TOPIC 3

BUDGETING AND BUDGETARY CONTROL IN MALAYSIAN PUBLIC SECTOR

TOPIC 3: BUDGET

TOPIC OUTLINES
Introduction Definition of terminologies Legal Requirement The objectives of budgeting The functions of Budgeting Components of budgeting Types of Budgeting Structure of Code of accounts for budget item Budget Format Budgeting process Budgeting techniques/methods Conclusion
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The Roles of budgeting

Introduction
Budgeting is the first activity in the government financial management. In public sector budget is the only way for the government to withdrawal the money from CF. It is there for, normally the government will table the budget in September or October every year.

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Definition of terminologies
Type of Budget refer to the way of budget -Deficit Budget -Surplus Budget -Balanced Budget Budget component
Refer to the main items in the budget, Revenues and Expenditures

Budgeting - a plan showing how resources will be acquired and used over a specified time interval Budgetary Control Establishment of budgets relating to the responsibilities of executives to the requirement of a policy. Budgeting technique Refer to the technique or system in formulating the budget figures
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Legal Requirement
Budgeting need to be prepared by the government every year as required by the. Article 99 & 100, 101 of FC Sec 15 FPA, 1957 Treasury Instruction (TI) no 29-51(The procedure for preparation of budget) Treasury Circulars, no. 2, 2009

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The objectives of budgeting

a.To fulfill legal requirement
- Articles 99 & 100 FC - Sec 15 FPA 1957 - TI no. 29-51 b. As a tools for planning, Control & Evaluation -As an economic instrument - As an accounting tool

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The Roles of budgeting

a. Planning Instruments management is forced to look ahead, to set targets, to anticipate problems and to give the organization purpose and direction b.Communicating Channel A formal system is necessary to ensure that each person is aware of what he or she is supposed to be doing. Communication may be top-down or two-way dialogue
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The Roles of budgeting ..cont

c. Coordination Tools The activities of different departments as subunits of the organization can be coordinate through budget d. System of control The estimate figure can be used to control the actual expenditure e. Motivation Tools Good budget should be enable the employees to improve their performance
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The functions of Budgeting

a. Fiscal policy instrument
Allocation function security, social, economic, administration etc. Distribution function free education, free books, subsidies, etc. Stabilization function zero inflation, reducing unemployment, improve economic growth

b.

Management instrument
Manage financial resources budget ensures objectives are achieved as planned Control help management to control cost and use of resources Performance measurement compare actual with budget so that appropriate action can be taken to correct the situation

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Components of budgeting
Components of budget consist of

Estimated Revenues
Estimated Expenditure

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Components of budgeting ..CONT

REVENUES
All the income received by the government from various sources like tax, fees, services, licenses and others except money specifically for Muslim people like zakat and fitrah. REVENUES can be divided into four main category:
Tax revenues Non-tax revenues Non-revenue receipts Revenues from Federal Territories (For FG only)
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Components of budgeting .. Cont (Revenues) Tax Revenues all the revenues collected based on the law passed by the legislative.
Compulsory payment Can be divided into direct and indirect

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Components of budgeting .. Cont (Revenues)

Direct tax revenues
Manage by the IRB for FG Need to pay directly to IRB Examples:
Income tax, corporate tax for FG Land tax, Drainage tax (cukai taliair) for SG Assessment tax for LG

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Components of budgeting .. Cont (Revenues)

Indirect tax revenues
Tax Revenue that collect and manage by other government agencies, eg. Custom Department, Immigration Department. Eg. Export custom duties, sales tax, exercise duties for FG Entertainment duties, land premium for SG

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Components of budgeting .. Cont (Revenues)

Non Tax Revenue
Revenues collected from product or services provided by the government The public are required to pay when they used the product or services Those who are not used, they do not pay. Eg. Licences tax like road tax, taxi permit, service and service fee, etc for FG - entertainment permit, registration payment for SG - sales of form, Charges and penalty for LG

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Components of budgeting .. Cont (Revenues)

Non revenue Receipts
Collection made by the government but not based on any acts or laws Eg. Refund of expenditure, receipts from government agencies for FG Refund of expenditure, repayment of loan etc. for SG Refund of expenditure, repayment of salary etc. for LG

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Components of budgeting .. Cont (Expenditures) Expenditures

Total allocation required by all the department, ministries and agencies to run their operation for a year.

Can be divided into two categories:

Operational expenditure Development expenditure for the purpose of development of the nation

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Components of budgeting .. Cont (Expenditures)

Operational expenditure (OP)
Expenditure that specifically to cater (memenuhi) the operation of the government. Can be divided into Charged expenditure and Supply expenditure Charged expenditure will identify with the code (T) Supply expenditure indentify with code (B)

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Components of budgeting .. Cont (Expenditures)

Charge Expenditure (CE)
All the expenditure charged directly to CF Required by the Art. 98 FC Not subject to the budget approval Repeated expenditure and Fixed Main priority in allocation of the fund Eg. Royal families allowance, salary of Chief justice, Auditor general remuneration, etc.
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Components of budgeting .. Cont (Expenditures)

Supply expenditure (SE)
All expenditure need to cover the operation of the ministries, department or government agencies. Required by the Art. 100, 101, and 102 of FC Subject to approval by the legislative before being implemented Examples of SE are emolument for government servant, Assets expenditure, allowance, etc.

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Code of Accounts for Budget Items

In order to make sure all the agencies understand the nature and classification of revenues and expenditures, the government provides the standard code of accounts for revenues and expenditures. Currently, that codes provide through the FTC no. 5, 2004. That guidelines are to fulfill the requirement of TI 41
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Code of Accounts for Budget Items.. Cont

FTC 5,2004 Provide 4 different level of expenditure and revenues (Known as Object) All code consist of 5 digits All the revenues were classified into three group, namely tax, non-tax and non-revenue receipts. All expenditures were classified into five categories, Emoluments, Supplies & Services, Asset, Grants and Fixed Charged and Other expenditure For detailed discussion and explanation please refer to the FTC no. 5/2004
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Code of Accounts for Budget Items.. Cont

Level of Revenues and Expenditures The code that consist of four zero after the numbers will known as General object. The code that consist of three zero after the numbers will known as Spesific object. The code that consist of two zero after the numbers will known as Group-Detailed object. The code that consist of one zero in between the numbers will known as Detailed object.
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Code of Accounts for Budget Items.. Cont

Example: Expenditure
Code
10000 11000 11100 11101

Object Name
Emolumets (General object) Salary and wages (Spesific object) Salary for Public service (Group- detailed object) Common Salary for public service (Detailed object)

Revenue
Code 70000 74000 74100 74101 Object Name Non-tax revenue (GO) Rentals (SO) Land rental (G-DO) Land rental for agriculture (DO)
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Types of Budgeting
Refers to the proposed net effect of the budget. There are three possibility, deficit, surplus or balance. Deficit Budget
Government aims to spend more than its revenue earning. Example. Estimated Revenue RM232.8 b Estimated Expenditure RM357.9 b Deficit (RM125.1 b) The deficit is expected to be covered by bonds/borrowing The deficit budget is a source of govt. debts Suitable for countries experiencing recession/depression (high unemployment and low output) Govt spend more on operating and development expenditure

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Types of Budgeting .. cont

Surplus Budget
Estimated expenditure is less than estimated revenue Suitable for countries which going to reduce debts Formulated during inflation Reduce spending on operating and dev expenditure (increase tax and reduce salary scale)
Estimated Revenue RM357.9 b Estimated Expenditure RM232.8 b Surplus RM125.1 b

Example

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Types of Budgeting .. cont

Balance Budget
Estimated expenditure and estimated revenue are equal Suitable for country which wanted to reduce inflation

Example:
Estimated Revenue RM357.9 b Estimated Expenditure RM357.9 b Surplus RM0

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Budget Format
Operational Budget
Have a spesific format provides by the FTC Currently, need to prepared for two years, Current year and following year (FTC, 2/2009) The budget need to be prepared in summary and detailed format Summary format disclose item at general object (Detailed, Refer to illustration)

Development budget
No spesific format No need to table in legislative bodies
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Budget Format ..cont

State Government Budget Format (Summary)
Name of the state Estimated Revenues and Expenditures For the Year 2011 Estimated Revenues Revenues (RM,000 m) Tax Revenues xx Non-tax revenues xx Non-revenue receipts xx Total estimated revenues xxx Estimated Expenditures Operating Expenditures Charged Expenditure xx Supplies Expenditure xx Total Expenditures xxx Surplus/ (defisit) xx
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Budget Format (SG) ..cont

Estimated Development Expenditures State Consolidated Fund xx Federal contribution/grant xx State Loan Fund xx Total Estimated Development expenditures Estimated Water Supplies Expenditures State Consolidated Fund xx Federal contribution/grant xx State Loan Fund xx Total Water Supplies Expenditure

xx

xx

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Budget Format ..cont

Local Government Budget Format (Summary) Name of the LG Estimated Revenues and Expenditures For the Year 2011 Estimated Revenues Revenues 2011 2010 Tax Revenues xx xx Non-tax revenues xx xx Non-revenue receipts xx xx Total estimated revenues xxx xxx Estimated Expenditures Operating Expenditures Emoluments xx xx Supplies and Services xx xx Assets xx xx Fixed Charged and Grant xx xx Other Expenditure xx xx Total Expenditures xxx xxx Surplus/ (defisit) xx xx
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Budget Format ..cont

Local Government Budget Format (Summary)
Development budget format Estimated Development expeditures Council Development fund Launching Grant Grant form Federal Government Capitation grant Total Expenditures

2011 xx xx xx xx xxx

2010 xx xx xx xx xxx

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 BUDGET STATISTIC FOR FEDERAL GOVERNMENT

Year
2007

TR (M)
134,815

TE (M)
157,496

OE (M)
112,986

DE (M)
44,510

D/S
22,681(D)

2006
2005 2004 2003 2012

123,500
106,304 99,397 92,608 186.9 B

143,500
128,278 120,162 114,577 232.8 B

107,700
97,744 91,298 75,224 181.6 B

35,800
30,534 28,864 39,353 51.2 B

20,000 (D)
21,974 (D) 20,765 (D) 21,969 (D) 45.9 B (D)

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Main Agencies Involved in Budgeting process

Central Agency
Economic Planning Unit Implementation Co-ordination Unit Public Service Department

Implementation Agency
Ministries Department Statutory Bodies
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BUDGET CYCLE
10) Allocation warrant to ministries/dept.
1) Treasury Circular

9) General warrant issue to accountant general

8) Minister of Finance table budget report in parliament 2) Preparation of budget by Ministry/dept

7) Treasury approve the budget

3) Approve & coordinate Ministry/dept budget by controlling officer

6) Budget examination meeting

4) Propose budget to central agency 5) Revise propose budget by central agency

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BUDGET PREPARATION CYCLE

Nov-Dec

Budgeted debated and approved by parliament, given consent by YDPA & issuance of allocation warrant Oct Budget documents printed and presented in Parliament

Sept MoF atten annual meeting of World Bank and IMF July- Aug Dialogue session between MoF and significant business and community group

May- July Preliminary budget hearing and actual budget hearing March-April Budget examination process March Submission of budget byagencies Jan Circular sent by Secretary Gneral MoF to agencies
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Budgeting techniques/methods
Spesific only for Operational Budget Refer to the way how to formulate and determine the amount to allocate for the purpose of expenditure There are for technique available; - Line-item Budgeting System (LIBS) - Programmed and Performance Budgeting System (PPBS) - Modified Budgeting System (MBS) - Zero based Budgeting System (ZBB)
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Budgeting techniques/methods
Development of budgeting Technique in Malaysia Prior to 1969 Traditional/line items Budget System (LIBS) was used Due to numerous weaknesses of the LIBS, a new technique, Program Performance Budgeting System (PPBS) was introduced in 1969 following the issues of Treasury Circular no. 5-1968 After 20 yrs of using PPBS, a study was conducted to overcome certain weaknesses of PPBS In 1990, govt. introduced a new system, a modification of the PPBS, known as MBS
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Budgeting techniques/methods .. cont

A new Modified Budget System (MBS) was introduced as pilot project in Ministries of Health, Public Works and Welfare Since 1996, the whole govt. has been using the system

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Budgeting techniques/methods .. cont

Line Item BUDGETING SYSTEM (LIBS) LIBS approach/technique
Takes the last years spending and existing budget as the basis for next years budget Analyse the addition to the base for increase in cost of labour and materials To add for costs of new projects and programs Also known as Incremental budgeting system

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Budgeting techniques/methods .. cont

Assumptions in LIBS All activities making up last years spending: - Were essential to achieve the ongoing objectives - Activities must be configured during the coming year and are more urgent than newly created programs - Are now being performed well and in most costeffective manner - Will continue to be cost-effective and necessary in the coming year - All increases are due to labour and material inflations
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Budgeting techniques/methods .. cont

Weaknesses of LIBS Vagueness of objectives. Limited analysis to alternatives. Partial costing of programs Inadequate consideration of future year implications of present decisions Short review and decision period Emphasis on expenditure control instead of performance Gap between planning, budgeting and control Focus on RM expense based on the previous year. Does not suggest any new method of doing things
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Budgeting techniques/methods .. cont

Advantages of LIBS
Simple Easy to control Cheap in cost of implementation Can be used in all economic condition Suitable with the nature of government

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Budgeting techniques/methods .. cont

Program and Performance Budgeting System (PPBS)
Started in late 1950s in the US by the US Secretary of Defense, Robert McNamara Have been used by many developed nations Is a system to help management make better decisions on the allocation of resources among alternative ways to attain govt. objectives

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Budgeting techniques/methods .. cont

PPBS
Needs for PPBS Increasing complexity of modern life Demands from public for govt. services has increased Shortage of funds to meet the demands Need to determine priorities, design programs and control budgets
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Budgeting techniques/methods .. cont

PPBS
Main Components of PPBS: consist of program & performance Program includes: - Functions - Objectives - Activities - Responsibility centre Performance includes: - Appropriateness - Adequacy - Effectiveness - efficiency
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Budgeting techniques/methods .. cont

Critical Features of PPBS: Determination of objectives as specific as possible Determination of programs and activities to achieve the objectives Measurement of performance in-term of benefits or effectiveness Evaluation of Program
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Budgeting techniques/methods .. cont

Elements of PPBS:
Identifying Objectives: Identifying objectives is fundamental to PPBS approach Simply it means setting out in clear terms the purposes for which an organisation (govt. agency) exists

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Budgeting techniques/methods .. cont

Identifying Objectives in PPBS: example:
Objectives of Ministry of Health is to raise health status of Malaysians by providing promotive, preventive, curative and reliabilitative health services Objective of Ministry of Education is to educate Malaysians through a national education system to make them knowledgeable and responsible capable of enjoying a comfortable standard of living
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Budgeting techniques/methods .. cont

Identifying Objectives in PPBS (Cont) Identification of objectives forms the framework towards a better and meaningful planning Also encourage considering of other alternatives in achieving the objectives Enables management to avoid duplications of functions of the various organisations within the department. An efficient management is one which is able to identify and formulate objectives in a clear, precise and concise manner
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Budgeting techniques/methods .. cont

Program Planning in PPBS: Program planning involves the selection of best feasible alternative for the purposes of achieving identified objectives and reflecting it in terms of programs A program is a set of activities which have common objectives Program Structuring: Refers to the hierarchical listing programs, activities and sub-activities which contribute to the achievement of objectives
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Budgeting techniques/methods .. cont

Program Planning: Example of programs (under Ministry of Health):

Medical care service Dental service Manpower planning and training Pharmacies and supplies Research and administration etc

Example of activities (under Medical Care Service Program) - General patient care - Psychiatry service - Leprosy service - Medical administration and service
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Budgeting techniques/methods .. cont

Developing Performance Indicator in PPBS: to evaluate financial and physical performance Involves identification and selection of suitable units of measurement which reflects the output of each activity and program in either qualitative or quantitative terms Also involves making comparisons between actual output for a given period with the planned or targeted output and identifying the causes for any variance between the two Results will provide information as to whether programs have been realistically planned and properly managed
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Budgeting techniques/methods .. cont

Performance Evaluation in PPBS:
Assess the relevance, results and impact of programs of the agencies An important element for purposes of revising or modifying plans and involves the asking and answering of general questions: - Are the objectives of the programs realistic and reasonable? - Has the programs been properly selected? - Is it the best alternative for achieving the objectives? - Is it adequate in scope to solve the problems identified? - Has the programs been properly planned in term of time and adequately provided with the necessary resources?

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Budgeting techniques/methods .. cont

- Has it been efficiently managed and executed? - Has the program been effective in relation to the objectives? Advantages of PPBS over LIBS: PPBS makes budget as an instrument of expressing govt. policies through each of its programs More useful document to taxpayers and MPs since major emphasis is on programs, activities, work to be completed and costs
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Budgeting techniques/methods .. cont

Advantages of PPBS: (cont) Provide better information to parliament on effectiveness and management of ministry/dept./agency Require govt. administrations and managers to think and plan in term of program objectives and the most efficient and economical way of attaining them Introduces the valuable element of long range planning on operating and development expenditures Improve coordination between economic planning and financial planning Systematic and continuing method of evaluating performance Facilitate setting budget priorities between competing programs
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Budgeting techniques/methods .. cont

Weaknesses in Implementing PPBS: Goals and objectives not clear Budget as an allocation tool not as management tool Performance achievement is not significant Lack of planning

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Budgeting techniques/methods .. cont

MODIFIED BUDGET SYSTEM (MBS)
Modification of PPBS To overcome certain weaknesses of PPBS especially program evaluation stage which could not be implemented in full Its introduction was first announced by govt. through Treasury Circular no. 11, 1988 Treasury Circular no. 8, 1990 announced implementation of MBS pilot project by 3 govt. ministries
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Budgeting techniques/methods .. cont

Fundamental principles in MBS: Let manager manage - Managers nearest to where outputs are produced should be given as much authority/flexibility as possible - Line managers should be more motivated to produce better output - More responsive fewer delays in decision making and implementation Authority must match with accountability simply giving authority without accountability will result in abuses

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Budgeting techniques/methods .. cont

MBS Objectives: Improve allocation of resources to ministries and programs by streamlining and rationalising the decision process Bring about more efficient management of govt. programs through better management practices Facilitate accountability
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Budgeting techniques/methods .. cont

Main elements in MBS
Expenditure target (ET) Program agreement (PA) Exception reports (ER) Cycle of program evaluation (PE) A more generalised approach to expenditure control

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Budgeting techniques/methods .. cont

Main Element in MBS (Cont) Expenditure Target: Represents Treasury estimate of the base level of resources a ministry/dept./agency requires to conduct programs as in the previous years. Total allocation of funds based on: - Expenditure target for existing policy - Adjustments for salary increments, inflation and exchange rate - Plus allocation for approved new policies - Less one offs (unavoidable and non annual expenses) - Less efficiency dividend (efficiency implementation related to learning effect and implementation of improved methods)
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Budgeting techniques/methods .. cont

Expenditure target (cont) Calculation of ET
ET for Next year (2012) equal to:
Existing policy for previous year (2011) Plus: New policy for previous year (2011) Minus: New policy which not implemented for previous year (2010) Plus: 2% of emolument incremental from current year (2010)

For the year 2013

ET (2012) + NP approved for 2013
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Budgeting techniques/methods .. cont

ET Calculation (cont) Existing policy
All the program and activities that are being implemented in current year have been approved by the treasury except for one-off

New policy
All the new program and activities which approved by the treasury including the extension, expansion and continuation of existing policies. Examples of NP : Establishment of new unit
New activities, etc.

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Budgeting techniques/methods .. cont

Calculation of ET
See the example given

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Budgeting techniques/methods .. cont

MBS Element (Cont) PROGRAMME AGREEMENT - Contract between manager & subordinate to whom certain authority has been delegated - The manager requires the subordinate to be accountable through submission of progress periodic reports - Provides information on agreed target for the inputs, outputs & impacts
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Budgeting techniques/methods .. cont

MBS Element (Cont) EXCEPTION REPORTS (ER) - Subordinate manager keeps the authority informed of progress against a programme agreement - ER identify indicators for which performance is inconsistent with the target - Reasons for the inconsistent performance - Remedial actions to prevent such recurrence

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Budgeting techniques/methods .. cont

MBS Element (Cont)
Benefits from Program Agreement and Exception Reports: Improved accountability at all levels of management through: Emerging problems can be identified earlier Exceptions reports provides information to the boss of areas where problems may be developing Highlight areas of relative strengths and weaknesses to enable management make better decisions Allows senior managers to focus on priority and problem areas Reduces potential for information overload
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- Compliance with rules and regulations - Efficiency and effectiveness of programs

Budgeting techniques/methods .. cont

Benefits of MBS: At the Central Budget Level:
- Improved identification of priority expenditures during budget submission - Shift focus of budget examinations from one of cutting expenditures (poker game) to one of identify the best mix of resources within a constraint based on past and targeted program performance - Reduce paperwork in submissions and examinations - Allow more time for discussion of new policy proposals and policy change proposals - Provide Treasury with information on program performance
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Budgeting techniques/methods .. cont

At the Departmental Headquarters Level:
- Enable a more top-down (strategic) approach to budgeting - Controlling officer can use budgets as a management device - Improved communication of top managements priorities to lower level managers and staff

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Budgeting techniques/methods .. cont

At the Line Management Level:
- Improve through: motivation among line managers

- increase awareness and understanding of top management priorities (through program agreement to which they are held accountable) - greater flexibility in the deployment of resources within aggregate constraints
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Budgeting techniques/methods .. cont

ZERO-BASED BUDGETING SYSTEM (ZBBS) All managers analyse their operations in terms of: Objectives Alternatives Performance measurement Incremental costs/benefits Start from zero Suitable to organisations with financial crisis Requires managers to decide which activities/functions should be performed Match resources with activities
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Budgeting techniques/methods .. cont

ZBBS Process: Develop planning assumptions Identify decision units groups of similar activities Analyse each decision unit in term of objectives and current operations Preview and reallocate resources Prepare detailed budget Evaluate performance financial and nonfinancial
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 THE END

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