Case Study:Formulating a provincial budget
Case Study: Formulating aprovincial budget
Case Study: Formulating aprovincial budget,
The case study focuses onformulating a provincial budget at the beginning of a budget cycle.It outlines the essential variables that are essential in the initialbudgeting process in an ideal province. There is no ideal budgetstrategy. Therefore, the case outlines how a range of possibilitiescan be considered in a budgeting process in order to arrive at thebest option. However, it is important to note that the methods ofarriving at a budget vary from one provincial government to another.Additionally, the budgeting process may vary from one fiscal year toanother in the same provincial government. There are essentialaspects of the budgeting process, which includes developing a budgetstrategy, a forecast of the revenue levels and tax rates andallocating resources to different social and economic programsaccording to priorities. In an ideal provincial budget makingprocess, a tentative view of the budget is handed to the minister.This is done before the resources are allocated or priorities areset. The aforementioned presentation becomes the framework for thefinal decisions on revenue and expenditure. It also forms the baseson which other parties involved in the budgeting process give theirinputs on the process. This is the tentative stage of the budgetingprocess, which updated regularly after reviews to ensure that it isin congruent with emerging economic, social and political trends inthe province. Thus, at this stage, the budgeting team will have atarget of the aggregate expenditure as well as revenue targets forthe province. The aggregate expenditure target can also be brokendown to each of the policy sector (Leger, 2006).
As mentioned, the preparationand presentation of a budget framework is an essential process inbudget making. An important aspect in the preparation is theframework is the identification of how the resources will beallocated to different sectors. This is commonly referred to at theglobal constraints. Since financial resources are always limited,any provincial budget must have boundaries on resources allocation.Some of the factors to consider in setting global constrains includerate of growth of social and economic programs, whether fiscalstimulus or restrain are necessary, taxation as well as debts andborrowing (Leger, 2006).
It is essential to note thatin the preparation of a provincial budget, there are severalbureaucrats and political who are involved in the process. Takingnote on some of the things that are central to their interest isessential. Thus when the fiscal framework is developed, the aggregateexpenditure is tentatively decided. It is therefore important to sortout the competing demand for resources between different sectors atthis stage. This will also be essential in setting an expenditureceiling in the first round of “blood and gut budgeting”. Theconsideration of the competition for resources should be within apreset budget which is determined by the several factors mainlysocial and financial economics factors. However, it is essential tonote that the tentative framework should be realistic since an errorof above more than five percent has potential negative effects onsubsequent processes (Leger, 2006).
There are six major stepsthat must be considered in the first step of developing a budgetstrategy for a province. Although forecasting the economicperformance is difficult, it reveals some of the future strong andweak points in the economy. Thus, the most important step is anappraisal of future economic outlook of the province. For example,the future economic outlook will identify the need for fiscalstimulus and restrain in the economy. Another important step isforecasting the grown of expenditure in the province. This identifiesthe sectors which will have pressure points and thus resourcesallocation priorities. The third step involves forecasting therevenues in the province. The total expected revenue, includingcontribution from the consolidated funds to provincial coffer,provides a ceiling for budgetary expenditure in the fiscal framework.The forth step includes a review of the ability of the province toraise funds. In the fifth step, it is essential to forecast thebehaviors of critical financial ratios in the future, for example,service of the debt and gross revenue relationship. This is anindication of the financial health of the economy. In the last step,the budgeting team should take into account the policy environment inthe province. This includes federal fiscal polices and declaredpolicies at the provincial level. The prevailing attitude on spendingand taxation, among the public, is an important aspect of policyenvironment. This will avoid unnecessary resistance in the finalsteps of the budgeting process. These stages or assessments willresult into fiscal frameworks options, alternatives that can beadopted in subsequent stages in the budgeting process (Leger, 2006).
It is also important to takeinto account other constrains that are inherent in a politicallysensitive process. For example, lack of flexibility in altering theexpenditure is a major constrain in provincial budgeting process(Canadian Centre for Policy Alternatives, 2005). Upward changes inrevenue are politically viable while the ability of provincialgovernment to alter total revenue is limited by the role of thefederal government. Thus, a small alteration of the revenuestructure, as little as three percent, has huge implications. Theexpenditure, especially in relation to economic and social programs,is also limited by a number of factors. For example, reduction inexpenditure in a fiscal year is difficult since it will affect keysocial and economic programs. On the other hand, increase inexpenditure is limited by expansion pressures. While bothexpenditure and revenues can be raised or reduced, giving rise tofour options, the most feasible option is raising expenditure. Theinternal rigidity is an essential constrain in developing the initialbudget framework. Borrowing is, to some extent, a requirement inrunning of social and economic programs by a government. Therefore,it can result into essential constrain in the budgeting process.Borrowing is used to fund deficits in the government expenditure.When renders refuse to lend funds, for example due to non assetexpenditures, it results into increased cost of borrowing (Leger,2006).
The case study provides animportant insight in the development of the budget framework.Although the case study provide a brief overview of the stages thatare basic in the preparation of a budget framework, a detailedanalysis of all aspects of the provincial economy and society isnecessary (Gunnar et al, 2003). Effective communication is alsoessential in the formulation of the budget. This is because theframework provides the bases through which the fiscal policy willtransform the economic landscape of the province (James & Allan,1989). For example, in the case, option 3 may be more feasible due toan increase in expenditure. However, this results into an increase inbudgetary deficit and therefore the net debts. On the other hand,another team may go for option 2 due to the low budgetary deficit butput pressure on basic social and economic programs. It is thereforeimportant to way the competing factors before making a decision.
Canadian Centre for PolicyAlternatives (2005). Repairingthe nets: Nova Scotia alternative provincial budget fiscal plan2005-06, Halifax,N.S.: Canadian Centre for Policy Alternatives.
Gunnar, S. E. et al (2003).Fiscaldecentralization and the challenge of hard budget constraints,Cambridge, Mass. MIT Press.
James C. & Allan, M.(1989). Budgeting inthe provinces: leadership and the premiers,Toronto.
Leger, P. C. (2006).Formulating aProvincial Budget,IPAC Case Study 1.35