Chapter Four

Public Budget

4.1. Budgetary Concepts

The Meaning of Public Budget

Public budget is a document that forecast a government expenditures and revenues for a given
fiscal year. It indicates how a public entity spends the financial resources in order to realize
specific public goals. The document becomes a legal financial plan after it has been approved
through the legislative process of the country.

It is also defined as annual plan of the government which outlines planned public revenue and
expenditure. It usually is passed by the highest governmental bodies, such as: parliament,
municipal councils and regional/provincial councils, known as legislature. It is generally
considered to be an action plan for spending in the future according to the income expected.

The public budget is the most important policy for implementation of the citizens’ rights (right to
health, education, housing, social protection, etc.). The existing public policies and laws are just
empty promises of the government, unless the government allocates adequate level of the budget
resources for their realization. The government budget reflects the county’ or government
priorities and is a very good indicator for the level of the government commitment to implement
the international and national obligations toward improvement of the living status of the people.
Regardless of the level of the government the public budget refers to, the budget funds are
allocated towered satisfaction of the following public functions: health, security (public order,
peace and defense), economic development, environment protection, education, social
protection, culture, etc.

Budgeting thus, is the art and science of dividing available money between competing needs.
The public budget is a process by which government sets levels of expenditure, collects revenues
and allocates the spending of resources among all sectors to meet national objectives. Budgeting
is the financial plan of action for the year, reflecting government priorities on expenditure,
revenue, and overall macro-economic policy. Thus, budget is central to realizing national
objectives, goals and programs linked to the role of the government in financial matters.

1
The public budget is divided in two sections: projected revenues and projected
expenditures.
Projected revenues section: In the projected revenues section of the public budget the
government outline the amount of funds expected to be collected through the calendar year from
different sources, in order to be able to cover the expenses for implementation of the main
budget functions. The government finance its functions with funds collected from the following
sources of revenue:
 Tax revenues: profit taxes, income taxes, property taxes, taxes on goods and services;
taxes from international trade, taxes on special services, etc…;
 Non – tax revenues: users fees, fines, income from the work of the public enterprises
and income for public property, service charges, etc…;
 Capital revenues: sale of public property, sale of public goods, sale of land and assets,
dividends, etc.
 Transfers and donations: transfers from other levels of government (ex. the transfers
from the central government to the local governments), capital donations and current
donations, etc…;
 Internal borrowings: issuing short or long term public bonds; borrowings from
domestic creditors (commercial banks and other creditors);
 External borrowings: borrowings from external creditors (foreign government or
international development agencies)

Projected expenditures section: in the projected expenditures section of the public budget the
government outline the amount of funds expected to be spend through the calendar year for
implementation of the main budget functions. The expenses side of a budget shows how much
and on what a government plans to spend its revenue. The expenses of government are usually
divided into two categories: ongoing running costs (commonly called operational/recurrent/
administration costs), and one-off costs with long-term benefits (commonly called development/
programme costs), including capital items such as roads, buildings and equipment. The public
expenditures can be divided in the following categories:
 Salaries;

2
  Goods and services: communications, heating, electricity, maintenance, materials and
small inventor, contracting services, etc.
 Capital expenditures: construction, purchasing equipment, purchasing furniture,
purchasing vehicles, purchasing strategic goods, etc.
 Interest payments;

The concept of budget deficit and surplus

In most of the countries the projected expenditures exceed the amount of expected revenues.
This situation is known as budget deficit. In case of budget deficit the government responds with
cutting the budget expanses, borrowing or seeking for international assistance. The situation in
the budget, when the government plans to spend fewer resources, than the amount of expected
revenues, is known as budget surplus. Thus, budget surplus is a situation where projected
revenues exceed the projected expenditures. This is a very rear situation in the countries, but if
this is the case in the country the government will more probably increase the expenditures or
pay the existing debt.

Why does Government Prepare Budget?

As there is never enough money to do all the things that the government would like to do for its
citizens, the budget acts as a tool that government uses to weigh up various needs and decide
how to allocate the available scarce resources according to priorities. The identified priorities
reflect the goals to which government is most committed and it will be reflected in its budget. It
reflects the government's socio-economic policy priorities. It is an instrument for holding the
government transparent and accountable for it actions. It also helps government to translate
policies, political commitments and goals into decisions.

The Budgetary Process

The Ethiopian government budget process has four stages at all level of jurisdiction (Federal,
Regional, and Woreda government) which is guided by Financial Calendar directive issued by
the Ministry of Finance (MOF) to all public budgetary bodies (institutions). The four stages of
government budget are:-
1. Budget Formulation (draft/design process),

3
2. Budget approval and appropriation (legislative process),
3. Budget execution (implementation process), and
4. Budget control (performance monitoring – audit and oversight).

As shown in the following table the budget calendar directive has a time table to ensure that
planning and budgeting are prepared, approved, appropriated and executed accordingly.
Budget Main Responsible Time
Process Activities at Body
each Stage
Budget Macro-Economic MOF By 10th
preparation and Fiscal November
Framework
(MEFF)
preparation.
Based on MEFF, MOF By January 24th
annual fiscal
plan will
prepared
public MOF By 8th
investment February
program;
annual subsidy
estimates to
regions; budget
call to public
bodies
Public bodies Public Bodies By 22 nd
March
submitting
budget
Request
Conducting Public bodies By 23rd May
budget hearing with
MOF
Approval of Executives By 30th June
Recommended
Budget
Budget approval of the Legislators/the By 7th July
approval budget and parliament

4
 annual
appropriation of
the approved
budget
Budget Budget All public bodies From July
Execution 8th to July 7th
implementation
Budget  performance MOF/public From July
Control review and bodies/Auditor 8th to July
control General/ 7th
 auditing
legislators
public bodies
 oversight

Public Financial Management (PFM)

A public financial management (PFM) system is a set of rules and institutions, policies, and
processes that govern the use of public funds across all sectors, from revenue collection to
monitoring of public expenditures. PFM policies vary by country and can cover issues related to
tax law, budget management, debt management, subsidies, and state-owned enterprises. A well-
functioning PFM system is critical to ensuring accountability and efficiency in the use of public
financial resources, while a weak PFM system can result in significant wastage of scarce
resources. PFM is particularly relevant to health financing, as most resources for health tend to
come from public budgets. In particular, PFM systems influence how much funding is available
and allocated to projects, the effectiveness of spending on projects, and the level of flexibility in
use of project funds.