposes, transparency, and efficient policy decision-making. The
distinction is fundamentally important for the assessment of the operating costs
of government and the investments made by it along with measuring the
efficiency of government activities. Moreover, developing a performance-
oriented approachrequires separation of running costs from capital
expenditures. The emphasis on distinction between Revenue and Capital
expenditures is therefore, not only a constitutional requirement but also an
essential ingredient for policy formulation and efficient resourceallocation. The
removal of Plan and Non-Plan expenditure is expected to fulfill this objective.
1.6 The six-tier functional classification system forms the base on which budget
estimates are presented. All expenditure provisions are appropriately classified
at the relevant levels in the six-tier classification. The distinction between
Revenue and Capital expenditure/receipts also, as mentioned above is based on
the functional basis with the first digit denoting whether the transaction is
receipts, revenue expenditure, capital expenditure or loans. The robustness of
the above classification system has withstood the needs of the government
budgeting and accounting and the same will be continued as the base even
while the distinction between Plan and Non-Plan will be dispensed with.
1.7 There will henceforth be no Five-Year Plan post12th Plan. However, in
place of earlier Plan resourceestimation, the Ministry of Finance will carry out
resource estimation for funding of various Central schemes and programmers as
well as central funding for the State/UT schemes/programmers. The Ministry of
Finance will be guided by the Vision document being prepared by the NITI
Aayog, as this will help in setting out the resource priorities of the Government.
The budgeting exercise will shift towards a medium-term framework to give
greater predictability to Ministries about resourceavailability. This will enable
Ministries to Plan their activities with a medium-term horizon and also shift
19. from input based budgeting towards output and outcome based budgeting. A
guidance note on Plan and Nonplan merger has already been circulated to all
Ministries on 23.08.2016.
1.8 Multi Year Expenditure Framework: To achieve the allocative objectives,
the Ministry of Finance will prepare projections of budgetary resources of
Centre including central supportto the States (outside the Finance Commission
recommendations) through various schemes and programmers. This will need
to follow the resource estimation of tax, non-tax and other receipts of the Centre
for the budget year and the projection period in the medium term as per the
FRBM Act.
1.9 Further, in keeping with the spirit of holistic and medium-term budgeting,
the focus would be on top down budgeting where the resource priorities are
guided by a medium and long-term strategies. The yearly sectoralpriorities and
allocations would also accordingly be set. Based on the medium-term
allocations under the MTEF statement, the Ministries would set a
outcome/output framework. They would also accordingly carry out the scheme
wise allocations. There is also an endeavor to move towards giving Ministries
maximum flexibility to re-appropriate amongst schemes and components of
expenditure within a scheme, required to maximize the achievement of the
agreed objectives.
1.10 The start has already been made in 2016-17 with the MTEF statement
indicating the revenue and capital allocations of Miniseries for the current
financial year and next two financial years. MTEF Statement can be accessed at
official website of Ministry of Finance through the link: fimin.nic.in >
Department of Economic Affairs > Budget Division > FRBM/MTEF
Statements and related circulars > MTEF Statements. The Ministries would
need to accordingly prepare their Statement of Budget Expenditure (SBEs) and
outcome budgets. The outcome budgets would also have to be approved by
NITI Aayog/Plan Finance II, Department of Expenditure. These documents
would form the basis of RE discussions and help decide the allocations for the
next year. The broad budgetary process is outlined below.
2. Finalization of Budgetary Estimates and Timelines
2.1 The basis of the budgetary allocations would be the ceilings indicated in the
MTEF statements. The MTEF statement was tabled in the Parliament in the
Monsoonsession. Using the allocations indicated in the MTEF statement, each
Ministry would, decide the scheme-wise allocations in the SBE format and
forward them to the budget division. The format of SBE is given in Appendix I
. The outcome budget framework would also need to be prepared as per the
allocations indicated in the 3 MTEF statement. The outcome budget would need
to be duly approved by NITI Aayog and Plan Finance II Division, Department
of Expenditure.
20. 2.2 The SBE (Proposed)furnished to Budget Division would form the basis of
RE discussions. The estimates will be finalized after Secretary (Exp.) has held
discussions with the Financial Advisers, as in the past. These discussions are
scheduled to be held in October/November, 2016 starting 17th October, 2016.
2.3 The ceilings for all categories of expenditure including Central Sectorand
Centrally Sponsored schemes will be discussed in the RE meetings.
Accordingly, the RE 2016-2017 and BE 2017-18 for all categories of
expenditure may be indicated separately for Revenue and Capital expenditure.
2.4 It is proposedto discuss during the RE meetings to be taken by Secretary
(Exp.) the totality of the requirements of funds for various programmers and
schemes, along with receipts of the Departments (viz. interest receipts,
dividends, loan repayments, departmental receipts, receipts of Departmental
Commercial Undertakings, etc.). The indicative budget figures will be
discussed on a net basis. The dates of discussions will be intimated separately.
In the meantime, Financial Advisers may prepare the SBEs (proposed)for
2017-18 and forward the same to Budget Division by 10 th October, 2016
positively.
2.5 For the Budget estimates of the next financial year, the allocations will be
finalized for the Establishment and Other Central government expenditures
(non-scheme related) as well as the Finance Commission related transfers
which are already projected in the report and agreed to by the Centre. Forthe
Central SectorSchemes and Centrally Sponsored Schemes. The initial ceilings
would be discussed during the pre-budget meetings. This initial ceiling will be
based on the projections made in MTEF allocation for 2017-18 for each
Ministry/Department (discussed earlier), subject to changes if any in sharing
pattern, merger and de-merger etc. The final ceilings for the schemes will be
decided separately by the Ministry of Finance latest by 15th January 2017,
taking into account the resource assessment of the Government and the
available fiscal space. The Outcome Budgets, with scheme wise
outputs/deliverables will also need to be revised if there are changes in
budgetary allocations from the MTEF projections.
2.6 After the pre-Budget meetings are over, the approved ceilings for
expenditure, as finalized in these meetings, will be communicated on the basis
of which Financial Advisers will prepare the Statement of Budget Estimates
(Provisional) in form Appendix I and forward to Budget Division. As indicated
above, The SBE will be sent to Budget Division in two stages: Stage I or
SBE(Provisional), immediately after the ceilings are communicated by this
Ministry. The columns relating to the current year RE and the tentative BE for
next financial year would be filled up. The final ceilings shall be communicated
by this Division separately latest by 15th January after ascertaining the final
receipt position. Stage II or SBE (final)- Once the final allocations are
21. communicated by this Division, SBE (final) incorporating the final ceilings of
BE 2017-2018 should be forwarded within 3 days of such communication
2.7 ensure that there is no delay in transmission of estimates,
Ministries/Departments should make the entries in the Union Budget
Information System (UBIS) software and also forward a hard copyof these to
the designated sections in the Budget Division indicated in Appendix LII. It
may be noted that no pen drives will be issued henceforth for collecting
information. All information will be entered online in UBIS. Hard copies will
not be accepted unless data entry has been completed in UBIS. The
communications should be sent by special messenger and not through the R & I
Section of the concerned Ministry or to the R & I Section of the Ministry of
Finance. While providing the estimates to Budget Division, the forwarding
authority may indicate his/her name, complete office address viz. RoomNo.,
name of the building etc., email and the telephone number (preferably mobile
number) in the forwarding letter.
2.8 To ensure that there is no delay in transmission of estimates,
Ministries/Departments should make the entries in the Union Budget
Information System (UBIS) software and also forward a hard copyof these to
the designated sections in the Budget Division indicated in Appendix LII. It
may be noted that no pen drives will be issued henceforth for collecting
information. All information will be entered online in UBIS. Hard copies will
not be accepted unless data entry has been completed in UBIS. The
communications should be sent by special messenger and not through the R & I
Section of the concerned Ministry or to the R & I Section of the Ministry of
Finance. While providing the estimates to Budget Division, the forwarding
authority may indicate his/her name, complete office address viz. RoomNo.,
name of the building etc., email and the telephone number (preferably mobile
number) in the forwarding letter.
2.9 In so far as the Department of Atomic Energy and Department of Space are
concerned, SBE (proposed)may be forwarded to Budget Division as soonas
the estimates are compiled, but not later than October24, 2016.
2.10 Office of the Comptroller & Auditor General of India may send the SBE
to Budget Division by October24, 2016. These may be supported by actuals as
indicated in preceding paragraph along with item-wise actuals for 2015-2016,
as also actuals up to September, 2016 against BE 2016-2017.
2.11 A list of Demands for Grants for the year 2017-2018 as drawn up on the
basis of the Government of India (Allocation of Business) Rules, 1961 as
amended from time to time is contained in Appendix L. Also, Appendix LI
shows allocation of demands to the various sections of the Budget Division.
22. 3 Instructions related to preparation of SBE(proposed) and
material for RE meetings
3.1 With the elimination of Plan and non-Plan distinction there has been a
revision of formats of various budget documents to distinguish allocation in
terms of revenue and capital expenditure and not in terms of Plan and non-
Plan as is being shown currently in the expenditure related budget
documents. In case of the SBE, The Central government expenditure would
now be classified into six broad categories indicated in the box below.
3.2The description of the six categories mentioned above is given below: (i)
The Establishment Expenditures of the Centre will include all the
establishment related expenditure of the Ministries/Departments. The
budgetary proposals for this section will include establishment
expenditure on attached and subordinate offices, on various heads related
to establishment viz. salaries, medical expenses, wages, overtime
allowances, foreign travel expenses, domestic travel expenses, office
expenses, materials and supplies, publications, advertising and publicity,
training, other administrative expenses, POL, costof ration, clothing and
tentage, professional services, rent rates and taxes, royalty, pensionary
charges, rewards and minor works, motor vehicles, information
technology etc.
(ii) The Central Sector Schemes will include all those schemes which
are entirely funded and implemented by the Central Agencies viz.
Ministries/Departments or various agencies of GoI such as the
autonomous bodies and other special purposevehicles. In some cases as
an exception, and with the specific prior consent of Finance Ministry
(Department of Expenditure) the central sector schemes may be allowed
to be implemented through the concerned State implementing agencies.
The transfer of funds in such cases will be done directly to the
implementing agencies and not through the State treasuries.
(iii) The Other Central Expenditure will include provisions made for the
Central expenditure on PSUs, autonomous bodies etc. and other
expenditure not covered in the category of schemes or establishment
expenditure. In certain cases, such as ICAR, CSIR and Atomic Energy
etc. which also implement some Central Sector schemes, the provision
related to the schemes will be shown in the category of the central sector
schemes.
(iv) The Centrally SponsoredSchemes will include the schemes under
the National Development Agenda as recommended by the Sub-Group
of Chief Ministers on rationalization of Centrally Sponsored Schemes
and approved by the Cabinet on 3.8.2016. The list of approved Centrally
23. Sponsored Schemes is given at Annex A and A1. These schemes will be
implemented by the State/UT governments with the fund sharing pattern
as approved by the Central Government. The Central share for the
schemes will be routed through the State/UT treasury as grants-in-aid
under various object heads, except MGNREGA wage payments which
are 100% funded by the Centre and routed through the State
Employment Guarantee Fund.
(v) The category Finance Commission Transfers will only come in the
demand titled “Transfers to States” under the Department of
Expenditure, Ministry of Finance.
(vi) The category Other Transfers to States will include all other
transfers to state such as those made under National Disaster Relief
Fund, Assistance to schemes under proviso(i) to Article 275(1) of the
Constitution.
3.3 While preparing SBE in the new format, the following instructions
should be strictly adhered to:
(i) While filling the SBEs care needs to be taken that schemes be
depicted, up to a maximum of three levels only as given below: a.
Umbrella Schemes b. Schemes c. Sub-Schemes A. Centre’s
Expenditure:
(i) Establishment Expenditures of the Centre;
(ii) Central Sector Schemes;
(iii) Other Central Expenditure, including those on CPSEs and
Autonomous Bodies; Centrally Sponsored Schemes and other Transfers:
(iv) Centrally Sponsored Schemes;
(v) Finance Commission Transfers; and
(vi) Other transfers to States.
(ii) There will be no categorization of schemes as Central Plan and
State Plan. All schemes henceforth would be categorized as either
Centrally Sponsored Schemes or Central SectorSchemes. Allocation of
one scheme would appear only at one place in the SBE. Accordingly,
entries for Allocation for North East should be done separately under
each scheme and not as Lump-sum provision for N.E. as was done
earlier.
(iii) If a scheme has EAP componentand/or funding from a Fund in the
public account (in caseof say funding from cesses)then the components
have to separately depicted at the sub-scheme level as below: a. Gross
Budgetary Supportb. EAP Component c. Amount met from (Name of
Fund)
24. (iv) The entries related to transfer to fund and the amount met from
fund, wherever applicable will be shown as two separate entries in the
SBEs below the schemes which are funded from it. In case the
utilization of the Public AccountFund is towards a Centrally Sponsored
Scheme, then transfer of the correspondingamount should be made
from the major head 3601/3602 to ensure that the transfers to states are
not understated.
(v) In the new SBE format, the major heads would no longer be
depicted in a separate column in Expenditure Budget Vol II. However,
within each scheme allocation would continue to be prepared major
head-wise, as was being done earlier. This information would be used to
generate the DG, Part B of the SBE and the statements of Expenditure
Budget Vol.–I.
(vi) In the new format of SBE to be adopted from 2017-18, as referred
to in section 3.1, all existing line entries have to be put under one of the
six indicated categories. In case the existing line/umbrella scheme has
items which belong of more than one of the six categories, then the
existing line would need to be broken up and adjusted suitably under the
relevant categories. Forinstance, if there is an existing umbrella
‘Welfare of Children’ which has a central sectorscheme and direct
assistance to an Autonomous body(i.e. untied GiA and not under the
scheme), then the umbrella scheme would need to be broken up and the
Central sectorscheme would go under category II – Central Sector
Schemes and the assistance to autonomous bodywould go under
category III – Other Central Expenditure. It may be noted that if grants
are being given to any Autonomous Body under a scheme for
implementing of that scheme, then the line need not be 7 broken up and
would figure under the Central SectorScheme. All SBEs should be,
accordingly, thoroughly reviewed and discussed with Budget Division
before making entry in UBIS.
(vii) Earlier Part-C of the SBE used to show the Plan outlay categorized
by different major heads. This will be replaced by a new Part-B which
will depict the all the activities of the Ministry/Department by
Developmental and Major Heads.
(viii) The Earlier Part-B Investment in Public Enterprises will
henceforth becomePart-C.
3.4 While preparing the estimate in the new SBE format indicated
above, care may be taken that the total proposedallocation under the
demand should be in line with the ceilings indicated in the MTEF
statement. The ceilings should not be normally exceeded. In case of any
deviation from the MTEF ceilings, the reasons should be clearly brought
25. out. While preparing the estimates care must be taken to first budget for
all committed and continuing expenditure first, before including
provisions for new schemes/ items of expenditure. Further, the
following factors inter-alia, must be taken into consideration while
preparing the estimates:
a) Latest actuals during current year;
b) Actuals for the same period in preceding year;
c) Actuals in past year/previous years;
d) Appropriations/appropriations ordered/contemplated during
remaining part of the year, or any sanction to expenditure
issued/proposedto be issued, including on new scheme during the
remaining part of the year;
e) All pending arrears should be incorporated in BE 2017-18 and in
case a part of it is left out in SBE, the reason for the same need to be
separately submitted.
f) Any other relevant factor which may be foreseen at the time of
framing the RE 2016-2017/BE 2017-2018
g) Actual expenditure up to 30th September, 2015 of BE 2015-2016 as
also actuals up to 30th September 2016 of BE 2016-2017 would
supplement the process offinalization of RE 2016- 2017. The actuals
may be reconciled with the monthly accounts compiled by Controller
General of Accounts before incorporating the same.
3.5 The following information may also be furnished to Budget
Division along with the SBEs (proposed):
(i) Effect of additional installments of dearness allowance sanctioned
this year and the net additionality asked therefor (that is, after setting off
against savings, if any).
(ii) Arrears paid up to 31.8.2016/30.9.2016 to employee’s consequent
upon implementation of 7th CPC, arrears yet to be paid, shortfall (if
any) from the existing budget provision.
(iii) Items of expenditure, which are matched by or linked to receipts
such as externally aided projects, bonus share, cusses etc.
(iv) Provision included in respectof vacant posts.
(v) A separate statement giving the committed liabilities as arrears of
the Ministry/Department, in terms of payments already due, but lying
unfulfilled due to lack of budgetary provision.
(vi) A separate statement indicating
(a) provision made scheme-wise/project-wise in BE 2016-2017 against
externally aided projects,
(b) expenditure incurred up to September 2016,
(c) amount for which claims have been lodged with the office of
Controller of Aid Accounts & Audit, DEA seeking reimbursement from
the external donor and
(d) requirement in RE 2016-2017 and BE 2017-18.
26. (vii) Details of authorized and held manpower and current/arrear
liability on account of pay & allowances in respectof CPSUs and
substantially financed autonomous bodies getting Nonplan budget
support.
(viii) Unspent balances as on 31st March, 2016 with all grantee/loaned
bodies (other than the States) in respect of all bodies which received
more than ` 1 crore grant/loan during 2015-2016. (Separate details for
each body).
(ix) Unspent balances and pending Utilization Certificates, State-wise
and scheme-wise, as on 31st March, 2016 and 30 September 2016, in
respect of all schemes. 8
(x) Explanations for variations between BE 2016-2017 and RE 2017-
2018 (proposed)may be given scheme-wise separately. Any
increase/decrease in BE 2017-2018 (proposed)may also be explained
suitably.
(xi) Whether all continuing expenditure has been included in RE 2016.
(xii) Violation of approved MEP/QEP.
(xiii) Measures to increase user charges of Autonomous Bodies with a
view to recover costs and engaging in buyback of shares.
(xiv) Efforts to recover arrears of Non-Tax revenue and whether PSUs
are paying dividend as per new dividend policy given in DIPAM’s O.M.
No. 5/2/2016-Policy dated 27.05.2016 (Annex B).
(xv) Progress in compliance to cash management guidelines as detailed
in O.M. No. 4(10)-W&M/ 2016 dated 4th August, 2016 (Annex-Q)
(xvi) Savings as a result of implementing DBT It may be ensured that
formats given in Appendix I to VII are invariably filled and submitted
through UBIS before 10th October2016. Note: The Pre-budget meeting
of the Ministry/Department will be possible only after receipt of full
information as required above
3.6 Revenue & Capital Expenditure : As per Article 112 of the
Constitution of India, Annual Financial Statement shall distinguish
expenditure on revenue account from other expenditure. Rule 46(2) of
General Financial Rules, 2005 (GFR)mentions that the estimates of
expenditure shall distinguish provisions for expenditure on revenue
account from that for other expenditure including expenditure on
Capital Account on loans by the Government and for repayment of
loans, treasury bills and ways and means advances. Further Rule 79 of
GFR defines the Capital and Revenue Expenditure. All the
Ministries/Departments may kindly refer to these Rules and prepare the
Budget Estimates in compliance of the statutory obligations.
3.7 Grants-in-Aid to Autonomous Bodies & Institutions : For providing
grants-in-aid to autonomous bodies and institutions, the instructions
contained in Rule 209 of the General Financial Rules, 2005 may be kept
in view. In cases where activities of a bodycover more than one
27. function of the Government and the bodyis likely to approachseveral
Departments for grants, consultation should take place among the
concerned Departments before the grants are approved. The body
should be specifically asked to furnish details of assistance received or
proposedto be received from other Central Government Departments
and also from State Governments.
3.8 No provision may be made in the establishment budget for posts,
which are lying vacant for one year or more. Even otherwise,
provisioning for vacant posts should be made with caution so as to
avoid chances of eventual savings due to these vacant posts not being
filled up.
3.9 Items of expenditure which are linked to receipts, like those met
from proceeds ofcess or '1605-External Grant Assistance' or '1606-Aid
Material and Equipment' may also be similarly segregated in the
Statement of Budget Estimates.
3.10 Subsidies being provided towards payment of interest fall under
two categories. They are
(i) 100% subsidy and
(ii) interest differential/ subvention (part subsidy).
These two items may be shown distinctly in Statement of Budget
Estimates.
3.11 With a view to maintaining uniformity in the treatment of
provision for Voluntary Retirement Scheme(VRS)/Voluntary Separation
Scheme (VSS) to Central PSUs, it is desired that these amounts should
be depicted as a loan, unless approved otherwise by the Competent
Authority.
3.12 Further, the estimates of expenditure in the Expenditure Budget
Vol. 2 and also in Demands for Grants, are expressed in crores of rupees
with two decimal places. Under the present system of rounding, major
head under which the total provision is less than ` 50,000 gets excluded
from the two documents referred to above. This causes discrepancy with
Detailed Demands for Grants in which the provisions are expressed in
thousands of rupees. In such cases the major head, etc. will be shown in
the SBE and the Demands for Grants with a footnote that “the provision
is less than ` 1 lakh”. The Statement to be furnished in the SBE and
other Statements to be forwarded to the Budget 9 Division should be
suitably rounded to crores of rupees with two decimal places for each
major head. The breakup of the provision for schemes included under a
major head should also be suitably rounded so as to work up to the total
in respect of each major head in crores of rupees with two decimal
places. Similarly, the provisions under the various detailed heads in the
28. Detailed Demands for Grants should also be suitably rounded so that the
total under each major head included in that demand is in crores of
rupees with two decimal places. It should, however, be ensured that in
the amount so rounded off, there is no inflation in the total fund
requirements. Instructions at paragraph 12.1 may also be seen. 3.13 The
Ministries/Departments may review the SBEs for 2017-2018 in respect
of their Demands for Grants and modifications therein, if any, as may be
required keeping in view the guidelines mentioned above.
Benefits of Budgets
With careful planning and good execution, a company can reap the benefits of
having budgets in many ways, including:
Communication of corporate goals
Modern corporations consistof departments of different important functions. It
is quite hard for the chief executive officer to convey the corporategoals to
each employee very well. But on the other hand, in order for corporation to
reach its best performance, it is indispensable for employees in different
positions within a corporation to understand the corporategoals. The process of
preparing budgets actually constructively bridges this communication gap
because it engages everyone from managers to front-line staff. Quite often in
practice, an CEO will hold a budgets discussion meeting that managers of
various departments will come and discuss the company's whole budgets and
make adjustments according to next year's goal. In this way, budgeting comes a
communication tool becausethe different departments get the chance to take
part in future planning and discuss the priorities for where the money and
resources should be most suitably spent and allocated. More importantly, the act
of making estimates about future economic conditions and about the company's
ability to respond to them, forces managers to synthesize the external economic
environment with their internal goals and objectives. This whole
"communication process" is extremely crucial given the consideration of the
complexity of business in recent years.
29. Warning of potential problems
Keeping budgets and constantly comparing it with the running of the real
operating acts as an early warning system of potential problems which the
management people in charge can make changes before things get out of
control which make the company suffer greatly in terms of money and
resources. In this way, when a flag is raised, managers in charge can revise their
immediate plans suchas to change a productmix, revamp an advertising
campaign, or borrow money to cover cashshortfalls.
Coordination of different segments
Having the different departments within the corporation to create budgeting
together is the key to resolving the differences and conflicts between various
departments when involves in money and resources handling. Often in practice,
the chief executive officer asks departments of various functions to make their
own department budgets first according to each department's needs and its
specific goal next year. Throughout this process, each department correlates
each segment's goals with corporate objectives. Preparation of a budget assumes
the inclusion and coordination of the activities of the various segments within a
business. The budgeting process demonstrates to managers the inter-
connectedness of their activities and offers them directions to follow.
Evaluation of actual performance
The budget provides definite objectives for evaluating performance at each
level of responsibility assigned (Jan, et al., 2008). Managers in charge are able
to have access to do quick and easy performance evaluations with previous
established criteria. With the economic conditions rapidly changing, managers
may increase activities in one area where results are well beyond their
exceptions. In situation like this, budgeting maximizes the objectivity to a great
extent and offers a helpful hand for managers in making sound judgments with
some indicators to compare. In other situations, managers may need to refer
some measurement to reorganize activities whose outcomes demonstrate a
consistent pattern of inefficiency, so that they can make timely adjustments to
minimize the loss that otherwise might incur.
Problems of Budgets
As one of the most important steps in running a successfulbusiness, there is
also some problems that involves with the budgets, including:
30. Overstating projections
Companies with strong ambitious of achieving success usually tend to think that
their business will do a huge amount of business in a short amount of time
which sometimes could be not very realistic in practice. So in this case, they
often inflate the budgeted sales figure with possibly wrong sales forecasts. The
overstating sales projections resulted from over optimistic future sales
predictions most of the time will lead to other financial budgets.
Lack of fairness in funds allocation
When asked to their own budget, different departments often have a tendency to
ask more than they need to provide buffer in caseunforeseen things that might
happen in the future, so that they will not be under budget. This tendency
prevent the funds to be allocated to the company's bestinterest and distorts the
real needs and makes the next year funds allocation somehow lack of the
fairness it should have, especially for corporations which is at the growing stage
when the funds is extremely precious and limited. What is worse, when it
comes to the using the budgets, the majority of departments will tend to squeeze
the use of the budget at the beginning of the period to save for the later use,
while try everything they can to use up the rest of the budget by the end of the
period. This lack of consistency in usage actually further wastes the company's
resources and money, which is likely lead to inconsistency of the goods and
services that the company provides.
Lack of operation flexibility
While sticking to the budgets provides a roadmap for the running of operation,
it can hinder creativity and flexibility of the company's development (Eugene,
Michael, 2010). This situation arise often enough the managers cautiously and
strictly enforce the operation in accordancewith the budgets and give up some
opportunity that might open doors to developing innovative products and
exploring new markets. This is particularly true for those giant corporations
where the managers are more willing to play it safe than taste a new flavor and
usually lead them to only look at an annual plan therefore may fail to take a
longer term view into account.
Behavioral aspects of Budgeting
Budgetary control relies greatly on the individuals of a corporation. The human
aspectin the budgetary system can be very complicated since the budgetary
process involves relationships between different people within the corporation
which includes the chief executive officer, managers and staff. Some times
budgets affect people's behaviors and vice versa. Thus the behavioral aspects of
budgeting are of vital significance and consist of many different areas that high
attention must be paid.
First and foremost, we need to know the Factors affecting behavior of
budgeting, including:
31. Budgets perceived by employees as being too difficult
In situations that lack full participation of all levels in preparing for the budgets,
the employees will perceive the budgets as being too difficult to follow. In
addition, the punishment that comes along from failing to meet what this
budgeted has a tendency to encourage staff's attempts to beat the system. This
greatly affects the employees' enthusiasm for the job and can knock down their
creativity and initiative which might lead to financial and nonfinancial loss for
the corporation. In order to deal with this kind of situation, the managers in
charge should maintain supportive and cooperative relationships with staff of
all levels since it can leads to increase productivity and satisfaction which in
turn can raise the working morale of staff. What is more, managers should try
their best to make communication open without obstruction, which is extremely
critical becausethe good communication in budgeting can act as a good
delivery of corporategoals.
Targets that do not provide any challenge
In sharp contrast to the previous situation discussed just now, non-scientific and
not reasonable budgeting could also result in having targets that do not provide
any challenge which leads to no breakthroughs and developments. This happens
more often than not when managers only emphasize on the financial goals
which is quite detrimental to the realization of important non-financial goals. In
order to fix this problem, managers should use the historical data as an
important reference and try their best to gain a better understanding of the
directions that the future economic conditions. Moreover, it is also of crucial
importance for managers to identify the employee's ability objectively and truly
engage the staff in participation genuinely. Due to a tendency for individuals to
become "ego" involved in decisions which they have contributed, only in this
way, can the budgeted goal be set in a way that reflect the real conditions and
performs guidance.
Insufficient flexibility
There are times when strong-minded managers strictly hold on to budgets and
overlook the real actual operation performance. Confronted with this kind of
situation, what a company should do is to adoptvariance analysis in practice. It
is encouraged for businesses regularly conductvariance analysis because this
allows them to notice if financial plans are inaccurate and therefore make
timely adjustments. On the other hand, if businesses fail to analyses variances
on a regular basis they will not be aware of their financial performance
compared to what is budgeted. Favorable variance is when revenues are greater
than budgeted or costs are less than budgeted. In contrary, adverse variance is
when revenues are less than budgeted or costs are greater than budgeted. By
calculating variances through looking at costs and revenues, managers can
make wise remedies to copewith the situation and keep the company running
on the right track.
32. Conclusion
Budgeting is a very crucial process that can bring numerous benefits to the
companies if be used wisely and correctly. These benefits include:
Communication of corporategoals, Warning of potential problems,
Coordination of different segments, and Evaluation of actual performance. All
of them will increase the management's ability to more efficiently and
effectively deploy resources, and to introduce modifications to the plan in a
timely manner. However, there are also problems of that might incur when the
budgeting is not properdone. These problems include: Overstating projections,
Lack of fairness in funds allocation, and Lack of operation flexibility. In order
to truly embrace the benefits of budgeting, managers really should study the
behavioral aspects of budgeting.