IMPACT OF STATISTIC ON THE NATIONAL BUDGET

ARTICLE: IMPACT OF STATISTIC ON THE NATIONAL BUDGET

          What is a budget: A budget is the sum of money allocated for a particular purpose and the summary of intended expenditures along with proposals for how to meet them. Usually the government councils translate their services through budget as it has to do with financial plan or estimate of proposed income and expenditure for a particular period normally a year. It is the translation in financial terms of government policies; a fiscal estimation of what government plans to spend, where it plans to spend it on and how it intends to source the funds.

          The principles adopted in budget preparation is one that is aimed at making the entire process transparent and participatory. Budget is an important tool in governance and most relevant to the economic policy. It is the second most important document after the constitution in any nation. It signifies that budget is an expression of the constitution and statutes of government which endow the executive and legislature with designated financial and managerial responsibilities.

          Budget undergoes some processes before it becomes both a law and an economic tool. Budgetary process involves all centers, programmes and administrative units of an entity in the development of periodic budget. The process involves all the executive and legislative processes, that is, collection of estimate from the various government departments to the defense before the various committees of the legislatures and debates in the floor of the houses, the passage into law and the final implementation and monitoring.

          Preparation of budget primarily involves identification and setting of developmental goals. That is, it involves setting budgetary thrusts and policies based on the development plan. At the Federal level, the responsibility of the president for the preparation and submission of budget is well established. At the state level, it is the statutory responsibility of the governor to prepare and submit the budget. In the local government, the Chairman forms the government and invariably has complete control over budget preparation but assisted by the finance committee and departmental heads.

          Though in most occasion, the process varies from State to State. The budget process commences with a call circular from the Executive Committee consisting the Chairman, the supervisory councilors and other officials (Secretary, treasurer, head of personnel and legal advisers). They call on all relevant departmental heads to prepare estimates for the coming fiscal year. Subsequently, the head of departments prepare estimates of expenditure in line with the goals and the estimates of revenue expected as well as the sources expected. As soon as the process is concluded, each department hands its own estimates to the treasurer or finance head.

          The executives having gone through the budget estimates present it to legislature for approval. The method of approval also varies from one council to the other, that is, while some require a simple majority, others would require two-third majority for the approval.

IMPACT OF STATISTIC ON THE NATIONAL BUDGET

Although the idea of budget balance in the administrative budget has been the dominant consideration in the budgetary policy of most countries, it has gradually been realized that such a concept may be inappropriate when external shocks such as exchange rate movements or a world recession occur. Because varying levels of unemployment are a major reason why expenditures may change without comparable change in the public sector output, the concept of a full-employment budget has emerged. This type of budgeting is based on receipts and expenditures that would prevail under conditions of full employment. The approach views the actual expenditures and receipts for the coming year as of secondary importance; it assigns primary importance to the influence of the budget on the national economy. In time of recession a budget deficit may thus be presented as a necessary step toward achieving a balanced budget at full employment. Ideally, the budget should include estimates of expenditures and revenues at full employment, and also estimates of the same items at the anticipated level of employment. These ideas have been extensively used in the United States.

          An analogous procedure could be used with respect to inflation, but this idea is still far from acceptance, because governments are no less reluctant to anticipate inflation than they are to budget for unemployment.

          When inflation is rapid, interest rates are correspondingly high and a government may appear to run a deficit as a result of high debt servicing costs even if the real value of the debt is declining. The United Kingdom, for example, has seen a government deficit in almost every year in the postwar period, even though its debt has been a diminishing fraction of national income, because growth and inflation have been increasing the level of national income. Although inflation adjustments have been widely advocated and often adopted in private sector accounts, governments have been reluctant to adopt them for public finances because of the element of uncertainty in prediction.

Statistics with a wide knowledge on how to compute data and an advanced planning on issues relating to a Nation can be applied in the following areas of National budget.

Value for money measurements

As the emphasis in budgetary policy has shifted away from mere authorization of government spending and toward more public scrutiny of what government accomplishes, the idea of appraising value received for money spent in government finance has grown in importance. This has led to an increasing variety of measurements of public sector efficiency. In general terms, taxpayers need to be satisfied that their money is being used wisely. Because of the wide variety of items within even a single program, however, it is often difficult to identify precisely what is spent on the provision of each service, and the services that are provided rarely have well-developed private sector counterparts to act as a basis for comparison.

In some programs, governments have developed efficiency measures that relate observable facts, such as the quality of national health or the number of operations performed, to the cost of providing the service. The use of such measures is by no means widespread, however, and their basis is often open to question. The principal difficulty is that there is either no meaningful measure of the output of a public service—defense, for example—or output is complicated and multidimensional—as with education or health. The result is that any method used to measure efficiency is open to debate and challenge.

Attempts to control public expenditure, particularly since the mid-1970s, have led to some reexamination of which programs should remain in the public sector. In the United Kingdom many services (for example, hospital cleaning) have been transferred from public sector agencies to private contractors, in the search for more cost-efficient purchasing.

Budgetary planning: cash, volume, and cost terms

There are three principal bases for public expenditure planning: cash, volume, and cost. The cash basis is concerned simply with the projected money expenditure on the services involved. Making such projections is difficult because what the cash expenditure will buy depends on what happens to prices over the planning period. Moreover, many public expenditures cannot be planned in cash terms, because legislation prescribes the output. Most social benefits, for example, must be paid to anyone who is entitled to receive them, and this means that the government cannot control directly the amount of the expenditure.

The volume basis is concerned with the planned output of public services. The difficulties of measuring output, however, have already been noted. More often the planning process, assuming that changes in inputs are associated with changes in outputs, operates with reference to the cost basis of programs.

All countries have an annual program of public expenditure allocation, in which those responsible for individual programs argue for greater allocations for their activities and those responsible for raising the money attempt to control the amount allocated. In practice, the results of this process depend as much on the political weight of individuals in charge of a spending program as on an objective assessment of its desirability. The normal practice is to take as a base what each program spent the previous year and then argue about incremental changes, rather than (as under zero-base budgeting) to consider each program in its totality. This creates perverse incentives, in that departmental heads who have saved money in one area in a particular year have an incentive to spend more in other areas in order to protect next year’s total budget.

The basis for most expenditure planning is therefore the number of public employees already in place and the volume of goods and services purchased in the base year. This, multiplied by base year prices, gives the input volume in the base year. In the late 20th century many countries (particularly the United Kingdom) have been abandoning this approach, largely because it gives inadequate control of total expenditure. One reason for a given volume’s costing too much to supply is the so-called relative price effect. This arises because goods and services bought by the public sector (labour, medical care, or defense equipment) may rise in price more quickly than commodities generally. Once this has been determined, volume can be expressed in cost terms. The relative price effect is somewhat subjective, however, because of the difficulty of measuring the quality of goods and services. In the case particularly of health care and defense, the relative price effect will often contain the increased price of services and improved equipment, which are actually a volume increase.

Cost measures, however, merely reflect the cost of a given input; controlling public expenditure in cost terms without taking full account of the relative price effect’s change may lead to inappropriate volume responses or, more commonly, spiraling costs as existing input volume is maintained. Hence many countries have moved one stage further, attempting to monitor and control public expenditure in purely cash terms. The United Kingdom’s public expenditure programs, for instance, are now “cash limited.”

Although planning in cash has a superficial simplicity, at times of significant inflation it is not a very appropriate tool, and differential price rises may lead to a balance of expenditure provision somewhat different from the intended plan. In practice, although cash planning is presented as the base on which decisions are taken, those countries that have adopted this approach in fact allow informal flexibility in cash budgets, with volume measures being implicitly, if not explicitly, adopted.

Components of the budget

The budget for each fiscal year contains detailed information on the outlays intended by the federal government and the receipts expected, including those from trust funds. The budget also divides authorized expenditure into that which can be carried out without action by Congress and that which requires further authorization. In any year, about half of federal expenditure requires authorization from Congress; by withholding this authorization, Congress is able to force changes in the government’s budgetary policy. The budget also summarizes the outstanding debt of the federal government and estimates the size of the surplus or deficit expe

Composition of public expenditure

Expenditures authorized under a national budget are divided into two main categories. The first is the government purchase of goods and services in order to provide services such as education, health care, or defense. The second is the payment of social security and other transfers to individuals and the payment of subsidies to industrial and commercial companies. Both types are usually labeled “public expenditure,” and in many countries attention usually focuses on the aggregate of the two. This obscures important differences in the economic significance of the two items, however. The first represents the public sector’s claim on total national resources; the second the scale of its redistribution within the private sector.

In most Western countries, the share of the public sector in total economic activity averages between 20 and 30 percent. This reflects the proportion of workers who are employed in the public sector or in publicly financed activities, the proportion of national output generated there, and the proportion of incomes derived for productive services that is earned by public sector employees.

Some of these activities yield commercial revenues the postal service, for example. Most have to be financed by taxation. In addition, the government raises taxation in order to redistribute income within the private sector of the economy. It taxes some activities and subsidizes others—through investment credits, for example. On a larger scale, it uses the benefit and social security system to make payments to needy individuals and raises taxes in order to subsidize those who warrant it. With this redistributive activity, plus the direct government productive activity financed from legislation, the total share of incomes taken in taxation is higher than the share of government in total production. It averages around 40 percent in Western economies.

In addition to direct expenditures, attention has been drawn to “tax expenditures.” If the government favours a particular activity such as investment grants or tax concessions may be awarded to that activity. The two procedures have much the same effect on investment and on government revenues, but one appears to raise public expenditure and the other to reduce taxation. It has been suggested that these tax expenditures tax reductions motivated by an economic or social objective should be the subject of a tax expenditure budget similar to the public expenditure budget, and several countries have now moved in that direction. For all private and public purposes within the economy, the scale of public activity is best measured as a proportion of national income: the total of incomes generated or (equivalently) of expenditures on goods and services. The overall proportion of national income that is collected in taxes, raised from profits on government activities, or borrowed varies widely in the developed nations. This variation reflects different national decisions concerning the proportion of a nation’s activity deemed most appropriate to have carried out by the various levels of government or by government agencies. Much of the variation occurs because of choices over the provision of health care (mostly public in the United Kingdom, mostly private in the United States) and over the level and importance of transfer payments. By the late 20th century the share of national income devoted to public expenditure varied from almost 60 percent in countries such as Denmark, Sweden, and the Netherlands to about 30 percent in Australia, the United States, Japan, and Greece. The United Kingdom, Italy, France, and Germany all devote between 40 and 50 percent of their national incomes to public spending. Expenditures on transfers also vary widely, depending partly on how redistributive the government wishes to be, partly on how much of this redistribution is carried out through the tax system, and partly on factors such as the number of old people and the level of unemployment. The dominant payment in every country is for old-age pensions, and the amount depends on how well-developed private sector pensions are. Another factor is the extent to which the government chooses to use direct subsidies rather than tax concessions to stimulate the economy. In the United States in the late 20th century, between 25 and 30 percent of the federal budget was being spent on defense and a similar amount on social security and Medicare payments. Only a fairly small proportion of the federal budget was spent on other items, with about 10 percent of the overall budget being devoted to the salaries and other remuneration of federal civilian employees. Most other provision of public services education, roads, welfare, public health, hospitals, police, sanitation were provided by state and local governments, which spent about three times as much as the federal government on the provision of civilian services. Both levels of government in the United States raise taxes from a variety of sources. The relative importance of state, local, and federal expenditure on civil functions has varied considerably, with the role of the federal government being greatest before World War II and declining after the war.

Problems of public expenditure control

The problems of controlling public expenditure vary across programs. Some are “demand led.” Transfer payments, and particularly social security payments, are largely dependent on the number of old or unemployed people. Apart from reducing benefits (which may in turn be prevented by past commitments), or through macroeconomic policies designed to reduce unemployment, for example, there is little that can be done to limit these payments. Most countries have seen a steady rise in transfer payments as the longevity of the population and the benefits of pension schemes increase.

Public expenditure also depends on the price of the goods and services that the public sector buys and on the efficiency with which they are used. Public sector workers are often highly organized and may be well placed to demand pay increases from an employer who is able to recoup the costs from taxation. Public sector purchasing may be inefficient—civil servants may find it easier to enjoy a comfortable relationship with their suppliers, and, in fields such as health and military expenditures, administrators may demand the latest technologies with little regard for their cost-effectiveness.

At the same time, much of the public sector lacks the incentives to increase efficiency that apply to private firms in competitive markets. It is easier to resist innovation, and bureaucracies often have a conservative culture in which it is more important to avoid mistakes than to experiment with new techniques and procedures. With few external indicators of performance, managers in the public sector may feel inclined simply to promote the growth of their organization and the staff numbers and budgets that they control. As the level and complexity of governmental involvement in the economy has risen, so public expenditure has become increasingly difficult to control. The only people with enough information to monitor their program needs are those actually engaged on the program. Coupled with technological change, the general tendency has been for expenditures to rise without any clear evidence of increased levels of service being provided. Indeed, in many key areas, such as health and education, expenditures have risen steadily at the same time that the public perceived a deterioration of service. Governments in most countries have responded to this problem by occasional severe contraction of particular programs or of public expenditure in general. Numerous countries have adopted cost-cutting exercises with some limited success. But attempts at cost reduction can provoke inappropriate reactions. If politicians discover expenditure can be reduced without reducing the value of the services provided, they may insist on further cuts. If, on the other hand, popular or politically sensitive activities are restricted, there will be pressure to restore expenditures. Managers of public sector programs therefore often have incentives to respond to cuts in ways that maximize, rather than minimize, the effects on the services provided.

Revenue

Governments acquire the resources to finance their expenditures through a number of different methods. In many cases, the most important of these by far is taxation. Governments, however, also have recourse to raising funds through the sale of their goods and services, and, because government budgets seldom balance, through borrowing. The subject of borrowing, because of the intricacies of deficit spending, is covered in a separate section of this article.

Taxation

Most countries raise resources through a variety of taxes, including direct taxes on wage and property income, contributions to trust funds, and a variety of indirect taxes on goods, either at the final point of sale or on the inputs used to make them. A smaller amount of revenue is raised from taxes on property, on capital gains, and on capital transfers, particularly at death. Most countries have a separate corporate income tax.

The composition of tax revenues

The balance between these different taxes has varied considerably over time and between countries. In the United States, sales taxes are relatively unimportant, accruing mainly to state and local governments. Federal government revenue is principally derived from taxes on personal and corporate income; until the 1980s the corporate share was diminishing, but changes in tax law tended to increase it. This dominant reliance on income taxes in the United States is a post-World War II phenomenon; at the beginning of the 20th century about half of all tax revenue came from taxes on property and half from sales taxes. Income tax was introduced on a regular basis only in 1913.

The tradition in Europe is somewhat different, with indirect taxes being relatively more important. All the countries in the European Union impose a tax (at varying rates) on value added, charging tax on output from industry and rebating it on inputs. In the United Kingdom, value-added tax (VAT) raises about half as much as the personal income tax, and together excise duties and VAT raise about one-third of total tax revenue. U.K. corporation taxes on non-oil activities are relatively light, although oil revenues have become very important, despite fluctuations, contributing increasingly to all tax revenue.

Australia, New Zealand, and the Scandinavian countries all rely heavily on income and profits taxes, which account for about half of all revenue raised from taxation. In contrast, France, Greece, Portugal, and Spain raise only about one-fifth of their revenue from such taxes. Social security taxes are important throughout Europe, raising about 30 percent of all revenue in Austria, Belgium, France, Greece, and Italy and rather more in Germany and the Netherlands. The Scandinavian countries, Ireland, and the United Kingdom rely less on these taxes, which are not used at all in Australia and New Zealand. Japan, like the United States, raises about 30 percent of total tax revenue from social security taxes.

Payroll taxes are relatively unimportant, raising significant amounts only in Australia, Austria, France, Ireland, and Sweden but rarely exceeding 5 percent of total revenue. Property taxes rarely account for more than another 5 percent, with the United Kingdom being the exception in this case. Sales taxes, excise duties, and VAT account for nearly one-half of all revenue in Greece, Ireland, and Portugal, compared with less than one-fifth in Japan.

The relationship between tax rates and revenues

In deciding how to raise enough money to finance its expenditure program, a government faces a large number of different considerations. First, the tax system is complex, containing many different taxes, each often having a complex structure. Perhaps the major consideration is the effects on behaviour that particular tax rates will cause.

Income tax has a graduated structure whereby no tax is paid on the first segment of income and then each subsequent segment is taxed at a higher rate than the previous one. In the United Kingdom most taxpayers pay tax at a uniform marginal rate, while other countries have more steeply rising rate schedules. Higher marginal tax rates make work less rewarding, which tends to reduce work effort. High marginal rates, however, may have less impact in some areas than others, a factor that needs to be considered when deciding who should bear the tax burden. Such considerations presumably have influenced the trend in many countries to tax the wealthiest groups.

Whatever the structure of the tax, the general proposition that increasing tax rates will reduce work effort usually holds; and this, in turn, tends to reduce tax revenue again. A vigorous debate has persisted over the “Laffer curve,” which postulates that at some level of tax the disincentive effects will be so great as to mean that an increase in tax rates actually reduces revenue. This idea has been influential in leading governments to attempt to curtail the share of public expenditure in national income. The administration of Ronald W. Reagan in the United States cut taxes in 1981 in the hope of increasing revenue by stimulating the economy, and, while this succeeded to some extent, expenditures grew even more, causing a substantial increase in the budget deficit.

Tax rates affect the pattern and level of consumption. Excise duties, value-added tax, and sales taxes all change the relative prices of goods and the attractiveness of consumption relative to saving. Once again, an increase in tax rates will generate responses that tend to cause a reduction in revenue, and, again, governments must balance the strength of these effects when deciding on which rates to increase. Other considerations, such as the protection of domestic industries, also affect such decisions.

Tax rates also affect commercial decisions, and the balance between individual and corporate taxes must reflect this. Accordingly, many countries have sought to attract new manufacturing industry with tax concessions. Finally, as rates rise, taxpayers seek more ways to avoid taxes. They employ tax advisers to find more tax-efficient routes, which, in particular, can involve a search for capital rather than income-yielding assets and the movement of activities overseas to less heavily taxed countries.

REFERENCES

Central Bank of Nigeria (2007): Annual Reports 1999-2007; Abuja: Central     Bank of Nigeria. Institute of Policy Analysis and Research (IPAR):     Budgetary Process in Kenya: Enhancement of its Public       Accountability,     Policy Brief  Vol 10 , Nairobi: IPAR

Obadan, M.I (2003) National Development Planning and Budgeting in Nigeria:          Some Pertinent Issues. Ibadan: Broadway Press Limited

Omopariola, S. (1984):  Value For Money in Public Sector. The Quest for                  Budget Reform in Nigeria during the Second Republic, Ibadan: NISER

Phillips, A (1997) Nigeria’s Fiscal Policy 1998-2010. NISER Monograph         Series, No 17 Ibadan

Schick, Allen (1997) Budget Innovation in the United States. Washington D.C.          The Brooking Institutions.

World Bank (1998) Public Expenditure Management Handbook “Linking         Policy, Planning and Budgeting in a Medium Expenditure Framework”