INTRODUCTION

The word budget was originally derived from French

word “bougette” which means “small bag” or the
public purse which serves as a container for revenues
and expenditures of the state.
 Budget is the most important tool for the
government to manage the public resources of the
nation economy.
 It serves as an instrument to allocate the scarce
resources among the different computing un limited
needs of the society.
 It is document containing planned program which
planned a head to reach objectives and targets.
 It is also a practical agenda for an action of the
future.
Government budgeting should contain :
❖ Information about the type and amount of proposed
expenditure
❖ the purpose for which they made and
❖ the proposal means of financing them.
 Budget preparation and allocation techniques are influenced
by the economic, political and social condition of the
country and referral services of the existing government.
 Budgeting has no uniformity it differs from countries to
countries. In most countries budgeting system was
established first at the national level and spread to the
provisional as the same time different countries began
budgeting system earlier whereas the other practices latter.
 Is a plan for the future to reach objectives and
targets
 Is a statement of proper allocation of resources to
public programs
 To relate major decision to the state of the national
economy
 Long term economic growth
 To facilitate legislative control over the various
phases of the budgetary process.(control of the
legislative branch over the executive branch)
 Equitable distribution of income & wealth
 Securing economic stability and full employment
 Contain information about the type and amount of
proposed expenditure, the purpose for which they
made, and the proposed means of financing them.
 The structure of governmental budget constitutes the
formats in which the budget data are organized and
classified for different purposes.
 The governmental budget in Ethiopia is classified in
to:-
❖ Revenue Budget &
❖ Expenditure Budget
1. Revenue Budget:-is usually structured in to three major
headings:
✓Ordinary revenue
✓External assistance &
✓Capital revenue
Hence, the funds expected from these three sources
are proclaimed as the annual revenue budget for the
country.
The revenue budget is prepared by the ministry of
finance (MOF) for the federal government and by
finance bureaus for regional governments.
a.Ordinary Revenue:-consists of both tax & non tax
revenues.
The direct tax of the ordinary revenue consists of:
◦ Personal income tax
◦ Rental income tax
◦ Business income tax
◦ Tax on dividend & chance winning
◦ Land use fee & lease
 II. The indirect tax consists of:
 Excise & sales tax and locally manufactured
goods, services, sales tax stamps on duty.
 Tax on foreign trade includes customs duty &
excise tax on imported goods & export tax on
coffee.
NB- The revenue budget for the federal government of
Ethiopia is prepared by the MOFED & for the regional
governments by the respective regional finance bureaus.
B. External Assistance:- include cash grants
 These are grants from multilateral &
bilateral donors for different structural adjust
programs; and technical assistance in cash
and material form.
C. Capital Revenue
 These could be from domestic (sales of
movable properties and collection of loans),
external loan from multilateral & bilateral
creditor mostly for capital projects, & grant
in the form of counter part fund.
Government expenditure for administration &
developmental activities are handled through the
expenditure budget.
These expenditure are categorized in to:
a. Recurrent Expenditure:-is structured by implementing
agencies (public bodies) under four functional categories:-
I. Administrative & general services includes such activities as:
➢ Council of representatives And ministers
➢ Ministers
➢ Defense & so on
II. The economic service includes:
➢ Agricultural
➢ Industrial &
➢ Service sector activities
III. The social service includes such activities:
➢ Health
➢ Education &
➢ Culture
IV. Other expenditure includes:-
➢ Pension payments
➢ Repayment of public debts
➢ provision of unforeseen expenses & similar items.
B. Capital budget expenditure
◦ Is usually made on acquisition &
improvement in to fixed asset for consultant
services.
◦ it is grouped under three headings:-
1. Economic development
2. social development &
3. General development
1
1. Economic development includes:-
◦ Production activities in the agricultural &
industrial sector
◦ Economic infrastructure in mining
◦ Commerce & communication
2. Social development includes:-
◦ Education
◦ Health
◦ Urban development & welfare
3. General development includes:-
◦ General governmental activities
 Note – the capital budget is usually financed by
external borrowing & grants.
1.Capital vs. Current budget
 capital budgets, obviously, deals with the
acquisition of fixed assets.
 The legislature will likely approve the
acquisitions one year at a time
 Current budgets, of course, are concerned
with the current year’s operating
expenditures.
 sometimes called recurring expenditures.
 similar sorts of expenditures are needed year
after year.
2.Tentative vs. enacted budget
 The tentative budget is still in process.
 It has not yet been officially approved.
 An enacted budget has been officially
approved and is a binding legal document.
3. General vs. Special budget
 A budget prepared for the General, Special
Revenue, and Debit Service Funds referred to
as general budget.
 A budget prepared for any other fund
referred to as special budget.
4. Fixed vs. Flexible
 A fixed budget is for a fixed total dollar (or Birr)
amount and cannot be exceeded because of
changes in demand for governmental goods or
services.
 A flexible budget fixes the cost per unit of goods
and services.
 If more units of goods and services are desired
because of a change in circumstance or need, the
dollar amount of a flexible budget can increase.
 Flexible budgets are more appropriate for
enterprise and internal service funds.
5. Executive vs. legislative budget
 Budgets are sometimes categorized by
preparer.
 Budgets prepared by executive and legislative
is called executive and legislative budget
respectively.
 On the other hand a budget prepared by a
joint legislative-executive committee is
referred to as joint budget.
1. Incremental or object of expenditure approach
 The object of expenditure or incremental
approach is also known as the traditional
approach.
 Incremental budgets take the previous year’s
budget as a base and add or subtract a
percentage to give this year’s budget.
 The budget for each period is based on the
budget for the previous period, adjusting the
previous period’s budget to take account of any
expected changes.
 The changes may be the annual rate of inflation,
or specific adjustments that relate to expected
salary increase.
 This approach is unlikely to result in the
optimum allocation of resources.
 It tends to perpetuate inefficient and
unnecessary practices.
 It may result unnecessary expenditure built into
the budget.
 Incremental budget is simple to apply .
 This approach is low cost but does not provide
information about performance.
2. Zero-Base-Budgeting (ZBB) approach
 ZBB is one method of continually evaluating
programs and services.
 The primary idea of ZBB is that each program
must justify its existence every year.
 No program is assumed to be continuing from
one year to the next.
 In this approach, the starting point for the
budget each year is zero.
 First the program itself must be justified, then
different ways of carrying out the program are
examined and the best is chosen.
3. Performance budgeting approach
 It is a plan for relating resource inputs to the
efficient production of outputs.
 It focuses on the relation between input and
out put of each organizational unit rather
than programs.
4. Planning-Programming-budgeting (PPB)
 PPB emphasizes broad policy goals, strategies
and objectives, rather than details of spending.
 It considers long-range plans.
 In that long-range plan both ultimate goals and
objectives must be explicitly stated.
 After formulating the long-range plans, it then
evaluates costs and benefits of different ways of
meeting the goals and objectives.
 It also emphasized the government’s overall
program, rather than a specific department.
 involve the principles for performance-based
budgeting
 budgets are considered an essential tool for
financial management in the public sector.
 budgets should be prepared with a clear
understanding of objectives and outputs.
 Budgets must align with the overall objectives
of the entity
 Budgets support transparency and accountability in
public sector financial management.
 Budgetary reporting should include a
comparison of the approved budget with
actual expenditures
 Outturn reporting refers to the reporting of
actual financial performance against the
budget.
 entities should report on both the financial results
and the effectiveness of achieving intended
outcomes.
 Budgeting from the initial stage of forecasting the
annual revenues and expenditures, to the final stages
of approval of the annual by the council of people’s
representatives, passes through a sequential and an
iterative process.
 This budgeting process:-
 Preparation of the macro-economic & fiscal frame
work
 Revenue forecast and determination of expenditure
budget ceiling.
 Allocation of expenditure budget between federal &
regional governments.
 Allocation of federal government expenditure
budget between recurrent & capital budget.
 Budget call & ceiling.
 Budget review by MOF & MOFED.
 Budget hearing and defense.
 Review and recommendation.
 Submission of the budget to the council of ministers.
 Submission of the budget to the council of people’s
representatives.
 Notification and publication of the budget and
 Allocation
 The budget process thus include all these stages, which
obviously are sequential (one after the other) & iterative