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”