Budget is a quantitative expression of a plan of action and an aid to co-ordination and implementation. Historically, in Britain, the King used to demand money to wage wars from the representatives of the countries under his possession. The representatives who used to be usually Nobles and Knights, used to commit the money on behalf of their country and used to recover this money through increased taxation in the country. Slowly the concepts of democracy started taking roots in Britain and 3 different classes of representatives came into existence – Lords/Nobels; Commoners; and Knights and clerical class. All the representatives then used to discuss among themselves in these 3 groups as to what amount should be agreed for each country as a contribution towards war efforts of the king. Slowly, with the passage of time, the class of Knights merged partially with Lords (or Nobles) and partially with commoners and two distinct Houses of Parliament namely House of Lords and House of Commons came into existence. Then, with the emergence of democratic principles of ‘No taxation with representation’, the power of granting the increase in taxes shifted to the House of Commons and slowly the concepts of modern budget emerged.
Origin of the term ‘Budget’ can be traced back to the French word ‘bougette’, meaning a leather bag or Wallet. The Chancellor of Exchequer used to have a leather wallet to carry his papers etc relating to the annual financial statement to the House of Commons. The content of the bag were kept secret till the bag was opened before the House of Commons. In a satire against Walpole’s financial plan, in 1773, it was said that he ‘opened the budget (meaning – the bag) and took out his papers ‘for presenting the proposals’. Since then the appellation has stuck to financial schemes or statements and the term Budget is used to denote that document which contains estimates of revenue and expenditure of a country, usually for the fixed period of one year. Same of the definitions of the word ‘Budget’ are as follows:
“A Budge, According to Dimock, “is a financial plan summarising the financial experience of the past, stating a current plan, and projecting it over a specified period of time in future”. Taylor defines the Budget as “a financial plan of the government for a definite period”. Wilne has defined the concept of Budget in the following words very comprehensively. According to him, “Budget is a detail of estimated revenues and expenditure, a comparative chart of revenues and expenditures – and over and above this, it is an authority and direction of the competent authority given for the collection of revenues and expenditure of the public money. ”
From the above definitions of Budget, one can conclude that the following are four essential features of a Budget:
- It is a statement of expected revenues and proposed expenditure.
- It requires some authority to sanction it.
- It is for a limited period only, generally one year.
- It also sets forth the procedures and manner in which the collection of revenue and the administration of expenditures is to be executed.
SIGNIFICANCE OF A BUDGET/MAJOR OBJECTIVES OF BUDGET
Financial budgets are among the oldest devices we have for controlling the operations. Governments started using rudimentary budgets about 200 years ago. Their aim was to secure a balance between tax, income and the operating expenditure – a problem that continues to haunt public administrators. It was not until quite recently that businessmen discovered that the use of this control device forced them to improve their planning. This in turn, became a valuable means for subsequent measurement and control, co-ordination of related activities (such as purchasing, production, storage and sales); and stimulating preventive action, so that very little corrective action was necessary.
In the hands of the administrator, the budget is a record of the past performance, a method of current control, and a projection of future plans. Hence, if the budget is broken down finely enough, it is relatively easy for the administrator to determine what has been happening and whether or not some special action is called for. It gives a report of the entire financial operations of a particular department (or the government) in the part and gives us a glimpse of the future policy to be adopted by the department (or by the government).
From the point of view of the public, the budget can act as an important indicator of the performance of the government in the previous year and it gives a glimpse into the future government fiscal policies. It hence proves to be an important guide for them during the next general elections and helps them to decide, whether the current government should be given a chance to carry out its policies or not. The Government in power aims to gather legislative support for its proposals and policies through the instrument of budget. If the budget is not passed by the legislature, the Government has to resign and a fresh government takes office. Major objectives sought to be achieved through a budget are as follows:
Budget as a Tool of Financial Control
- For Parliament, the budget acts as an excellent instrument with which control and accountability can be enforced on the government. The Parliament exercises financial control due to the fact that all the demands for grants in the budget need to be supported by the explanation of purpose by the government. Parliament, hence, according to the constitutional provisions, can decrease the amount asked for by the government or it may refuse to pass the whole budget altogether. The Parliament also exercises post-control on the budget through its committees which can also be termed as the accountability. The Parliament has control over the execution of the budget through executives because in Parliamentary System, the executive is a part of legislature.
- The budget acts as an index of performance of the government against which the performance of the government in the previous year can be evaluated in terms of achievement of goals and policies. This hence helps in fixing the responsibility at the time of general elections.
- It is an excellent tool of administrative control since the administrator knows at the start of each activity through proper budgeting and accounting as to how much resources he has in hand and hence he knows the maximum amount of resources that can be spent on a particular activity.
- The budget is an indicator of the total health of the economy in the current scenario. Hence it is the best instrument that can provide steering control to the overall development process of a country.
- It is well known that control over the Finances provides control over all other aspects of administration. For example, even the personnel policy of a government can be dictated by the controlling agency e. g. the Parliament, by refusing to provide extra money for the salary of the fresh recruits.
- Budget reflects one of the most important economic principles i. e. one should only according to the resources available in hand. Hence, budgeting helps to control the extravagance on the part of the executives. The very fear that somebody will be checking the accounts during audit stops him from misusing the money.
The Budget as an Instrument of Socio-Economic Policy
Directive Principles of State Policy given in the Indian Constitution provide broad outlines for investment in the area of social welfare activities. These objectives outlined in the Constitution are achieved through adjustment of the priorities and emphasis accorded to various heads and sub-heads in the budget. The budget is an important instrument of socio-economic policy in the following three ways:
- The pattern of spending envisaged in the budget reflects the priorities of the present day government. An analysis of these patterns over the years reveals the shift in the priorities of the government over the years. For example, a cut in the spending in the social welfare sector indicates that for the time being the social welfare is not the priority of the government.
- The Fiscal Policy declared in the budget indicates the pattern of taxation in the country. The taxation rates are an effective tool to achieve or curb some practices in the country. For example high rate of tax on a product e. g. cigarette indicates that the government wants to curb its consumption for the better health of the people. Similarly high rate of excise on liquor tends to limit its consumption without taking an extreme step like banning it which would deprive the Government of all the revenue that comes from liquor. Differential rates of taxation e. g. Progressive Taxation tends to protect small scale sector of the economy and tends to bring the Rich and the Poor of the economy closer in economic terms. On the other hand Tax exemption on something e. g. savings tends to enhance the savings which is then utilised by the Government for the socio-economic development of the country.
- At a time, when the budget is being discussed in the Parliament, important issues relating to administrative organisation and administrative relationships are raised. As a result often new administrative reorganisation is attempted by the Executives in order to dilute the resistance in the Parliament and to achieve faster socio-economic development of the country.
Budget as a Tool of Management
Budget is an excellent tool of administrative management. Budgeting is one of the seven activities in an organisation suggested by Gullick & Urwick as POSCORB. It is important to note that all the other six functions of the Management in an organisation came to a halt in the absence of finances and hence it can be said that all of them can be achieved partially or completely through Budgeting. For example planning is inherent in budgeting, as budget itself is an annual financial plan. Demand for more staff is reflected in the budget, as more amounts needs to be sanctioned for the fresh recruits to meet their salary bill and to meet the expenses which are consequent to the creation of new administrative institutions and fresh staff. Similarly co-ordination can be achieved through budgeting by having a system of centralised financing in the budget etc.
Budget also serves as an instrument of internal administrative control through three types of agencies –
- Executives. Executives control the overall policies of the department and hence the expenditure that is perceived to be unnecessary is curbed right at the time of budget formulation. Budget also acts as an instrument of co-ordination since it is the Head of the Department who disburses the money. The disbursement of the money only at a time when it is required helps avoid duplication and wastage, as well as it brings co-ordination between various parts of the department.
- Operating Agencies. Agencies operating the budget exercise control both at the time of budget preparation and budget execution. Head of the Department, who is also the disbursing officer of the department and the Financial Adviser of the Department are such officers who exercise financial control while the budget is in operation. Their role has been discussed in detail in the later part of this article.
- Finance Department. Finance Department, situated in the Ministry of Finance, is the third agency exercising internal control. It is the nodal agency that prepares most part of the budget, manages government finance and keeps a constant control over the finances of the government.
The external control on the financial affairs of the Government, which is important from the point of view of the management of the affairs of the Government comes in the form of 2 agencies – Comptroller and Auditor General and the Parliament. CAG audits the accounts of the Government and points out the instances of misappropriation of money. Important questions relating to administrative organisation/reorganisation are raised in his report which serves as an important tool of management. Similarly, the legislature enjoys the overall managerial control, as it not only sanctions the money, but also sanctions or rejects the policy of the government also.