public expenditure

PUBLIC FINANCE ADM652
Budget
Public Expenditure – Reasons
P. Expd – Classification & Canon
Cost and Benefit Analysis

To explain the components of budget
To discuss the various reasons for the brisk
expansion of public expenditure
To identify the mechanism to control public
expenditure
To understand the application of CBA

Derived from the French word
‘bongette’= a small bag – symbolizes
a bank containing the financial plan
The term budget used for the
financial plan by the governments in
Europe back in 1733
Derived from the French word
‘bongette’= a small bag – symbolizes
a bank containing the financial plan
The term budget used for the
financial plan by the governments in
BUDGET
What What is is
Europe back in 1733
Budget?
Budget?
Definition:
Formal estimate of the resources
required for a given period of time
Resource – man, money, material
Period – short & long term
Definition:
Formal estimate of the resources
required for a given period of time
Resource – man, money, material
Period – short & long term

B.J. Reed & John W. Swain – Plan
acquisition and used of resources by
public entities similar to what
individuals and household do when
spending money.
Otto Eckstein – A detail statement
of government expected
expenditures and revenues.
William Gladstone – Budgets are
not really a fares of arithmetic but in
a thousand ways go to the route of
prosperity of individuals, the
relations of classes and strength of
kingdoms
B.J. Reed & John W. Swain – Plan
acquisition and used of resources by
public entities similar to what
individuals and household do when
spending money.
Otto Eckstein – A detail statement
of government expected
expenditures and revenues.
William Gladstone – Budgets are
not really a fares of arithmetic but in
a thousand ways go to the route of
prosperity of individuals, the
relations of classes and strength of
kingdoms
BUDGET
Other
Other
Definitions of
Definitions of
Budget?
Budget?

1. Money is limited resource
-Allocating the money according to
the needs of the society
-There is a competing demand – the
allocations are based on priority
2. Equitable Distribution Fund
-To distribute the resource equally
or reasonable (needs and situations
-Taxes the rich and distribute to the
poor through the Fiscal Policy
1. Money is limited resource
-Allocating the money according to
the needs of the society
-There is a competing demand – the
allocations are based on priority
2. Equitable Distribution Fund
-To distribute the resource equally
or reasonable (needs and situations
-Taxes the rich and distribute to the
poor through the Fiscal Policy
BUDGET
Functions /
Purpose / Aim
Functions /
Purpose / Aim

3. Stabilization Function
-Stabilization role via the tax policy
and expenditure policy
-e.g. During the period of recession,
the government used more resource
to the extent of borrowing
-e.g. During inflation – govt. will tax
more, encourage people to save (the
govt take out the money from people
to reduce the purchasing power / no
demand for certain goods
3. Stabilization Function
-Stabilization role via the tax policy
and expenditure policy
-e.g. During the period of recession,
the government used more resource
to the extent of borrowing
-e.g. During inflation – govt. will tax
more, encourage people to save (the
govt take out the money from people
to reduce the purchasing power / no
demand for certain goods
BUDGET
Functions /
Purpose / Aim
Functions /
Purpose / Aim

1. Policy Tool – has important
impacts not only through the flows
of fund but also to various fiscal
policies and financial measures, as a
tool to formulate policies and set
priorities for the development plan
1. Policy Tool – has important
impacts not only through the flows
of fund but also to various fiscal
policies and financial measures, as a
tool to formulate policies and set
priorities for the development plan
BUDGET
RRoolleess
2. Management Tool – can be used to
allocate resources, distribute costs &
benefits and stabilize economies as
well as to present choices under the
condition of scarcity
2. Management Tool – can be used to
allocate resources, distribute costs &
benefits and stabilize economies as
well as to present choices under the
condition of scarcity

3. Control Tool – as budget
represents constrains (restrictions)
thus, govt. officials are required to
strictly adhere to the restriction
terms provided in the budget
3. Control Tool – as budget
represents constrains (restrictions)
thus, govt. officials are required to
strictly adhere to the restriction
terms provided in the budget
BUDGET
RRoolleess
4. Political Tool – political parties,
administrators, interest groups and
interested citizens vie one another to
have their preferences to be listed in
the budget (budget – outcome of
political compromises and bargains,
victories & defeats)
4. Political Tool – political parties,
administrators, interest groups and
interested citizens vie one another to
have their preferences to be listed in
the budget (budget – outcome of
political compromises and bargains,
victories & defeats)

5. Statement of Government
Expenditures – must provide clear,
systematic and detailed description of
its revenue and expenditures for a
financial year for public reference.
Hence, public aware of the activities
undertaken by government. – guide
for government officials to perform
duties
5. Statement of Government
Expenditures – must provide clear,
systematic and detailed description of
its revenue and expenditures for a
financial year for public reference.
Hence, public aware of the activities
undertaken by government. – guide
for government officials to perform
duties
BUDGET
RRoolleess
6. Performance Measurement Tools –
To assist in the performance
measurement of government
programs in terms of efficiencies and
effectiveness.
6. Performance Measurement Tools –
To assist in the performance
measurement of government
programs in terms of efficiencies and
effectiveness.

BUDGET IInnttrroo
It is an annual financial plan of the government
Involved 2 elements = (revenue & expenditure)
Plan = it is a proposed projected revenue and
proposed expenditure
Consist of revenue & expenditure prepared for a
period of 1 year ( short-term plan)
There are two types of Budget:- Operating Budget &
Development Budget
Also involved Charged Expenditure
It is an annual financial plan of the government
Involved 2 elements = (revenue & expenditure)
Plan = it is a proposed projected revenue and
proposed expenditure
Consist of revenue & expenditure prepared for a
period of 1 year ( short-term plan)
There are two types of Budget:- Operating Budget &
Development Budget
Also involved Charged Expenditure

Types of Budget
Operating
Budget
Operating
Budget
Development
Development
Budget
Budget
•Also called Supply Budget
•E.g. Salary / Emoluments, utility bills, repairs
•It also refers to the expenditure that recur
monthly or annually – that could not be
avoided (recurrent expenditure)
•Also called Supply Budget
•E.g. Salary / Emoluments, utility bills, repairs
•It also refers to the expenditure that recur
monthly or annually – that could not be
avoided (recurrent expenditure)
•Involved the acquisition of land
•E.g. equipment cost, construction cost,
compensation on land
•Also refers to projects which involved
acquisition of land, equipment, consultancy &
contract service
•All 5-year development plan are put under
Development Budget
•E.g. Smart School, Agriculture Development
•Involved the acquisition of land
•E.g. equipment cost, construction cost,
compensation on land
•Also refers to projects which involved
acquisition of land, equipment, consultancy &
contract service
•All 5-year development plan are put under
Development Budget
•E.g. Smart School, Agriculture Development

Types of Budget
DDiiffffeerreenncceess
•Operating – expenditure on annual basis
•Development- period between 1 – 5 years
•Operating – expenditure on annual basis
•Development- period between 1 – 5 years
SSiimmiillaarriittiieess
•Both must become “Supply Bill”
•Could not be held without parliamentary
approval
•Both must become “Supply Bill”
•Could not be held without parliamentary
approval
Charged
Expenditure
Charged
Expenditure
•Charged = no need to get approval from
Parliament
•Parliament has enacted legislation for this
particular expenditure
•Straight away withdraw from Consolidated
Fund
•Charged = no need to get approval from
Parliament
•Parliament has enacted legislation for this
particular expenditure
•Straight away withdraw from Consolidated
Fund

BUDGET
Components
of Budget?
Components
of Budget?
Public Expenditures
Public Revenues

Public Expenditures WWhhaatt??
Refers to expenses (federal or state) incurred by the
government
-provision of various public spending & services to the
people e.g. education, health, security
-promoting the welfare and well-being of the people
-maintenance of the government defenses forces, police,
civil servants, etc
-maintaining the economic stability
-reducing inequality of income & for reallocations of
resources

What are the macro
economic objectives of
public expenditure?
What are the macro
economic objectives of
public expenditure?
Public Expenditure
Refers to expenses (federal or state) incurred by the
government
-provision of various public spending & services to the
people e.g. education, health, security
-promoting the welfare and well-being of the people
-maintenance of the government defenses forces, police,
civil servants, etc
-maintaining the economic stability
-reducing inequality of income & for reallocations of
resources

Public Expenditure Trend
Year Operating
(RM)
Development
(RM)
TOTAL
(RM)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
42,713,554,700
45,633,123,200
47,042,200,000
53,350,999,600
62,210,442,950
66,982,014,490
72,838,816,760
80,530,000,000
89,141,090,000
101,246,477,910
112,985,928,000Ã‚
17,268,654,900
18,491,268,800
18,053,000,000
24,674,292,000
28,836,348,460
33,536,491,630
36,962,737,700
31,960,000,000
28,303,894,600
35,502,044,600
46,510,219,000
59,982,209,600
64,124,392,000
65,095,200,000
78,025,291,600
91,046,791,410
100,518,506,120
109,801,554,460
112,490,000,000
117,444,984,600
136,748,522,510
159,496,147,000

Reasons for the Growth of
Public Expenditure in Malaysia
Expansion in the
Activities of the
Government
The Growth of Social
Security / Social
Assistance Scheme
Development of
Agriculture
Meeting Defense
Needs
Rising Trends of
Prices
Increase in
administrative cost
Urbanization Maintaining
economic stability
through fiscal policy
Economic
Development
Industrial
Development
Rural Development Tourism
Development

Reasons for the Growth of
Public Expenditure in Malaysia
Introduction of New
Technology
Increasing
Population
International
Relations
Implementation of 5-
Year Plan
Globalization
Mismanagement of
Fund /
Maladministration
Implementation of
Mega / Prestige
Projects
Political Activities

1. Classification by
Categories
Categories
Classification of
Public Expenditures
a) Operating Expenditure; (Supply)
-denoted by the letter ‘B’=bekalan
a) Charged Expenditure
shown by the letter ‘T’=tanggungan
a) Development Expenditure; (project which
involved acquisition of land, equipment,
construction and compensation)
-denoted by the letter ‘P’=pembangunan

Sector
Sector
Classification of
Public Expenditures
Divided into:-
(i) Economy services
(agricultural, mineral resources, transportation,
communication utilities, trade & industry, public
utilities)
(ii) Social Services
(education, healthcare, information, housing,
culture, youth & sports, welfare services)
(iii) Security (Ministry of Defense)
(Internal Security, External Security)

Sector
Sector
Classification of
Public Expenditures
(iv)General Admin
(Services of all agencies, ministries, departments,
universities e.g UiTM 300,000 mil annually)
(v) Transfer Payment
(All the grants and loans to the states)
(vi)Specific Obligation
(Charged expenditures, pension & gratuities, debt,
service charges, interest)

General Object
General Object
Classification of
Public Expenditures
On items of expenditure
Divided into:-
(i) Emoluments - Code 10,000 (Salary &
Remuneration)
(ii) Supplies & Services – Code 20,000 (buy / maintain/
repair e.g aircond
(iii)Assets –Code 30,000 (Purchase of equipment /
government assets
(iv)Grants & Transfer – Code 40,000 (transfer of
money to state universities, PEs, Statutory Bodies

Gener
al
Object
10000
Emoluments
20000
Services
and
Supplies
30000
Assets
40000
Grants and
Fixed
Charges
50000
Others
Expenditure
TOTAL
Year
2006 23,586,575,715 20,553,979,915 1,608,062,94
0
54,993,809,530 504,049,810 101,246,477,910
2005 22,241,481,996 18,790,128,264 1,414,421,59
0
46,263,928,540 431,129,610 89,141,090,000
2004 20,933,872,960 17,215,514,155 768,494,103 39,426,938,009 2,185,180,773 80,530,000,000
2003 19,727,373,937 14,253,002,599 1,612,982,44
9
34,514,289,875 2,731,167,900 72,838,816,760
2002 17,581,347,017 12,065,207,187 1,532,739,43
1
33,328,009,975 2,474,710,880 66,982,014,490
2001 16,921,053,410 10,078,049,903 1,149,547,59
5
32,135,234,492 1,926,557,550 62,210,442,950
2000 14,607,733,010 7,564,036,760 610,145,960 28,370,827,980 2,198,255,890 53,350,999,600

Program / Activity
Program / Activity
Classification of
Public Expenditures
-Codes (6 digits) are assigned for programmes: 010000 to 380000
for Ministry of Education
-Examples: 010000 Corporate Mgmt & Audit (P)
010100 Corporate Mgmt (A)
010200 Policy & Quality (A)
010300 Schools Audit (A)
-Parliament give allocation based on programmes
-The idea is to capture how much to spend / to capture
accounting information or data
-e.g Ministry of Health – Hospital Service Program

Canon of
Public Expenditures
Def: Rules / Principles that has to be followed by the government when
incurring expenditures
-This principles have been suggested by economist
Why?
1. They believed public expenditure has to be made according to
priority
2. To avoid waste
3. To avoid extravagance & unnecessary spending – want government to
be thrifty
4. Made to produce wealth, goods that we can earn some income for the
country, to enhance national productivity
5. To maximize benefits
6. Want to have equitable distribution of wealth ( tax the rich, social
assistance, programme of eradicating poverty)
Def: Rules / Principles that has to be followed by the government when
incurring expenditures
-This principles have been suggested by economist
Why?
1. They believed public expenditure has to be made according to
priority
2. To avoid waste
3. To avoid extravagance & unnecessary spending – want government to
be thrifty
4. Made to produce wealth, goods that we can earn some income for the
country, to enhance national productivity
5. To maximize benefits
6. Want to have equitable distribution of wealth ( tax the rich, social
assistance, programme of eradicating poverty)

TTyyppeess o off C Caannoonn Canon of
Public Expenditures
1.Canon of Benefit
-When public expenditure is incurred, they must be the
social advantage (maximum social benefits to the citizen)
-Must benefit all members of society / nation regardless of
race, religion & background
-Must benefit all section of society
-Concept: Greatest happiness of the greatest number =
everyone in the society must be able to have the benefit
from the expenditures
-Why acceptable? – it benefits all, critical especially in
multiracial country

Public Expenditures
Problems / Weaknesses:-
-how do we measure national unity benefits?
-e.g. how do we measure enjoyment?
-certain things are not quantifiable / some activities are
intangible –cannot be measured
Accepted or Not?
-useful to developing countries

Public Expenditures
2.Canon of Economy
-most developed and developing countries use this rule
-to avoid corruption
-to protect the interest of tax payers
-avoiding lavish spending (extravagance) / thrifty
-must not implement programme that does not benefit the
society
-the spending must be able to generate income/revenue
Useful Principle
-advises government throughout the world – future
-help the businesses to meet the consumer demand
-multiplayer effect – for productive purpose

Public Expenditures
3.Canon of Sanction
-means – approval= public expenditure must be incurred
only after approval and it is made according to the
authority
-Art 99 & 100 – budget must be submitted to the
Parliament every year
-’Parliament’ is considered as the sanctioning authority
-Only those who has the authority can approved it
Reasons:
-The approved fund will only be used for that particular
purpose
-To take it as mandatory that fund must first be approved

Public Expenditures
Why accept?
-to control expenditure
-to make the expenditure legal or authorized
-to avoid corruption, especially in developing countries

Public Expenditures
4.Canon of Surplus
-means: access (balance, deficit, surplus)
-surplus: revenue is more than expenditure
-government must avoid deficit budget
-they must spent less from what they have earned and
keep it for the future
-’surplus fund’ has to be spent to face the emergency
needs e.g. flood, earthquake, war
-unnecessary borrowing has to be avoided

Public Expenditures
Problems / Weaknesses:-
-not applicable during recession
-certain condition (economic) are unpredictable
Practical or not? Pragmatic or not? Accepted?
-Government could not administer the country w/o fund
-according to the eco. Principles, government need to
spend more during inflation & recession
-not so pragmatic – expenditures depends on the current
situation esp, during economic crisis
-it is only practical when there is a boom in economy
-Only countries like Japan and US ever used this rule

Public Expenditures
5.Canon of Elasticity
-means: flexible = can be changed according to the needs /
circumstances
-the expenditures must be flexible
-the policy must be adaptable – according to the situation
-recession – spend more / inflation – spend less
-e.g. danger / threat from enemy – government has to
spend more money on defense system
Good or not ?
-a very pragmatic principle
-acceptable to all countries globally

Public Expenditures
6.Canon of Productivity
-means: performance
-guidance for developing countries
-focus more on agriculture and industrial sectors
-development of roads, schools
-industrial goods (export and import)
-the government should encourage productive activities to
offer more benefits to the society – offer more job
opportunities (employment opportunity is the main obj)
-must be maximum output
-greater income – element to enhance national output
-production will not depends heavily from other countries
– import

Public Expenditures
Acceptable or not?
-industrial & agricultural goods emphasized national
production that can generate income
-useful to developing countries to focus more on industrial and
technological means
-can be considered as the perfect canon of expenditures for
developing countries to achieve higher economic growth

Public Expenditures
7.Canon of Equitable Distribution
-to reduce the inequitable distribution of wealth or
national income
-public expenditure should reduce the gap / disparities
between the have and have not
-more money should be allocated to the poor rather than
the rich e.g. social assistance sheme, subsidies
-to help increase the income of lower income group
-assistance: loans, better health, housing, welfare,
education

Public Expenditures
Useful or not?
-useful to the country glaring inequitable income eg.
India, China and Pakistan and most countries in Africa
Weaknesses
-burden the rich people
-poor people will fully depends on the government

Cost-Benefit Analysis
IInnttrroodduuccttiioonn
• Cost-benefit analysis is a valuable tool for evaluating the net benefits of
proposed government projects. It represents a practical technique for
determining the relative merits of alternative government projects over
time.
• Use of cost-benefit analysis can contribute to efficiency by making sure
that new projects for which marginal social cost exceeds marginal social
benefit are not considered for approval.
• It can be used to organize information in a way that aids citizens,
politicians, and bureaucrats in making choices among alternative
government projects.
• CBA is not a new tool. It has been used in US since 1900.
• Essentially, there are 3 steps involved in CBA:-
1) Enumerate all costs and benefits of the proposed project
2) Evaluate all costs and benefits in Ringgit / dollar terms
3) Discount future net benefits.

1) Enumerating 1) Enumerating BBeenneeffiittss aanndd CCoossttss
•Firstly is to define both the project under consideration and its
output. Once this is done, the analyst can proceed to enumerate the
costs incurred and the benefits generated over the life of the project.
•Benefit can be divided into two categories: direct and indirect.
•Direct Benefits = those increases in output or productivity
attributable to the purpose of the project. Eg. Irrigation project: The
purpose is to increase the fertility of a particular track of land. The
direct benefits in this case will be the net increase over time in
agricultural output on the land being irrigated.
•Indirect, or spillover, benefits = those accruing to individuals not
directly associated with the purpose of the project. In an irrigation
project, spillover benefits might include the improved fertility of
adjoining land that is not actually irrigated by the scheme.
•In enumerating benefits, only real increases in output and welfare
are considered. Care must be exercised not to double-count benefits.

1) 1) EEnnuummeerraattiinngg BBeenneeffiittss a anndd C Coossttss
PPrroobblleemmss
•Double Counting still occur on various occasion.
•Problem with definition of indirect or spillovers, effects of a project.
In some cases, analysts include as a benefit the extra profits of third
parties not directly affected by a project.
•For some projects, enumeration of benefits is difficult. How are the
benefits of an education program or a health program defined?
Again the answer must yield a quantifiable result that avoids double
counting.
•In enumerating costs of a project, listing direct resource costs gives
only a partial account of real cost when external costs also will occur.
•Any costs not reflected in the prices of inputs must be included.
E.g. a new project in a given area will have the effect of reducing
water resources available to nearby agricultural land. The
corresponding reduction in agricultural output must be included as a
cost of the project.

22)) E Evvaalluuaattiinngg BBeenneeffiittss aanndd CCoosstt
•After all costs and benefits have been satisfactorily enumerated, the
nest step is to evaluate these costs and benefits in dollar terms.
•Valuing output requires and estimate of the demand for increased
production and calculation of consumer surplus. When the outputs of
particular programs are not sold in markets, the problem of valuation
is difficult. Surrogate (substitute) measures of the willingness of
beneficiaries to pay for outputs that are not sold must be obtained.
•E.g. although the benefits of many public health programs are
consumed collectively, the value of these benefits might be reflected in
increased earnings of those whose health is improved by the project.
•An additional problem occurs with outputs and inputs that are
marketable but have prices that do not reflect their true social value.
This results when any output attributable to a project is sold in
monopolistic markets, when external effects are generated by
production of the output.

33)) D Diissccoouunnttiinngg F Fuuttuurree NNeett BBeenneeffiittss
• Here the step involved is, the choice of an appropriate discount rate
is of crucial importance. The need to discount stems from the existence
of positive interest rates in the economy.
•Positive interest rates imply that a dollar of benefits in the future
will be worth less than an equivalent dollar of present benefits,
because it takes less than a dollar of resources invested today to
produce a dollar of resources tomorrow, when interest rates are
positive.
•In general, the present value of X ringgit to be received n years from
now at simple interest rate r is obtained by solving the equation:
X=PV (1+r)n or PV=X/(1+r)n

How Discount R How Discount Raattee AAffffeeccttss tthhee PPVV ooff PPrroojjeeccttss??
1) It is no more important than the proper enumeration and
evaluation of costs and benefits. – an analysis that uses the correct
discount rate but seriously miscalculates costs and benefits will
produce results as misleading as a study that uses a zero discount
rate.
2) The higher discount rates result in fewer government projects that
can be approved. Insofar, as the discount rate reflects the return to
private consumption and investment, a higher rate implies that the
opportunity is greater. This in turn, implies that efficiency requires
a relatively smaller amount of government expenditure as a
percentage of GDP.
3) Economic efficiency must always become the main priority in
weighting or aggregating the projects.

PPRREEVVEENNTTIINNGG E ERRRROORRSS IINN CCBBAA??
1) Avoid Double Counting – avoid miscalculates costs and analysis –
consider externalities both positive and negative
2) Choose the right social rate of discount
3) Avoid from modifying techniques to build in equity as well as
efficiency criteria in ranking projects to be done
4) Treatment of inflation – both benefits and costs could be measured
through time in nominal values by estimating the rate of inflation
over time and inflating both future benefits and costs accordingly
5) Ranking projects – according to the present value of their
discounted net benefits
6) Avoid any biasness, discrimination in doing the analysis

public expenditure

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