Fiscal management

THE THEORIES OF BUDGETTHE THEORIES OF BUDGET“Verni Lewis Theory on Proposed National Budget”

A Report on

In Partial Fulfillment in the Course

FISCAL MANAGEMENT – IE 502

EDGAR JAVISONProfessor, Graduate Studies

CYRUS C. TRANCEMSIE – Educational ManagementFirst Semester, SY 2008 – 2009 <OUTLINE>

OUTLINE OF DISCUSSIONS ON BUDGET

Budget … a general impression Budget … in literal meaning & description Budget … origin of the term Budget … according to some economists… Modern Dimension of Budget Practical & Modern Theory of Budget Verni Lewis Theory of Budget for National Dev’t. Other Theories on Budget Summary of Discussions about Budget Credits & References

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MISCONCEPTIONS ON BUDGETINGLiterature on budgeting is so numerous that

causes confusions on the instead of enlightenment.

These are due to: lack of system lack of comprehensiveness lack of consistency lack of integration in the budget documents>

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THE THEORY OF BUDGET

Despite of the mentioned misconceptions, practical efforts and results show that:

budget appears to be the most maligned misunderstood and controversial subject>

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THE THEORY OF BUDGET

Budget is termed as…

nothing but a mere scrap of paper voluminous farce huge piece of garbage greatly influence by the negative emphasis<

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BUDGETING PRINCIPLES & THEORIES

The term budget means… bowgette (Middle English word) bouget (Middle French word) bouge (means leather bag) bulga (Latin word… meaning bag or purse)

“Bouget” was used by the King’s treasurer, the exchequer, to carry documents explaining the king’s fiscal needs.<

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BUDGET ACCORDING TO SOME ECONOMISTS*The term budget according to an American

Economist, Professor Philip E. Taylor (1961)…“The budget is the master plan of government. It brings together estimates of anticipated revenues and proposed expenditures, implying the schedule

of activities to be undertaken and the means of financing those activities.”

*Allan Schick views it as…“a process consisting of a series of activities relating

expenditures to a set of goals.”>

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WHAT IS BUDGETING?*According to Grooves and Bish…

“budgeting as the process through which public expenditures are made.”

Budgeting is treated as… part of the expenditure process; rather than revenue-raising process. necessary to provide a comprehensive view of revenues and expenditures to facilitate the process of rationing (involve in raising and spending of public revenues). the allocation of expenditures among different purposes so as to as to achieve the greatest results.>

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WHAT IS A BUDGET?*According to Aaron Wildavsky…

“budget is a document containing words and figures which proposes expenditures for certain items and

purposes.”*Expenditures means…• salaries, equipments, travels

*Purposes means…• preventing wars, improving mental health

*Figures are attached to each item or purpose…>

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BUDGETING PRINCIPLES & THEORIES*Budgeting is concerned… (according to Wildavsky)• with the translation of financial resources into human purposes.• as a network of communication in which information is continuously being generated and fed back to the participation.• to coordinate and integrate diverse activities.• maybe formulated for a specific target clientele• as phenomenon of human behavior in government setting

treats politicians as dealers of “preferences” “what people want”>

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BUDGETING PRINCIPLES & THEORIES*Wildavsky viewed budget as…• a representation in money terms of governmental activity.

*Eric Kohler defines budget as…• a financial plan which serves as the pattern for and a control over future operations

estimates of future costs…• a systematic plan for utilization of manpower material or other resources.>

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BUDGETING PRINCIPLES & THEORIES*According to Eric Kohler, there are two major management functions of budget… serve as plan indicating requirements of certain factors

cash, productive capacity serve as a control, containing criteria of cost or performance which are compared with actual data on operations.

facilitates evaluation encourage / enforce some measures of efficiency<

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MODERN DIMENSIONS OF BUDGETINGA budget is… a reflection of what the government is doing or intends to do. a translation in financial terms of the action program of government

coordinated & planned expenditures with expected revenue collection proposed borrowing operations

an instrument of administrative control• central financial apparatus• root of multi-purpose orientation

* control, management & planning>

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MODERN DIMENSIONS OF BUDGETINGBudget can be variously referred as… financial plans; work plans or programs; or political & social documents Objectives of budgeting

strengthening administrative processAchieving more effective or more stringent fiscal controls securing efficiency & economy effecting better utilization of resources controlling inflation broaden awareness & understanding of budget control>

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MODERN DIMENSIONS OF BUDGETINGBudget … preparation & formulation is an opportunity for government to assess the volume of taxation & expenditures to offset threats of inflation or economic recession.

a work program with emphasis on relating cost to performance tool for learning the relationship for government programs with economic & financial conditions & trends for designing suitable economic & financial policies and measures<

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PRACTICAL & OPERATIONAL THEORY OF BUDGETING

Budget relates to public expenditures & policy analysis as observed by Robert Bangs (American Economist)…

“Fiscal policy cannot be divorced practically from the total structure of

economic policy, which in turn is merely a part of larger cosmos of general policy

within which any government administration operates.”<

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VERNE LEWIS’ DIMENSIONS OF BUDGETINGAccording to Verne Lewis (American Economist)…

a theory of budget through the application of the basic economic phenomenon: “marginal utility theory” Theory of budgeting are based on the following:

Budget analysis Incremental analysis Comparison of relative merits

* Illustration of each principles are as follows:>

Principle 1 Principle 2 Principle 3

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Principle 1. “Budget decisions are made on the basis of

relative values.”

The values are defined as… “Relative Value” “Sacrificed Alternatives” “Opportunity Costs”

* No absolute standard of value* Difficult to determine* Keeps on changing – depending on time & environment >

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Based on Principle 1… “Scarcity of Resources in relation to demands confronts on every level of public budgeting.”

* Decision is a must under limited resources* Basis on the choice must be considered* Often times is based on Doctrine of Marginal Utility

“The choice is made in terms of relative values rather than absolute values.” “The principle of balance embodied in the concept”…

“the resources should be distributed among different uses that the marginal return of satisfaction is the same to all of them.”>


the increase in utility prompted by one

extra unit of a given service or product

The point view of budget in Principle 1…

“The returns from an expenditure for any activity must be more desirable and more necessary than for any alternative use of funds. Deciding on two

alternatives, an opportunity cost is incurred.”

* Opportunity cost – refers to the cost of a thing or service which must be given up for the other alternative taken. “budget analysis should indicate that results must be worth that cost in terms of alternative results are foregone or displace.”>


To illustrate the point in Principle 1…

“Government decision-makers should be able to justify that the results / benefits to ensure that the

choice made has more advantages than the sacrificed ones.”

Example… “when a nuclear power plant program are worth the supposed benefits of the sacrificed or canceled reforestation program...”<


Principle 2. “The principle of incremental analysis means that,

the more we acquire and more units of anything, the additional units will be less and have less value...”

“there will be a decreasing benefit per additional amount or cost.”>


To elaborate Principle 2…“there will be a decreasing benefit per additional amount or cost.”Example:

“A car owner would value so much for his fifth tire as his reserve to the four functioning tires. Buying a sixth or seventh tire, their value will be lesser than

the fifth as they are intended for the same purpose.”>


For Principle 2… “In the comparison of values, the marginal utility theory suggests that maximum returns can be obtained only if expenditures are distributed

among different purposes in a such a way that for every budget spent, yields the same real

return.” <


Principle 3. “The most common method of determining the

relative effectiveness of things in relation to their professed relative merits is through COST-

BENEFIT Analysis...” “Analysis and evaluation of relative effectiveness in achieving a common objective requires a set of basic premises which are found in the ultimate end of purposes established by the legislative body… acting for and in behalf of the people…” “This structure constitutes what makes “the best use of resources…”<

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A Reaction to LEWIS THEORY OF BUDGETING

“V.O. Key Jr. emphasized a basic limitation of the marginal utility theory to public

budgeting.” “marginal utility developed mostly in the analysis of the market economy” “has a ring of unreality of public expenditures”<

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OTHER THEORY OF BUDGET“Dr. Jose Soberano postulated another fiscal theory of

budget which was described as… ” the prevailing theories of the budget applied in developing countries are based on “economies of abundance…” things get out of control when theories are applied in “economies of poverty”…

*Sample Illustration:In case of Philippines when compared to those with similar status of economy; a single flood, a prolonged drought, an earth quake, or internal security can throw the most well-

planned budget out of gear and dump carefully formulated priorities.>

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OTHER THEORY OF BUDGET“Dr. Jose Soberano postulated sides at which fiscal management

may be possible under the following requirements…” A Positive Government - fulfillment of societal balance necessary for good life. Scientific Policies - operations & processes open to precise verification and validation in every significant aspect of performance. Abundant Economy - consistency on the availability of resources, technological progress, population policy, & human creativity. Responsive Society- common good, awareness & entitlements for organized life.<

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THEORY OF BUDGET: A Summary…

“Theoritical writings on the budget reveals that it can be viewed from the three frames

of reference:”1. budget as an economic process2. budget as a political process3. budget as an administrative process

All of these theories have suggested various approaches to help decision-making on

resource allocation.>

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THEORY OF BUDGET: A Summary…Verne Lewis’ emphasis on the marginal utility theory &

sophisticated decision-making techniques like cost-benefit analysis, feasibility studies, etc. which will help to decide among competing budgetary options…

Pendleton Herring, Wildavsky and other political scientists view budgeting as essentially a political process of competition among various groups for limited resources. “Those who have access to political power get a bigger share on the budget…”

REFERENCES

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CREDITS & REFERENCES ON THE TOPIC: BUDGET Fiscal Management by Cordero Microsoft ENCARTA 2008 – Dictionary (CD Edition) Grolier Encyclopedia – CD Edition WEKIPEDIA Website Merriam Webster Dictionary

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Economy & Finance

Fiscal management