Public Budget

A budget is a statement of expected results stated in numerical terms. It is formed in advance of

the period to which it applies. It is an instrument of planning as well as control. It serves as a
standard against which actual results can be compared. A budget can be seen as an economic
plan for a given period of time. Budgeting is the process of preparing budgets. In the words of
G.R. Terry, “A budget is an estimate of future needs arranged according to an orderly basis,
covering some or all of the activities of an enterprise for a definite period of time”

The various objectives of government budget are:

1. Reallocation of Resources:

Through the budgetary policy, Government aims to reallocate resources in accordance with the

economic (profit maximisation) and social (public welfare) priorities of the country. Government
can influence allocation of resources through:

(i) Tax concessions or subsidies:

To encourage investment, government can give tax concession, subsidies etc. to the producers.

For example, Government discourages the production of harmful consumption goods (like

liquor, cigarettes etc.) through heavy taxes and encourages the use of ‘agricultural products’ by

providing subsidies.

(ii) Directly producing goods and services:

If private sector does not take interest, government can directly undertake the production.

2. Reducing inequalities in income and wealth:

Economic inequality is an inherent part of every economic system. Government aims to reduce

such inequalities of income and wealth, through its budgetary policy. Government aims to

influence distribution of income by imposing taxes on the rich and spending more on the welfare

of the poor. It will reduce income of the rich and raise standard of living of the poor, thus

reducing inequalities in the distribution of income.

3. Economic Stability:
Government budget is used to prevent business fluctuations of inflation or deflation to achieve

the objective of economic stability. The government aims to control the different phases of

business fluctuations through its budgetary policy. Policies of surplus budget during inflation and

deficit budget during deflation helps to maintain stability of prices in the economy.

4. Management of Public Enterprises:

There are large numbers of public sector industries (especially natural monopolies), which are

established and managed for social welfare of the public. Budget is prepared with the objective

of making various provisions for managing such enterprises and providing those financial help.

5. Economic Growth:

The growth rate of a country depends on rate of saving and investment. For this purpose,

budgetary policy aims to mobilise sufficient resources for investment in the public sector.

Therefore, the government makes various provisions in the budget to raise overall rate of savings

and investments in the economy.

6. Reducing regional disparities:

The government budget aims to reduce regional disparities through its taxation and expenditure

policy for encouraging setting up of production units in economically backward regions.

Budget Cycle
Public budgeting systems, which are devices for selecting societal ends and means, consist of
numerous participants and various processes that bring the participants into interaction. As
described in preceding chapters, the purpose of budgeting is to allocate scarce resources among
competing public demands so as to attain societal goals and objectives. Those societal ends are
expressed not by philosopher kings but by mortals who must operate within the context of some
prescribed allocation process—namely, the budgetary system.
To provide for responsible government, budgeting is geared to a cycle. The cycle allows the
system to absorb and respond to new information and, therefore, allows government to be held
accountable for its actions. Although existing budget systems may be less than perfect in
guaranteeing adherence to this principle of responsibility, the argument stands that periodicity
contributes to achieving and maintaining limited government. The budget cycle consists of four
phases: (1) preparation and submission, (2) Legislation, (3) execution, and (4) audit and
evaluation
1. Preparation and Submission
The preparation and submission phase is the most difficult to describe because it has been
subjected to the most reform efforts. Experiments in reformulating the preparation process
abound. Although institutional units may exist over time, both procedures and substantive
content vary from year to year.
The process of budget formulation beings with resources estimation. Activity starts at ministry of
finance (MoF) with the Resources Committee (RC).comprising ViceChairperson of National
Planning Commission (NPC), financial Controller general and MoF Secretary. The RC
determines the size of the budget by analyzing overall economic situation of the country with the
help of macro-economic indicators. Resources estimates comprise estimate of revenue, foreign
lone, grant and domestic borrowing. Upon accomplishing resources estimation the Resources
Committee sets the ceiling for budget for the next fiscal year. The budget ceiling is fixed
considering availability of both internal and external resources. The NPC sets out the priority and
policy goals with respect to plans and programs for forth coming fiscal year and provide
necessary guidelines to the concerned Ministry and Ministry of finance, prior to sending of the
circular for preparation of budget (Budget Manual, 2000).
In the mid- fiscal year, the ministry of finance issues budget circular to all sector‟s Ministries
and Constitutional Bodies directing them to prepare the budget with following information:
 Ceiling of funds including external assistance available for each ministry for various budget
funds.
 Formats to be used for various estimates and instructions to be followed in preparing the
estimates.
 Policy guidelines to be followed in prioritizing activities.
Immediately upon receiving the circular, budget preparation at the ministry levels beings form
the project levels to be followed by a detailed discussion and scrutiny in the planning division of
the ministry. Estimation of foreign aid on the following basis:
 Review of project documents including project agreements, minutes of Understanding
(MoF), staff Appraisal Report, Master plan of Operation, and so on.
 Discussion and interaction with the counterpart donors held at the Ministry to identify
whether their commitments along with the governments counterpart funds are correctly
reflected.
 With all this information, the respective Ministry submits the budget proposal and the
annual program-one each to NPC and MoF in the beginning of third trimester of the
fiscal year.
The first round of budget discussion takes place at NPC in the case of capital/ development
budget in April/may participated by the line agency staff along with NPC and MoF staff, when
the proposed program is critically examined in the perspective of policy guideline and the
circular and the Mof staff assess the aidinvolved projects in the context of the confirmed and
unconfirmed commitments of the respective donors. The discussion at NPC refers to
 Projects to be funded under external assistance are retained as far as possible.
 There are some cuts and adjustments when grants assistance needs counterpart funding.
 Projects not supported by firm commitment or those, which depends upon availability of
funds, are taken out.
Although no donors are invited in the budget discussion at NPC, they get all these feedback
from their counterpart staff. If the discussion goes against the interest of donors, they can
influence the process at the policy level. The final round of discussion takes place at MoF,
representatives by the concerned ministries/ departments/projects and NPC staff.
Interaction takes place with the concerned projects/ministries/departments to confirm donor‟s
commitment to the project.
 Projects needing counterpart finding are examined critically when MoF often makes
unilateral cuts, reduces government counterpart funding budget and raises aid portion
without information the respective donors.
 Donors keep an open eye on those cuts and some donors may pressure through the
concerned ministries and secretaries not to deviate from the original proportion and
maintain at least the counterpart funding specified in the project document.
In view of all these factors specified above, MoF prepare a statement. Of expenditure (Red
Book) containing description of all estimated expenditure for each sector, ministry, which would
be ready by June/July. During these periods, considerable pressure may come from the
politicians, particularly the MPs and DDC Chairman, to adjusted development programs to their
constituencies resulting in bigger size of budget in excess of available resources. The role of
revenue consultative committee (RCC) set up mat national level under MoF is also significant
particularly in the context of attaining growth, equity and stability objectives of taxation. The
RCC is an apex body to provide recommendations for designing policies, determination tax base
and tax rates, setting the level of exemptions and personal and business deductions.
2. Legislation/ Enactment

Enactment/Legislation is the second step of budget formulation. The phase enactment beings
with budget speech by the finance minister at the joint session of parliaments in the second or
third week of July. It is followed by a brief discussion of the 42 underlying budgetary principles
and policies. The minister also submits an appropriation bill is accompanied with a description of
programs and their regional distribution, the discussion in parliament lasts for one and half to
two months, when subjects are analyzed item wise, followed by a voting on the bill in parliament
in September. After about one to two weeks from the date of parliamentary approval of the bill,
the bill gets the royal assent to become an Act. Government of Nepal and donors to the
respective programsafter the presentation of appropriation bill, the finance minister presents the
advances bill seeking authorization to release certain fixed amounts to the government till the
budget is passed. The appropriation bill is accompanied with a description of programs and their
regional distribution (Red Book). The discussion in parliament lasts for one and a half to two
months, when subjective are analyzed items wise, followed by a voting on the bill in parliament
in September. After about a one two weeks from the date of parliamentary approval of the bill,
the bill become the Act.

3. Execution (Implementation)

Implementation is also called the procedure of releasing budget. The process of fund release
starts with the approval of the budget by the parliament. After the parliament approves the
budget, the budget implementations require two future steps. They are:(i)finalization of work
programs consistent with the ratified budget for each spending unit by the respective line
Ministries and their approval by NPC, and (ii) the formal delegation (through official
notification) of authority to spend by the secretary of finance to sectors Ministries and then to
project managers. These procedures unnecessarily hold up implementation for several weeks,
and very little work is carried out in the first trimester of the fiscal year. Immediately after
completion of the discussion on the underlying principles and policies, the Finance Ministries
puts before the parliament the Vote on Account Bills, which authorizes the government to spend
a specified amount in advance. The process for releasing budget is given below:

a) Whereas up to one-third of the previous year‟s „expenditure was often released under the
advance bill before, the government can advance up to one –third of the budget for core
projects, two-third or one-sixth for remote projects and one-sixth for regular and other
programs, Subsequent release can follow after the Appropriation bill gets of the Head of
the State assent.

Budget release will be made on a monthly basis. In the past, trimester budget release was in
practice. However, the Financial Controller General Office (FCGO) has maintained the trimester
and lump sum system for subsides (DDC,VDC,Education, health, Public Corporation,
Companies),controlled budget (Medical Care, Gratuities) and others.
 b) For donor-funded projects, budget will be released on a pre-funding (donors have to put
deposit to GoN, treasury in advance) and reimbursement basis (applied for loan-financed
projects and to some extent for bilateral donorfinanced projects depending upon the
agreement.)
c) The system of impress account and Special established under ADB and World Bank-
financed projects have also been maintained under which the project authority can
withdraw directly from the said account

The budget release system, however, is not automatic. Its release is subject to the following
conditions; After the approval of the Appropriation bill, MoF will inform the entire sector
Ministries on the project details of the approved budget, and send the Sources Book onForeign
Aided projects and letter of authority for all expenditures to all ministries, FCGO and Auditors
General„s Offices (AGO). Line ministries also forward such budget details and authority latter
for expenditure through their concerned Department/project coordinator Offices (PCO) to the
district line agencies with copies to the FCGO and each District Treasury Offices (DTO)

The FCGO and DTO play important role in the budget release process. The DTOs process all
request and will release the funds requested to respective agency‟s bank account. DTOreleases
the fund upon the receipt of the following documents.

a) Authority letter from the concerned ministry,

b) Release order to DTO by FCGO.
c) Project/program duly approved by NPC and document In the budget,
d) The FCGO release funds on a monthly basis, provided the above mentioned condition are
fulfilled and the budget requests tally with the sources book,
e) DTO release the fund only after receiving the statement of expenditure of the previous
month from the requesting agency,
f) DTO is also empowered to release the donor portion budget on a reimbursement basis, if
so provisioned in the sources book,
g) In the case of pre-funding arrangement in the sources book, budget is released to the
extent of donor contribution available.

4. Auditing/ Evaluation
The final phase of budget cycle is auditing. This is the overall responsibility of the Auditor
General (AG) to prepare the annual report after accomplishing auditing of all government
transaction. The AG presents its annual report to GoN , which is later forwarded to parliament
for discussion and implementation. Unfortunately, financial irregularities are found at staggering
magnitude, which is indicative of growing corruption in government organizations. Stringent
condition with server punishment is required to check financial irregularities. In many state-
owned enterprises (SOEs) and DDCs auditing is pending for many years, yet there is no action
against form the center there is also growing demand from the civil society that political parties
too audit their account by the Office of the Auditor General and publish in media.AG submits the
report to government and presented in parliament for discussion and implementation of the
suggestions.

Budget formulation Process

National budget is the forecast of annual revenues and expenditures and is reflective of the
existing policies and plans of the government. It also represents an allocation of resources based
on the demands and needs of citizens. It is therefore prudent to understand the process that is
followed to prepare the budget.

Normally, the process of budget formulation in Nepal would begin in January and end in July,
when the fiscal year starts. However, this year on, in line with the provision of the Constitution
of Nepal 2015, the new budget cycle has been moved forward and it will now be presented on
constitutionally mandated date of 15th Jestha (May 28). This is expected to provide enough time
to disburse funds to the implementing agencies, which has for long been a major cause of delay
in conducting planned activities.

The first step in formulation of the budget is forecasting, wherein the sources of revenues and
tentative areas of expenditures are identified. The process of forecasting is led by a Resource
Committee, which is chaired by the Vice Chairperson of National Planning Commission (NPC),
and includes other members from NPC, members from the Ministry of Finance (MoF), Central
Bank of Nepal, and the Financial Comptroller General’s Office (FCGO). Once the forecast has
been prepared, it is presented to the budget committee comprising of the members of the NPC
and the MoF. The committee, after thorough discussion sets the budget ceiling, which limits the
budget expenditure based on sectors and availability of resources. The committee also prepares
the working guidelines for budget formulation. Thereafter, each of the line ministries is asked to
submit their programs and budget estimates (both capital and recurrent) in accordance to the
guidelines and sectoral budget ceilings. The line ministries then forward the guideline along with
the budget ceiling and priorities to respective departments and agencies functioning under it,
either at the district level or at the central level. Based on the guidelines, these agencies prepare
the forthcoming year’s programs and budget and send it back to the concerned departments. The
departments compile the programs and budget of all agencies under them and submit it to the
respective line Ministries. Some negotiations can take place between the Ministries and the
departments before it is vetted and consolidated by the Ministries and forwarded to the MoF and
NPC for finalization.

It is also important to look at the process of budget formulation for devolved programs, which
are financed by the center but falls under the administrative purview of the District Development
Committees (DDC). The NPC sends guidelines to DDCs for district level plans and programs.
The guideline is passed down to the Village Development Committees (VDCs) and
Municipalities, who hold village/town council meetings to discuss and prepare sector-wise
development programs and projects. Interest groups such as the consumer committees, NGOs,
political leaders, and citizens are included in these discussions. Their plans are then forwarded to
the VDC/municipality where it gets accumulated. Once the VDC scrutinizes and gives a green
signal to the plan, it moves up to the District Council which re-examines the budget and forwards
it to the DDC. The DDCs then hold meetings with district offices and finalizes district budget
and priorities, which is then sent to the NPC and the Ministries. While this is the process that
should be theoretically followed, it is not necessarily fully operated because of absence of
popularly elected officials. As departments are not given a sectoral budget ceiling, they generally
do not take expenditure limitations into account; instead they look at project-specific targets as a
guide for the budget.

Once the MoF receives the budget from all line ministries, inter-ministerial meetings are held to
vet and finalize the national budget. Similarly, the NPC discusses all the programs submitted by
the Ministries, and finalizes those programs in consideration of the relevancy, budget allocation,
and budget handling capacity of the Ministry. Before the budget is presented in the parliament,
the parliamentarians are presented with a draft budget document for them to discuss the sector-
wise specifics. The comments and queries that arise during the ministry-specific discussions are
discussed in detail until the relevant ministry and parliamentarians are satisfied with the
clarifications provided to their queries. The budget is presented by the government only after the
ministry level budget discussion ends. If the majority agrees with the budget then it is approved
and is presented to the national Parliament in the form of a Budget Speech by the Minister of
Finance.

As you can see, the formulation of the national budget is a combination of the top-down and
bottom-up approach, which brings about a synergy between the national level plans and local
level needs; and ensures that the budget fulfills the demands of both the state and the locals.

Government Budgetary Operation / Operation of Budgetary Process

For a number of years budget in Nepal was classified under two categories: regular and
development. However, this has been adjusted to international classification of current budget
and capital budget from FY2004/05. The major heading under current budget is expenditure on
consumption expenses, office operation and services, grants and subsidies, services and
production expenses, contingency expenses, principle and interest payments on domestic and
foreign loans, likewise, items falling under capital expenditure are capital transfer, capital
formation, investment in share and lone and capital grants. The NPC determines the size of
capital/development expenditure conformity with the policies programs and priorities envisaged
in the national plan and also by considering the extent of external borrowing both bilateral and
multilateral grants and loans as well as domestic borrowing available to treasury during the given
fiscal year. The capital development budget includes all the expanses of development project on
going and new. Expenditure on capital projects, training research exploration and
projects/programs activities supported by external assistance are also reflected in the
development budget. The magnitude of current/regular expenditure is estimated on financial
ceiling provided by MoF and NPC (financial management projects, 1995). There is limited scope
to expand the size of current budget in a resources scare economy where tax elasticity and
voluntary compliance on the part of tax payers are very low. Tax revenue constitute of both
direct and indirect taxes. The premier direct tax are on net income, property and capital gains and
major indirect taxes include domestic taxes on goods and services like VAT, excise etc, tax on
international; tread and transactionslike export and import duties. Non tax-revenues constitute
fines and penalties and royalties. A budget therefore, should be designed to facilitate
determination of governmental activates in the light of the preference of society by ensuring the
comparison of conflicting programs and methods in the attainment of the goals. The budget
should also aid in attaining greater efficiency in the use of governmental resources.

Nepals Budget operations 2021/22

Finance Minister Bishnu Prasad Poudel presented the 2021-22 budget on May 29 through an
ordinance, owing to the dissolution of the federal Parliament and the announcement of fresh
elections scheduled for November. The bloated budget includes big promises on expenditure,
revenue mobilisation and deficit financing that are challenging to implement if elections are held
—that too without fully vaccinating a sizable share of the population.

Nevertheless, the finance minister has rightly prioritised the most pressing challenge right now,
i.e., testing, tracing, treatment, vaccination and upgrading healthcare infrastructure. The strategy
seems to be the stabilisation and recovery of economic activities by addressing healthcare
challenges, continuation of existing projects and relief measures for individuals and businesses,
and propping up aggregate demand as well as the voter base by increasing allowances.

Large outlay, large deficit

The total expenditure outlay for 2021-22 is Rs1.65 trillion, which is 30.1 percent higher than
2020-21 revised estimate. Recurrent and capital spending allocations constitute 61 percent and
26 percent of the budget. Notably, the government started reporting recurrent and capital grants
to subnational governments (SNGs) separately from the next fiscal. This gives a better picture of
actual capital spending, because earlier the government used to argue that reported capital
spending underestimates the actual figure as some fiscal transfers recorded under recurrent
spending are used for financing capital projects by SNGs.

Total federal receipts (federal government’s share of revenue plus foreign grants) are estimated
to be Rs1.09 trillion. The revenue mobilisation growth target is set at 20 percent. Considering the
federal government’s expenditure and its share of revenue in total revenue mobilisation, the
budget deficit turns out to be Rs559.3 billion, which is to be financed by foreign loans and
domestic borrowing. The government expects foreign aid (grants and loans) to cover about a
quarter of its expenditure needs. Overall, the fiscal deficit is projected to increase to about 7
percent of the GDP in 2021-22, up from about 5 percent in 2020-21.

About 45.1 percent of the planned recurrent budget is earmarked for SNGs in the form of
recurrent fiscal transfer and unconditional recurrent grants. The other big-ticket item is social
security, which takes up about a quarter of the recurrent budget. Social security includes
allowances, social assistance (scholarship; rescue, relief and rehabilitation, medical assistance);
and social benefit of employees (pension and disability allowances, retirees related gratuity and
medical assistance). The increase in allowances by 33 percent, including for 70 years and above
elderly people, has drastically increased allocation under this heading by 50 percent. Meanwhile,
about 58 percent of the planned capital budget is going for civil works and 14 percent as capital
grants to SNGs.

Major takeaways

The budget has been rolled out when the country is at a critical juncture. In fact, economic
activities are estimated to have contracted by 2.1 percent in 2019-20 and will likely grow at
around 2 percent in 2020-21, most of which will be due to a base effect anyway. Increase in
social security allowances, the allocation for free vaccination, the continuation of refinancing
facility and business continuity funding, and income tax relief for individuals and businesses are
some of the notable features of the budget.

Without ascertaining resources, it is also redistributive in nature, particularly aimed at

influencing the voter base ahead of the planned federal parliamentary elections. A larger increase
in federal expenditure (30.1 percent) than an increase in federal receipts (14.5 percent) points to
a challenging fiscal management task going forward. Against this backdrop, there six specific
macroeconomic takeaways.

First, since the budget deficit is widening, and outstanding public debt and interest payments are
increasing, it would have been good to anchor expenditure and revenue on medium-term
expenditure and revenue frameworks. Outstanding public debt is also rising fast, particularly
after 2014-15, reaching about 37 percent of GDP in 2019-20 from 22 percent barely five years
ago. One also needs to tally how this budget falls in line with the 15th five-year plan and to what
extent it includes projects listed in the National Project Bank.

Second, the revenue mobilisation growth target of 20 percent compared to the 2020-21 revised
estimate is a bit ambitious at the moment. In fact, revenue growth has been consistently below 20
percent since 2016. Increasing excise duties on ‘sin’ goods and tinkering with administration
reforms may not yield many benefits without an increase in the taxpayer base and better
compliance. Large-scale, ad hoc tax exemptions are not helpful.

Third, most of the projected foreign loans may not be realised if project implementation is not
drastically overhauled. Compared to the revised estimate for 2020-21, foreign loans are projected
to increase by 87 percent, which is not realistic given the poor budget execution capacity and the
fact that if elections happen in November, it will disrupt development activities. Meanwhile,
domestic borrowing is projected to cross 5 percent of the GDP. Large domestic borrowing may
sound okay, given the ample liquidity in the banking system and lack of investment opportunities
for pension funds and institutional investors. However, as the situation normalises and capacity
utilisation of firms improve along with demand for credit by individuals and businesses, there
may be pressure on liquidity, leading to a rise in the inter-bank rate and then retail interest rates.

Fourth, the projection of foreign grants seems ambitious as sources of grants are drying up. For
example, Asian Development Bank and World Bank now provide loans only, although technical
assistance is principally a grant. And that most bilateral donors may not increase aid allocations
given their priority to boost domestic economies ravaged by the pandemic. The government is
projecting to receive a 134 percent growth in foreign grants over the 2020-21 revised estimate,
which is unrealistic.

Fifth, the non-contributory allowance for the elderly, a sort of a guaranteed universal basic
income, hopes to support individual or household consumption demand. However, it directly
increases the government’s liability as well, because it needs to be continued for years to come.
Normally, such schemes are reasonable when the economic pie is growing and there are enough
resources to fund populist schemes. Increasing social protection liability by borrowing or by
cutting down capital spending is not a good policy.

Finally, the real GDP growth target of 6.5 percent of GDP may a bit optimistic, given that the
pandemic will continue to affect lives, livelihoods and economic activities well into the next
year. There is no likelihood of sharp V-shaped recovery. Agricultural output growth might be
higher than in 2020-21 with a forecast for a normal monsoon and the availability of inputs such
as chemical fertilisers. Industrial output may not fully recover because capacity utilisation will
not drastically increase amidst subdued demand and investment. Travel and tourism activities are
unlikely to recover anytime soon without adequate healthcare measures and mass vaccination.
Elections-related spending, if it happens, will add to consumption demand. Overall, GDP growth
may hover around 4 to 5 percent in 2021-22.

Concept of deficit budget and its role as an instrument for resource mobilization
Budget deficit is referred to as the situation in which the spending is more than income.
Although it is mostly used for governments, this can also be broadly applied to individuals and
businesses.
In other words, a budgetary deficit is said to have taken place when the individual, government
or the business budgets have more spending than the income that they can generate as revenue.

Fiscal Deficit
Fiscal deficit is defined as the excess of total expenditures over the total receipts excluding the
borrowings in a year. In other words, this can be defined as the amount that the government
needs to borrow in order to meet all expenses.

Revenue Deficit
Revenue expenditure is defined as the excess of total revenue expenditure over the total revenue
receipts. In other words, the shortfall of revenue receipts as compared to the revenue expenditure
is known as revenue deficit
Revenue deficit signals to the economists that the revenue earned by the government is
insufficient to meet the requirements of the expenditures required for the essential government
functions.
Primary Deficit
Primary deficit is said to be the fiscal deficit of the current year minus the interest payments that
are pending on previous borrowings, or it can be said that primary deficit is the requirement of
borrowing without the interest payment.
Primary deficit, therefore, shows the expenses that government borrowings are going to fulfil
while not paying for the income interest payment.

Contrary to what it may sound like, a budget deficit is not always a negative indicator of
economic health. Some of the implications of a budget deficit are described below:

1. Increase aggregate demand

A budget deficit implies a reduction in taxes and an increase in government spending, which
results in an increase in the aggregate demand of the country and subsequent economic
growth, ceteris paribus.

2. Boost the economy during a recession

During a recession, the economy tends to experience a decrease in investment spending from the
private sector, along with lower aggregate consumption and demand. A government may choose
to borrow and run a deficit to combat the situation by taking measures to spend effectively.

3. Increase government spending

Government spending serves many purposes, including investments in infrastructure, healthcare,

human capital, unemployment benefits, pension programs, and so on. A nation’s government
may choose to spend more than its revenues allow by running a deficit.

4. Fiscal policy

A budget deficit may be used to finance an expansionary fiscal policy, which involves lowering
income and corporate taxes (therefore reducing revenue for the government) and increasing
government spending on infrastructure and investments to attract foreign capital and boost
economic growth.

5. Higher taxes in the future

A current budget deficit that runs persistently often implies that the government will need to
increase taxes in the future to pay off the accumulated debt since taxes are one of the primary
sources of revenue for the government.

6.  Higher interest rates and bond yields

In order to borrow large amounts, governments often offer higher interest rates to investors and
international banks that lend them money. Increased government borrowing results in higher
interest rates and bond yields since investors and banks require compensation for the risk through
interest payments.

Program-Based Budgeting

Program-Based Budgeting is a budgeting tool where all budgetary information is organized

around the City’s programs and services. The budget will show the costs of the program, the
revenues that the program generates, as well as showing a way to evaluate the program’s
effectiveness and outputs through performance metrics. Organizing the information in this way,
rather than at the department and division level, provides a clearer picture of how much money is
being spent on each program, the services that program delivers to Philadelphians, as well as
how well the program is performing.

Value of a Program-Based Budget

Transparency- The program-based budget will provide a fuller picture of performance, revenues
and costs (including indirect and capital costs) associated with each program.

Accountability- The budget will include measurable objectives and performance measures for
each program. Progress towards these goals will be a factor considered in determining future
funding levels. Funding may be increased where additional resources are needed or decreased if
there is insufficient justification for continued funding.

Data-Driven Decision Making- Understanding the full costs associated with each program, along
with the value of that program and whether the program generates revenue, will enable better
decision-making throughout the budget process.

Performance Budgeting (PB)

Performance budget may be defined as a budget based on functions, activities and projects.

Performance budgeting may be described as a budgeting system, where under input costs are

related to the end results, i.e., performance.

PB is the process of analyzing, identifying, simplifying, and crystallizing specific performance

objectives of a project to be completed over a period, in the framework of the organizational

objectives, the purpose and objectives of the job. It involves the evaluation of the performance of

the organization in the context of both specific as well as overall objectives of the country.

Purpose of PB:

The performance budget is an instrument through which financial resources are allocated

according to purposes and objectives. The costs of various programmes proposed for achieving

these objectives are clearly indicated.

It also presents data for measuring worth performance of the accomplishment of objectives set

under each programme. The focus of attention is not only on expenditure but also on

achievement. Both are integral parts of financial planning and expenditure authorization.

Process of PB:

PB is a technique or a method employed by any agency/department. The first stage is to decide

what its goal or objective should be, the next stage is to decide on a set of programmes in order

to achieve the goal and then to implement the programme.

Final stage is to evaluate the actual performance of each segment and its contribution towards

achievement of its goal.

Zero Based Budgeting

Zero based budgeting is a practice where all expenditure are allocated and revenue
estimates are made for a new period. Cleary, as the name indicate, zero-based
budgeting starts from a “zero base”. Everything including expenditure and receipts are
beginning from a scratch under ZBB. Budget estimates for each Ministries or
heads are provided on the basis of what is needed for the upcoming period, regardless
of the budget activity of the previous years.
Under ZBB, allocations or funding are based on program efficiency and necessity
rather than budget history. However, ZBB is a time-consuming process that takes much
longer time than traditional, cost-based budgeting.

Advantages of ZBB
ZBB is a voluntary concept of relatively a new management tool for planning and control of
activities. The plans and budget based upon ZBB are much improved then those based upon
traditional budgeting
a. Proper allocation of funds:
It enables the management to allocate the funds according to the justification of the program.
b. It improves efficiency:
ZBB improves efficiency of management because every manager have to give justification for
the demand of resources and hence only those activities will be undertaken which have its
justification and essential for the business.
Steps in Zero based Budgeting
Country can develop or modify their own unique approaches to ZBB, and the following five
steps can provide a baseline for implementation.
(a) Start. Begin at ground zero. Create a new annual budget from scratch without using last
year’s actuals as a baseline.
(b) Evaluate. Evaluate every cost area. Eliminate and reduce unnecessary activities or
services.
(c) Justify. Account for all components of the budget. Identify areas that are cost-effective,
relevant, and that drive cost savings.
(d) Streamline. Determine what activities should be performed and how. Automate and
standardize processes where possible.
(e) Execute. Roll out comprehensive planning and execution processes. Communicate clear
plans, roles and responsibilities.

Performance based in public expenditure management

In the past few decades, there had been an enormous growth in public expenditure in many

countries. The increasing pressures for more public spending were most likely stemmed from
demographic trends and globalisation. With the growing demand for public expenditure, it would

not be advisable to cut public spending. However, the rising public expenditure may possibly

strain public resources. Hence, it would be fundamental to ensure that public resources are

utilised efficiently and effectively. In other words, it is imperative that public spending is used

efficiently to improve long-term economic growth. As such, one of the primary concerns is the

need to raise the efficiency of public expenditure. Efficient public spending indirectly increases

the value of money in achieving growth objectives, thus making most of the available scarce

public resources.

Public expenditure represents „the ensemble of annual expenditure with public nature of a

country, financed on the basis of public budgetary resources”4. In fact, public expenditure

reflects the political choices of the Government, representing costs of the elements of economic

policy. aiming to deliver public goods. These costs relate to delivering goods through the budget

of the public sector or represent expenditure in the private sector, induced by regulations and

laws made by the public sector. What we called in the introduction the administrative burden of

private companies can be framed in this second category of expenditure. The costs from the first

category are in fact public expenditure, as such, of which a part represents the costs of

bureaucracy in any public administration. In an extended meaning for the administrative burden,
the costs of bureaucracy are in this category for a public administration.

In the structure of the national or local budgets we find:

• Exhaustive public expenditure focused on procurement of goods and services (for

ex: labour, consumables) and capital goods (for ex. investments of the public

sector in streets, schools, hospitals);

• Transfer public expenditure, such as public expenditure for pensions, subsidies,

interests, unemployment allowances.

Consequently, the administrative burden in the public sector comprises, mainly, procurement of

goods and support services for bureaucracy as well as payment of some charges etc.

Public expenditure and administrative burden

The weight of public expenditure is different and depends on the development levels for the

public or private sector. Reported to the latter, the administrative burden in the public sector will

have a certain non linear evolution. In this prospect it is worth to mention the models formulated

by Musgrave (1974) and Rostow (1960), stating that in the earlier stages of growth and economic
development, investments in the public sector are high, providing the core social infrastructure.

The purpose of these investments is to help economy to reach higher development stages, where,

although the state will continue investments, their role will be to complete the private

investments. The conclusions of the two economists are relevant also for the evolution of the

administrative burden, both in the public and private sector.

Assessing the administrative burden

The idea to assess the administrative burden is based on simple judgements, focused on the

structure of the public sector, respectively private sector. In the specialised literature, public

expenditures are grouped depending on different administrative or economic criteria. An

administrative classification of expenditures could be as follows:

• organic, when expenditures are grouped depending on institutions: ministries and other central

bodies, administrative – territorial units, other public institutions;

• functional, when expenditures are grouped depending on the profile of the activity of public

institutions: public power and general administration, justice and police, international relations,

army, culture, education, social actions, economic actions.

Taking into account the economic criterion, the classification is as follows: operational

expenditure, transfer expenditure and investment expenditure. In this context, the administrative

burden in the public sector will be included, mainly, in the operational expenditure and it will be

direct proportional with the number and size of the institutions concerned. The assessment of the

administrative burden in the business environment, consequently in the private sector, takes into

consideration another philosophy. The roots of such activity are situated in the Netherlands,

when at the beginning of 1990s, it formalised the first methods for assessing and reducing the

administrative burden for small and medium sized enterprises

Assessing public sector performance is deemed essential to maintain a prosperous economy and

promote economic growth. Efforts to assess the efficiency of public spending have since become

a subject of the growing literature, which proposes that the measurement of public expenditure

efficiency will provide room for future improvement in public policy.

The analysis of efficiency and effectiveness of the public sector will demonstrate the success of a

nation in using the scarce resources to achieve growth objectives. The importance of this analysis

has attracted many researchers to measure the efficiency and effectiveness of public spending. In

addition, some papers have sought to conduct a crosscountry evaluation to uncover further

interesting insights into the key drivers of public spending efficiency.

In dealing with the increasing pressure for higher public expenditure to meet increasing demand,

it becomes ever more fundamental to improve the efficiency and effectiveness of public

spending. With this in mind, many researchers analysed the efficiency of public spending in

various countries. Some offered cross-country comparisons of the efficiency and effectiveness of

public spending.

The commodity boom cycle from 2003 to 2008 had increased the world prices for oil and natural

gas. This allowed the resource-rich former Soviet republics, such as Azerbaijan, Kazakhstan, and

Russia, to dramatically increase their government spending between the years of 2000 and 2007.

Esanov (2009) found striking differences in the overall spending efficiency when he compared

their spending efficiency with that of the more advanced transitional countries and some

developed countries. Esanov also illustrated that better cost-effectiveness did not necessarily
translate into better systemic efficiency overall. Most of Esanov’s findings appeared to support

the argument that increased spending does not bring about additional efficiency, as in the case of

the former Soviet republic. Hauner and Kyobe (2008) offered an even more resounding

conclusion that the higher expenditure relative to GDP tends to be associated with lower

efficiency.

The topic of the efficiency and effectiveness level of government expenditure has become a

highly pursued topic, as evidenced by the growing literature. This paper provides an in-depth

explanation of the concepts of the effectiveness and efficiency level of public spending. In
addition, the relevant literature on measuring the effectiveness and efficiency level of

government spending reflects the importance of allocative efficiency. The existing literature

argues about the common belief of the significance of the size of public expenditure in

influencing its efficiency. Much literature has shed light on the significance of the composition

of the allocation and the influence of other determinants, suggesting that factors that influence

the efficiency of government expenditure require an in-depth study. The literature reviewed

further highlights that the efficiency of public expenditure is influenced by environmental

factors, such as economic, demographic, geographical, and institutional factors. However, these

findings remain relatively diverse across different countries and different spending areas. As

such, future studies on individual spending areas may seem to be more promising than total

spending. The reviewed literature further points out the gap on the extent of these factors in

influencing public expenditure efficiency. In addition, an in-depth study of a specific country

may be more useful to allow better identification of factors influencing public expenditure

efficiency. Such estimates will help policymakers develop a better fiscal policy with a higher

efficiency and effectiveness level.

Performance of Nepalese Government Expenditure

1. Credibility of the budget

At the aggregate level, the budget, both expenditure and revenue , is credible, and credibility has
become internalized. One weak spot is the composition of expenditure. Budget variance,
although declining with the return of political stability, has resulted from a combination of poor
budgets (where execution require re-allocation during the year)and some budget indiscipline
(evidenced by the number of votes that spend more than the authorized budgets)particularly in
public investment by the Ministry of Finance (MOF). The contingency fund is not large. And
because of the TSA and Financial Management Information System (FMIS), payments are more
prompt and better monitored compared to the last assessment. The implementation of activity
level budget coding is expected to strengthen program budgeting, help monitor budget
implementation, and reduce expenditure variances
2. Comprehensiveness and transparency

Budget information has become more transparent after the implementation of Government
Finance Statistics (GFS) classification and the TSA. The public’s access to fiscal reports is good
(PI-10). However, the fiscal reports are not comprehensive and many autonomous government
agencies and donor projects operate outside the TSA/FMIS framework. Fiscal relations between
central government and local bodies are complex. Even though there are allocation formulae for
unconditional block grants — the major source of revenue to the local bodies — they are not
being followed. The timing of grant releases, although trimester-based, is not strictly adhered to.
A review of the grant system is planned. Local bodies and public enterprises regularly submit
their financial statements to the center, but their consolidation is delayed. There is no
comprehensive assessment of fiscal risk to the government despite major accumulated losses in
some public enterprises.

3. Policy-based budgeting

Fiscal prudence at the aggregate fiscal level, facilitated by a rolling medium-term expenditure
framework (MTEF), is a strong feature of Nepal’s PFM. But in the absence of costed sector
strategies within an aggregate fiscal framework and lack of capacity for preparing sectorial
business plans, there is much room for aligning budgets more closely to development plans.
Expansionary investment plans are constrained by weak of implementation capacity, especially
on the capital expenditure side. Procurement plans are not prepared as part of annual work
program budgets, therefore the budgets are not realistic. Coupled with late approval of the budget
and cumbersome spending procedures, little of the year’s development budget is spent in the first
four months, and there always is a rush to spend in the last four months. This is mitigated to
some extent by flexible virement rules.

4. Predictability and control in budget execution

The legal and process framework for determining tax liabilities is clear and minimizes
discretionary power of tax officers. This is reinforced by a transparent tax appeals mechanism.
Taxpayer registration and assessments have also been improved. However, there are issues in the
accounting for assessments and collections, and tax arrears have continued to mount each year;
there is insufficient attention to clearing old arrears. The Parliament approval of the budget, at
times, may extend into the end of the first trimester of the fiscal year. Pending approval,
ministry, departments, and agencies (MDA) are authorized to spend up to four months of the
previous year’s budget (at least for ongoing priority projects);but new programs and projects are
delayed and subject to political interference outside the formal budget-approval process.
Information technology has been used to reach out to stakeholders – on the revenue side to
taxpayers and on the expenditure side to resource users. This has increased efficiency in tax
collection and budget management. The rollouts of the TSA and FMIS to all. The developmental
impact of spending has been reduced by widespread irregularities and weak-enforcement of
rules. Commitment control is weak despite the existence of rules and regulations. Internal audit
is beset by conflicts of interest as internal auditors also function, from time to time, as accounts
officers. The audit is not focused on internal control systems and their risks but is oriented to
identifying transactional irregularities, which reduces its effectiveness

5. Accounting, recording and reporting

The TSA rollout has strengthened cash-based accounting practices and transparency.
Expenditure cash reports are generated, and the mid-year reporting is comprehensive, except for
the omission of several autonomous government agencies and donor project accounts.
Reconciliation of revenue accounts is still an issue. Progress has been made in piloting the
international financial reporting standard (cashbased IPSAS) at the ministry level. But there are
technical capacity issues in the recording and analysis of financial statements as the result of
over-stretched account personnel and limited refresher training to update personnel on systemic
and accounting standards changes.