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Public Budgeting

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The philosophy of public finance is based on raising funds for public purposes. The writer maintains that public finance may also be defined as a science because (1) it deals with a definite and limited field of human knowledge. (2) It admits of an orderly arrangement of its facts and principles, and contains many laws of general progress belonging exclusively to its own field; (3) it admits of the application of scientific methods of investigation; (4) it foresees as well as explains a certain class of phenomena; (5) it is generally, if not universally, so regarded. It is however, a secondary or dependent science. It is closely related to two other sciences, upon which it properly depends (Plehn, C.1996 para.1). One may initially think that the meaning of ‘public finance’ is perfectly clear, being money raised and spent by the state: raised from taxes and spent on services in promoting the public interest, particularly in terms of benefiting the poor. This ‘tax and spend’ model of public finance is, in fact, a severely distorted perception. It is distorted for three reasons:  Taxation is not the only source of public finance

Public finance is not spent only on public services or welfare payments

‘The public interest’ is conceptually vague and meaningless in practical terms (Cullis, J. and Jones, P. 1998 p.3).

A comprehensive definition of public finance would have to encompass the following characteristics:
it is money raised from a wide variety of sources by the state and its agencies including taxes, sales, fees, charges, borrowing, lotteries, donations and bequests, payments in kind and so on.

disbursed within the public sector, and often in the private and voluntary sectors.
to individuals, families, companies and service organizations. both at home and abroad.
spent in the form of welfare payments, subsidies, grants, wages and salaries, rents, insurance premiums, interest and amortization payments on public debt, international transfers, humanitarian aid, payments for construction projects, equipment and other inputs from private sector companies (Cullis, J. and Jones, P. 1998 p.3). Thus, public finance ‘comprises any revenues or expenditures passing through state budgets, derived from whatever source and however spent’. The essential point is that finance has to be accounted for within governmental budgets for it to qualify as public finance. Therefore, any revenues or expenditures not passing through governmental budgets cannot be defined as public finance (Cullis, J. and Jones, P. 1998 p.3)

The sources and uses of revenues are therefore not the defining features of public finance. Recent moves towards more ‘entrepreneurial government’, namely paying more attention to raising (rather than simply spending) money from a plurality of sources, can be accommodated within this definition of public finance. It matters not how the money is raised, whether from taxes, charges, license fees, lotteries or the other sources noted above. What matters is that, irrespective of their source, those revenues are recorded in local, regional, central or federal government accounts. Likewise, it does not matter how or on what those revenues are spent, expenditures are treated as public finance if and only if they pass through state budgets (Cullis, J. and Jones, P. 1998 p.3)

Contrast governmental accounting with nongovernmental accounting. While the purpose of a commercial business is to generate a profit for the benefit of its owners, governments exist for the well-being of citizens by providing public services whether or not the services are profitable undertakings. Since taxes and many other government revenues are not equivalent to sales, the excess of revenues over expenses cannot be interpreted as an effectiveness measure in the manner of business net income. Whereas the purpose of government operations differs greatly from commercial businesses, the purpose of governmental accounting is the same to provide information that is useful to stakeholders in making decisions. However, governments have vastly different sets of users of accounting information. Like businesses, governments have creditors who are interested in assessing the creditworthiness of the government. Citizens and businesses, both within the government’s jurisdiction and those considering relocation to the jurisdiction, are also stakeholders who rely on governmental reporting to make economic decisions.

In addition, governments receive resources from other governments and grantors who may require financial reports and audits as a condition of the grant. Since this diverse set of resource providers have varying interests, the information needs of one group may not meet the needs of another. The result is that governments report far more disaggregated information than commercial enterprises (Copley, P.A. and Engstrom, J.H 2007 p 3). Explain the relationship between budgeting and financial reporting in government Government budgets are expressions of public policy and often carry the authority of law, preventing public officials from spending outside their budgetary authority. The increased importance of budgets is reflected in government financial reports by a required report comparing budgeted and actual amounts (Copley, P.A. and Engstrom, J.H 2007 p 4). The Federal Accounting Standards Advisory Board (FASAB) was established to recommend accounting and financial reporting standards to the principals—the U.S. Office of Management and Budget, the U.S. Department of the Treasury, and the U.S. Government Accountability Office.

The FASAB has issued six Statements of Federal Financial Accounting Concepts (SFFACs) . These concepts apply to financial reporting for the federal government as a whole and for individual reporting agencies. SFFAC 1, Objectives of Federal Financial Reporting, outlines four objectives that should be followed in federal financial reporting. The first, budgetary integrity, indicates that financial reporting should demonstrate accountability with regard to the raising and expending of moneys in accord with the budgetary process and laws and regulations. The second, operating performance, suggests that financial reporting should enable evaluation of the service efforts, costs, and accomplishments of the reporting entity. The third, stewardship, reflects the concept that financial reporting should enable an assessment of the impact on the nation of the government’s operations and investments. Finally, the fourth, systems and controls, indicates that financial reporting should reveal whether financial systems and controls are adequate (Copley, P.A. and Engstrom, J.H 2007 p 4).

Governments have two levels of financial statement reporting. The first is the fund-basis financial statements. Fund-basis statements are presented for three categories of activities: governmental, proprietary, and fiduciary. While the fund-basis statements present an in-depth record of individual activities of the government, it is difficult for the financial statement user to pull this disaggregated information together and form an overall view of the government’s finances. For that reason, governments are required to present government-wide financial statements. The government-wide statements combine the governmental and business type activities of the government for the purpose of presenting an overall picture of the financial position and results of operations of the government. An important feature of the government-wide financial statements is that they are prepared using a common measurement focus and basis of accounting (Copley, P.A. and Engstrom, J.H 2007 p 12).


Copley, P.A. and Engstrom, J.H (2007) Essentials of Accounting for Governmental and Not-for-Profit Organizations, 8/e McGraw-Hill

Cullis, J. and Jones, P. (1998) Public Finance and Public Choice: Analytical Perspectives (second edition) (Maidenhead: McGraw-Hill).
Plehn, Carl. (1996). Introduction to Public Finances. Norwood Publication Retrieved November 11, 2012 from http://chestofbooks.com/finance/Carl-Copping-Plehn/Introduction-To-Public-Finance/index.html

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