Public Finance and Taxation

Chapter 4
Budget Systems
Course Teacher: Dr. Anupam Das Gupta Professor, Department of Finance,University of Chittagong.

Budget Defined
 A budget (from old French bougette, purse) is a financial plan and a list of all planned expenses and
revenues.
 A government budget is a legal document that is often passed by the legislature, and approved by the
chief executive or president.
 “A government budget is an annual financial statement showing item wise estimates of expected
revenue and anticipated expenditure during a fiscal year.”
 The two basic elements :Revenues and Expenses.
 Revenues are derived primarily from taxes and non-tax revenue.
 Government expenses include spending on current goods and services, which economists call
government consumption ; government investment expenditures such as infrastructure investment or
research expenditure; and transfer payments like unemployment or retirement benefits, Social Safety
nets
Some Characteristics of Budget in Bangladesh
 It is effective during a financial year starting from July 1 and ending on June 30, next year
 The Government Budget in the country has two parts: Revenue and Development.
 The government budgeting is done on a cash basis. Both receipts and expenditures are shown in cash
terms;
 Foreign loans are reflected on a gross receipt basis showing total disbursement;
 Budget is prepared on incremental basis, on the basis of upward adjustment of expenditure as against
performance budgeting;
Basis of Budget
• Budgets have an economic, political and technical basis.
• Unlike a pure economic budget, they are not entirely designed to allocate scarce resources for the best
economic use.
• They also have a political basis wherein different interests push and pull in an attempt to obtain benefits
and avoid burdens.
• The technical element is the forecast of the likely levels of revenues and expenses
Main elements of the budget are:
• (i) It is a statement of estimates of government receipts and expenditure.
• (ii) Budget estimates pertain to a fixed period, generally a year.
• (iii) Expenditure and sources of finance are planned in accordance with the objectives of the
government.
• (Iv) It requires to be approved (passed) by Parliament or Assembly or some other authority before its
implementation.
Objectives of a Government Budget:
• It should be kept in mind that rapid and balanced economic growth with equality and social justice
has been the general objective of all our policies and plans. General objectives of a government
budget are as under:
(i) Economic growth:
To promote rapid and balanced economic growth so as to improve living standard of the people. Economic
growth implies a sustained increase in real GDP of the economy, i.e., a sustained increase in volume of goods
and services. Public welfare is the main guide.
(ii) Reduction of poverty and unemployment:
• To eradicate mass poverty and unemployment by creating employment opportunities and providing
maximum social benefits to the poor. In fact, social welfare is the single most important objective.
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Every Bangladeshi should be able to meet his basic needs like food, clothing, housing along with decent
health care and educational facilities.
(iii) Reduction of inequalities/Redistribution of income:
• To reduce inequalities of income and wealth, government can influence distribution of income through
levying taxes and granting subsidies. Government levies high rate of tax on rich people reducing their
disposable income and lowers the rate on lower income group.
• Again, government provides subsidies and amenities to people whose income level is low. Again public
expenditure can be useful in reducing inequalities. More emphasis is laid on equitable distribution of
wealth and income. Economic progress in itself is not a sufficient goal but the goal must be equitable
progress.
(iv) Reallocation of resources:
• To reallocate resources so as to achieve social and economic objectives. Again, government provides
more resources into socially productive sectors where private sector initiative is not forthcoming,
e.g., public sanitation, rural electrification, education, health, etc. Moreover government allocates
more funds to production of socially useful goods and draws away resources from some other areas to
promote balanced economic growth of regions.
(v) Price stability/Economic stability:
• Government can bring economic stability, i.e., control fluctuations in general price level through taxes,
subsidies and expenditure. For instance, when there is inflation (continuous rise in prices), government
can reduce its expenditure. When there is depression, government can reduce taxes and grant subsidies
to encourage spending by the people.
• (vi) Financing and management of public enterprises:
• To finance and manage public enterprises like railways, power generation and water lines etc.
Structure of Bangladesh Budget
• The Government Budget in the country has two parts: Revenue and Development. The former is
concerned with current revenues and expenditures i.e., maintenance of normal priority and essential
services, while the latter is prepared for development activities. Formulation of the two budgets follows
different procedures. Their financing pattern and the delegated authorities of incurring expenditure in
different tiers in them are also different. Revenue budget is prepared by the Finance Division and the
agency to prepare the Development budget is the Planning Commission.
Development Budget
• Development budget of the government of Bangladesh is a result of a continuous process of
identifying new projects, review of project concept papers (PCPs), and vetting of the projects in
ministries and in the Executive Committee of the National Economic Council (ECNEC). Usually by
December, the Economic Relations Division (ERD) prepares aid memorandum, circulates it to the
ministries for their comments, and based on domestic resource projections by National Board of
Revenue (NBR) and the Internal Resources Division, the ERD revises the aid memorandum. The
document is then sent to the Cabinet for approval. Resource position for revenue expenditure and
budget is then estimated and the Programming Committee finalizes eligible projects for inclusion the
Annual development Programme (ADP). In fact, ADP is the development budget, which, like the
revenue budget, requires approval of the parliament.
Receipts in Bangladesh Budget:
• Receipts in revenue budget consists of domestic receipts (tax and non-tax); foreign grants; capital
receipts (foreign loans); domestic capital (net of current receipts and expenditures in public
accounts); extra-budgetary resources (debenture of autonomous bodies, their self-financing and
accumulated balance, and materials at stock); and domestic loans and advances (net).
Receipts in development budget are grouped as public and private receipts. Public receipts are the revenue
surplus from revenue budget (revenue receipts minus revenue expenditures), incomes through new measures
(such as new taxes), net domestic capital, and extra budgetary resources. A special form of public receipts is
the foreign aid (project aid, counterpart fund from commodity aid and net food aid). Receipts under the private
head for development budget are generated through direct private investment, borrowing from banking system
and foreign private investment.
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Budget Cycle:

• Budget Preparation: The first phase of the budget cycle involves preparation by the departments
/agencies, ministries and finally ministry of Finance
• Legislative Approval: Typically, the legislature has the power to approve or reject a proposed budget.
They review it and vote. If approved, it moves into the implementation phase.
• Implementation and Execution: It is the duty of the executive branch - primarily involves distributing
the budgeted resources to their designated recipients within the government and spending it as
planned.
• Audit and Review: Finally, a budget is typically audited and reviewed following implementation to
evaluate the efficiency and effectiveness in order to guide future budgeting decisions.
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Types of Budget:

(a) Balanced Budget:

• A government budget is said to be a balanced budget in which government estimated receipts
(revenue and capital) are equal to government estimated expenditure. Let us suppose for the sake of
convenience that the only source of revenue is a lump sum tax. A balanced budget will then imply that
the amount of tax is equal to the amount of expenditure.
• Balanced Budget
• Estimated Govt. Receipts = Estimated Govt. Expenditure
• Two main merits of a balanced budget are:
• (a) It ensures financial stability and (b) It avoids wasteful expenditure.
• Two main demerits are:
• (i) Process of economic growth is hindered and (ii) Scope of undertaking welfare activities is restricted.
Unbalanced Budget:
• When government estimated expenditure is either more or less than government estimated receipts,
the budget is said to be an unbalanced budget. It may be either surplus budget or deficit budget.
(b) Surplus Budget:
• When government receipts are more than government expenditure in the budget, the budget is
called a surplus budget. In other words, a surplus budget implies a situation where in government
revenue is in excess of government expenditure.
• Surplus Budget = Estimated Govt. Receipts > Estimated Govt. Expenditure
• A surplus budget shows that government is taking away more money than what it is pumping in the
economic system. As a result, aggregate demand tends to fall which helps in reducing the price level.
Therefore, in times of severe inflation, which arises due to excess demand, a surplus budget is the
appropriate budget. But in situation of deflation and recession, surplus budget should be avoided.
Mind, balanced budget and surplus budget are rarely used by the government in modern-day world.
(c) Deficit Budget:
• When government estimated expenditure exceeds government receipts in the budget, the budget is
said to be a deficit budget. In other words, in a deficit budget, government estimated revenue is less
than estimated expenditure.
• Symbolically:
• Deficit Budget = Estimated Govt. Expenditure > Estimated Govt. Receipts
• Merits and demerits of deficit budget:
• A deficit budget has its own merits especially for developing economy For example (i) It accelerates
economic growth (ii) It enables to undertake welfare programs of the people, (iii) It is a cure for
deflation as it checks downward movement of prices. At the same time, it has demerits also such as:
• (i) It encourages unnecessary and wasteful expenditure by the government, (ii) It may lead to financial
and political instability, (iii) It shakes the confidence of foreign investors
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Different Types of Budget:

 Traditional incremental budgeting is prepared by taking the current period’s budget or actual budget
as a base, with incremental amounts then being added for new budget period.
 Traditional incremental budgeting justify only variances versus past years actual expenditure, based
on the assumption that the "baseline" is automatically approved
 Zero based budgeting is to “reset the clock” each year. The traditional budgeting assume that there is
a granted budgetary base – the previous years’ level of appropriation – and the only question is how
much of an increment will be given. In ZBB, all expenses must be justified for each new period. The
process of ZBB start from Zero base and every function is analyzed for its needs and costs.
In Zero based budgeting, every line item of the budget must be approved, rather than only changes. During the
review process, no reference is made to the previous level of expenditure (Reverse to Traditional).
Performance based budgeting is the practice of developing budgets based on the relationship between program
funding levels and expected results from that program.
Medium-term budgetary frameworks (MTBFs) are defined as those fiscal arrangements that allow
government to extend the horizon for fiscal policy making beyond the annual budgetary calendar. Although
the approval of the annual budget law remains the key step in which important decisions on budgetary policy
are adopted, most fiscal measures have budgetary implications that go well beyond the usual yearly budgetary
cycle. As a result, a single year perspective provides a poor basis for sound fiscal planning. MTBFs usually cover
the preparation, execution, and monitoring of multiannual budget plans and contain both expenditure and
revenue projections as well as the resulting budget balances.
• An MTBF is a set of interrelated systems, rules, and procedures ensuring that budgets are set with a
medium-term perspective and are compatible with fiscal sustainability. MTBF is a mechanism for
prioritization, reconciliation and presentation of multi-year expenditure envelopes
• Medium Term Budget Framework is a budgeting approach that links Government’s policy priorities to
resource allocations and resource allocations to performance. Emphasizes the efficient use of limited
public resources (both development and non-development) And accounts for the results.
• Program budgeting describes and gives the detailed costs of every activity or program that is to be
carried out in a budget. Expected results in a proposed program are described fully, along with its
necessary resource, raw materials, equipment, and staff costs. The sum of all activities or program
constitute the Program Budget. Thus, when looking at a Program Budget, one can easily find out what
precisely will be carried out, at what cost and with what expected results in considerable detail.
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Other Ministries/Agencies also involved in institutional framework of Budget in Bangladesh

• Planning Commission
• Line Ministry/Division/ Agencies
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Medium Term Budgetary Framework (MTBF)

• The Medium Term Budgetary Framework (MTBF) is a new budgeting approach generally known as the
Medium Term Expenditure Framework (MTEF)'. MTBF includes expenditure and Revenue (Receipt) also
• Multi-year approach covering a period of 5 years
• Includes estimated budget for the ensuing financial year and the projections for four further years
• Provisions made in the Public Moneys and Budget Management Act 2009 `
• The Finance Minister shall place the annual budget before Parliament prior to each financial year `
• The Finance Minister shall submit a Medium Term Budget along with the annual budget before
Parliament
Budget Making Process
• Bangladesh started implementing MTBF in 2004-05 and completed over 5 years.[i.e., Multi-year
approach covering a period of 5 years includes estimated budget for the ensuing financial year and the
projections for four further years ]
• At the helm is the BMRC (Budget Monitoring and Resource Committee)
• Headed by the Minister for Finance and performs the functions of co-ordination of the overall resources
and expenditure programs of the government;
• Finalizes the estimates of domestic resources. After determination of requirements for the non-
development budget, the remaining internal resources are set aside for the development budget.

MTBF: Different Stages of preparation

• Firstly, Finance Division issue Budget Circular-1 (BC-1) with Preliminary Indicative Expenditure Ceiling
for each Line Ministry
• Secondly, Line Ministry prepare Ministry Budget Framework (MBF) with the help of
departments/agencies (up to district level)
• Thirdly, Finance Division and Planning Commission jointly review and finalize agreed Budget numbers
and MBFs
• Fourthly, Finance Division issue Budget Circular-2 with Ministry-wise Indicative Expenditure Ceilings
• Fifthly the estimates are reviewed and finalized by FD
• Finally, Budget is presented to the Parliament
Core Budget Documents Placed before the parliament
• Budget Speech of the Finance Minister
• Budget in Brief
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• Annual Financial Statement

• Supplementary Budget (Additional demand for grants for the ongoing year)
• Combined Demand for Grants
• Consolidated Fund Receipt
• Medium Term Budget Framework
• Detailed Budget
• Annual Development Program(ADP)
• Gender Budget
• Bangladesh Economic Review
Ministry Budget Framework (MBF): Overview
• Ministry Budget Framework (MBF) is divided into two major Parts and five Sections
• Part-A is prepared by the Ministry or Division
• Part-B to be prepared by Departments/ Agencies under the respective Ministry/Division

Part-A of the MBF : Section 1

1.1 Mission Statement of the Ministry/Division
• To develop a clear mission statement, the ministry must consider the following:
• What is the purpose of this ministry; what does it intend to achieve,
• By what broad areas of operation will the ministry do this, and
• Who are the intended beneficiaries?
• Mission Statement should be brief – If it cannot be remembered by staff, it is not useful
1.2 Major Functions of the Ministry/Division
• List the major functions of the ministry/ division
• These should be summarised from the Allocation of Business
• These should, in general, be limited to a maximum of 8 functions
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Part-A of the MBF: Section 2

Medium-Term Strategic Objectives and Key Activities

Part-A of the MBF: Section 3

3.1 Impact of Strategic Objectives on Poverty Reduction (PR) and Women's Advancement (WA)
• The strategic objectives to be listed in this section are same as in section 2
• Describe how the strategic objectives and their associated activities relate and contribute to the
Government’s wider objectives of poverty reduction and women’s advancement.
3.2 PR&WA Related Spending

Part-A of the MBF: Section 4: Priority Spending Areas/Programmes:

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Part-A of the MBF: Form # 1

Key Performance Indicators (KPI) - Ministry

KPIs should meet the SMART criteria:

• Specific – the indicator is clearly defined
• Measurable – Stated in verifiable or quantifiable terms
• Achievable – the indicator targets are realistically set
• Relevant – the indicator is relevant to the objective
• Time bound - there is a clear timeframe for achieving the target

Part-B of the MBF: Section 5

5.1. Recent Achievements
• A brief narrative of recent achievements. The description should include recent data and provide a
good account of the scope and scale of the activities undertaken
5.2: Key Activities, Outputs related to the Activity
• From the activities that were identified by in Part A Section 2, list those that are carried out by the
department/agency
• Describe the total outputs to be achieved within the total life of the activity
5.3 Output Indicators and Targets
• 3 indicators that best summaries the key outputs of the department/agency
• A further 2 indicators may be included for outputs related to the objectives of poverty

5.4 Forward Budget Estimates

MBF document will include a table showing the budget estimates for the next FY and forecast for the subsequent
two years for the department
5.5 List of Projects and Programmes
• Name of the approved projects/programmes
• Name of the un-approved projects/programmes
• Name of the Probable Projects/Programmes
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IMPLEMENTATION ARRANGEMENTS
Three key organizational units responsible for the MTBF implementation in ascending order of hierarchy:
 Budget wing/branch/section to prepare drafts of MBF with budget allocations
 Budget Working Group (BWG) to support the Budget Management Committee (BMC) for decision
making on MBF

Consists of representatives of organizational units of the Ministry and of Finance Division and Planning
Commission
 Budget Management Committee (BMC) - the budget approval authority within the line ministry
• Led by the Secretary, and
• Consists of Additional and Joint Secretaries, Organizational Heads, and representatives of FD, PC,
Implementation Monitoring and Evaluation Division (IMED) & Chief administrative Officer (CAO)
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