The document discusses several theories of budgeting. It describes Verni Lewis' theory which is based on three principles: 1) budget decisions are made based on relative values and opportunity costs, 2) the marginal utility of additional expenditures decreases, and 3) cost-benefit analysis can determine the relative effectiveness of programs. It also discusses other economists' views of budgets as economic, political, and administrative processes. Finally, it summarizes that theoretical writings view the budget through these three frames of reference.

1. THE THEORIES OF BUDGETTHE THEORIES OF BUDGET
“Verni Lewis Theory on Proposed National Budget”
A Report on
In Partial Fulfillment in the Course
FISCAL MANAGEMENT – IE 502
EDGAR JAVISON
Professor, Graduate Studies
CYRUS C. TRANCE
MSIE – Educational Management
First Semester, SY 2008 – 2009 <OUTLINE>

2. OUTLINE OF DISCUSSIONS ON
BUDGET
Budget … a general impression
Budget … in literal meaning & description
Budget … origin of the term
Budget … according to some economists…
Modern Dimension of Budget
Practical & Modern Theory of Budget
Verni Lewis Theory of Budget for National Dev’t.
Other Theories on Budget
Summary of Discussions about Budget
Credits & References
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3. MISCONCEPTIONS ON BUDGETING
Literature on budgeting is so numerous that
causes confusions on the instead of
enlightenment.
These are due to:
 lack of system
 lack of comprehensiveness
 lack of consistency
 lack of integration in the budget documents>
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4. THE THEORY OF BUDGET
Despite of the mentioned misconceptions, practical
efforts and results show that:
 budget appears to be the most maligned
 misunderstood and controversial subject>
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5. THE THEORY OF BUDGET
Budget is termed as…
 nothing but a mere scrap of paper
 voluminous farce
 huge piece of garbage
 greatly influence by the negative emphasis<
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6. BUDGETING PRINCIPLES & THEORIES
The term budget means…
 bowgette (Middle English word)
 bouget (Middle French word)
 bouge (means leather bag)
 bulga (Latin word… meaning bag or purse)
“Bouget” was used by the King’s treasurer, the
exchequer, to carry documents explaining the
king’s fiscal needs.<
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7. BUDGET ACCORDING TO SOME
ECONOMISTS*The term budget according to an American
Economist, Professor Philip E. Taylor (1961)…
“The budget is the master plan of government. It
brings together estimates of anticipated revenues
and proposed expenditures, implying the schedule
of activities to be undertaken and the means of
financing those activities.”
*Allan Schick views it as…
“a process consisting of a series of activities relating
expenditures to a set of goals.”>
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8. WHAT IS BUDGETING?
*According to Grooves and Bish…
“budgeting as the process through which public
expenditures are made.”
Budgeting is treated as…
 part of the expenditure process; rather than
revenue-raising process.
 necessary to provide a comprehensive view of
revenues and expenditures to facilitate the
process of rationing (involve in raising and spending
of public revenues).
 the allocation of expenditures among different
purposes so as to as to achieve the greatest
results.>
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9. WHAT IS A BUDGET?
*According to Aaron Wildavsky…
“budget is a document containing words and figures
which proposes expenditures for certain items and
purposes.”
*Expenditures means…
• salaries, equipments, travels
*Purposes means…
• preventing wars, improving mental health
*Figures are attached to each item or purpose…>
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10. BUDGETING PRINCIPLES & THEORIES
*Budgeting is concerned… (according to Wildavsky)
• with the translation of financial resources into
human purposes.
• as a network of communication in which
information is continuously being generated and fed
back to the participation.
• to coordinate and integrate diverse activities.
• maybe formulated for a specific target clientele
• as phenomenon of human behavior in government
setting
 treats politicians as dealers of “preferences”
 “what people want”>
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11. BUDGETING PRINCIPLES & THEORIES
*Wildavsky viewed budget as…
• a representation in money terms of governmental
activity.
*Eric Kohler defines budget as…
• a financial plan which serves as the pattern for
and a control over future operations
 estimates of future costs…
• a systematic plan for utilization of manpower
material or other resources.>
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12. BUDGETING PRINCIPLES & THEORIES
*According to Eric Kohler, there are two major
management functions of budget…
 serve as plan indicating requirements of certain
factors
 cash, productive capacity
 serve as a control, containing criteria of cost or
performance which are compared with actual data
on operations.
 facilitates evaluation
 encourage / enforce some measures of
efficiency<
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13. MODERN DIMENSIONS OF BUDGETING
A budget is…
 a reflection of what the government is doing or
intends to do.
 a translation in financial terms of the action
program of government
 coordinated & planned expenditures with
expected revenue collection
 proposed borrowing operations
 an instrument of administrative control
• central financial apparatus
• root of multi-purpose orientation
* control, management & planning>
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14. MODERN DIMENSIONS OF BUDGETING
Budget can be variously referred as…
 financial plans; work plans or programs; or political &
social documents
 Objectives of budgeting
 strengthening administrative process
Achieving more effective or more stringent fiscal
controls
 securing efficiency & economy
 effecting better utilization of resources
 controlling inflation
 broaden awareness & understanding of budget
control>
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15. MODERN DIMENSIONS OF BUDGETING
Budget …
 preparation & formulation is an opportunity for
government to assess the volume of taxation &
expenditures to offset threats of inflation or economic
recession.
 a work program with emphasis on relating cost to
performance
 tool for learning the relationship for government
programs with economic & financial conditions &
trends
 for designing suitable economic & financial
policies and measures<
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16. PRACTICAL & OPERATIONAL THEORY
OF BUDGETING
Budget relates to public expenditures & policy
analysis as observed by Robert Bangs (American
Economist)…
“Fiscal policy cannot be divorced
practically from the total structure of
economic policy, which in turn is merely
a part of larger cosmos of general policy
within which any government
administration operates.”<
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17. VERNE LEWIS’ DIMENSIONS OF
BUDGETINGAccording to Verne Lewis (American Economist)…
 a theory of budget through the application of the
basic economic phenomenon: “marginal utility
theory”
 Theory of budgeting are based on the following:
 Budget analysis
 Incremental analysis
 Comparison of relative merits
* Illustration of each principles are as follows:>
 Principle 1
 Principle 2
 Principle 3
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18. Principle 1.
“Budget decisions are made on the basis of
relative values.”
The values are defined as…
 “Relative Value”
 “Sacrificed Alternatives”
 “Opportunity Costs”
* No absolute standard of value
* Difficult to determine
* Keeps on changing – depending on time & environment >
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19. Based on Principle 1…
“Scarcity of Resources in relation to demands
confronts on every level of public budgeting.”
* Decision is a must under limited resources
* Basis on the choice must be considered
* Often times is based on Doctrine of Marginal Utility
 “The choice is made in terms of relative values
rather than absolute values.”
 “The principle of balance embodied in the
concept”…
 “the resources should be distributed among
different uses that the marginal return of satisfaction
is the same to all of them.”>
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the increase in utility
prompted by one
extra unit of a given
service or product

20. The point view of budget in Principle 1…
“The returns from an expenditure for any activity
must be more desirable and more necessary than
for any alternative use of funds. Deciding on two
alternatives, an opportunity cost is incurred.”
* Opportunity cost – refers to the cost of a thing or
service which must be given up for the other
alternative taken.
 “budget analysis should indicate that results must
be worth that cost in terms of alternative results are
foregone or displace.”>
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21. To illustrate the point in Principle 1…
“Government decision-makers should be able to
justify that the results / benefits to ensure that the
choice made has more advantages than the
sacrificed ones.”
Example…
 “when a nuclear power plant program are worth
the supposed benefits of the sacrificed or
canceled reforestation program...”<
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22. Principle 2.
“The principle of incremental analysis means that,
the more we acquire and more units of anything, the
additional units will be less and have less value...”
 “there will be a decreasing benefit per additional
amount or cost.”>
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23. To elaborate Principle 2…
“there will be a decreasing benefit per additional
amount or cost.”
Example:
“A car owner would value so much for his fifth tire
as his reserve to the four functioning tires. Buying a
sixth or seventh tire, their value will be lesser than
the fifth as they are intended for the same purpose.”>
LEWIS THEORY OF BUDGETING NEXT><BACK<OUTLINE>

24. For Principle 2…
“In the comparison of values, the marginal utility
theory suggests that maximum returns can be
obtained only if expenditures are distributed
among different purposes in a such a way that
for every budget spent, yields the same real
return.” <
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25. Principle 3.
“The most common method of determining the
relative effectiveness of things in relation to their
professed relative merits is through COST-
BENEFIT Analysis...”
 “Analysis and evaluation of relative effectiveness in
achieving a common objective requires a set of basic
premises which are found in the ultimate end of purposes
established by the legislative body… acting for and in
behalf of the people…”
 “This structure constitutes what makes “the best use of
resources…”<
LEWIS THEORY OF BUDGETING <BACK<OUTLINE>

26. A Reaction to LEWIS THEORY OF
BUDGETING
“V.O. Key Jr. emphasized a basic limitation of
the marginal utility theory to public
budgeting.”
 “marginal utility developed mostly in the analysis
of the market economy”
 “has a ring of unreality of public expenditures”<
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27. OTHER THEORY OF BUDGET
“Dr. Jose Soberano postulated another fiscal theory of
budget which was described as… ”
 the prevailing theories of the budget applied in developing
countries are based on “economies of abundance…”
 things get out of control when theories are applied in
“economies of poverty”…
*Sample Illustration:
In case of Philippines when compared to those with similar
status of economy; a single flood, a prolonged drought, an
earth quake, or internal security can throw the most well-
planned budget out of gear and dump carefully formulated
priorities.>
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28. OTHER THEORY OF BUDGET
“Dr. Jose Soberano postulated sides at which fiscal management
may be possible under the following requirements…”
 A Positive Government
- fulfillment of societal balance necessary for good life.
 Scientific Policies
- operations & processes open to precise verification and
validation in every significant aspect of performance.
 Abundant Economy
- consistency on the availability of resources, technological
progress, population policy, & human creativity.
 Responsive Society
- common good, awareness & entitlements for organized life.<
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29. THEORY OF BUDGET: A Summary…
“Theoritical writings on the budget reveals
that it can be viewed from the three frames
of reference:”
1. budget as an economic process
2. budget as a political process
3. budget as an administrative process
All of these theories have suggested various
approaches to help decision-making on
resource allocation.>
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30. THEORY OF BUDGET: A Summary…
Verne Lewis’ emphasis on the marginal utility theory &
sophisticated decision-making techniques like cost-
benefit analysis, feasibility studies, etc. which will help
to decide among competing budgetary options…
Pendleton Herring, Wildavsky and other political
scientists view budgeting as essentially a political
process of competition among various groups for
limited resources. “Those who have access to political
power get a bigger share on the budget…”
REFERENCES
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31. CREDITS & REFERENCES ON THE
TOPIC: BUDGET
 Fiscal Management by Cordero
 Microsoft ENCARTA 2008 – Dictionary (CD Edition)
 Grolier Encyclopedia – CD Edition
 WEKIPEDIA Website
 Merriam Webster Dictionary
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