Budgeting Techniques | Economy for UPSC 2024 (Pre & Mains) PDF Download

 Page 1


 
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Budgeting Techniques 
 
The Line Item Budget 
1. Here individual items are grouped by cost centers or departments.  
2. It also shows the comparison between the data for the past budgeting 
periods and estimated figures for the current period. 
3. These line items include detailed ceilings on the amount a unit would spend 
on salaries, traveling allowances, office expenses, etc. The focus is on 
ensuring that the agencies or units do not exceed the ceilings prescribed.  
4. A central authority or the Ministry of Finance keeps a watch on the spending 
of various units to ensure that the ceilings are not violated. 
 
Performance Budgeting 
1. Concept 
1. A Performance Budget gives an indication of how the funds spent are 
expected to give outputs and ultimately the outcomes.  
2. A performance budget reflects the goals of the organization and spells 
out performance targets.  
3. These targets are sought to be achieved through a strategy(s). 
4. Unit costs are associated with the strategy and allocations are 
accordingly made.  
 
2. Issues in implementation 
1. It is difficult to arrive at the unit costs while relating them to the 
objective in social programmes. 
2. Its scope is limited to plan programmes and hence utility severely 
curtailed.  
3. Performance budgets were presented on a supplementary basis. The 
departments continued the practice of preparing performance budgets 
annually in addition to their regular budget. The preparation of 
performance budget has become a routine affair without any discernible 
influence on expenditure management. 
4. It is not sufficient to have the performance budget document as a 
supplementary one, as in that case it will not have any impact 
whatsoever on the existing system. For one, the performance budget is 
being evolved to overcome the deficiencies in the existing budgetary 
process. The idea of a supplementary document would inevitably mean 
the continuation of the existing process.  
 
 
Page 2


 
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Budgeting Techniques 
 
The Line Item Budget 
1. Here individual items are grouped by cost centers or departments.  
2. It also shows the comparison between the data for the past budgeting 
periods and estimated figures for the current period. 
3. These line items include detailed ceilings on the amount a unit would spend 
on salaries, traveling allowances, office expenses, etc. The focus is on 
ensuring that the agencies or units do not exceed the ceilings prescribed.  
4. A central authority or the Ministry of Finance keeps a watch on the spending 
of various units to ensure that the ceilings are not violated. 
 
Performance Budgeting 
1. Concept 
1. A Performance Budget gives an indication of how the funds spent are 
expected to give outputs and ultimately the outcomes.  
2. A performance budget reflects the goals of the organization and spells 
out performance targets.  
3. These targets are sought to be achieved through a strategy(s). 
4. Unit costs are associated with the strategy and allocations are 
accordingly made.  
 
2. Issues in implementation 
1. It is difficult to arrive at the unit costs while relating them to the 
objective in social programmes. 
2. Its scope is limited to plan programmes and hence utility severely 
curtailed.  
3. Performance budgets were presented on a supplementary basis. The 
departments continued the practice of preparing performance budgets 
annually in addition to their regular budget. The preparation of 
performance budget has become a routine affair without any discernible 
influence on expenditure management. 
4. It is not sufficient to have the performance budget document as a 
supplementary one, as in that case it will not have any impact 
whatsoever on the existing system. For one, the performance budget is 
being evolved to overcome the deficiencies in the existing budgetary 
process. The idea of a supplementary document would inevitably mean 
the continuation of the existing process.  
 
 
 
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www.SleepyClasses.com 
 
Zero-based Budgeting (ZBB) 
1. Concept 
1. Unlike the earlier systems where only incremental changes were made 
in the allocation, under zero-based budgeting every activity is evaluated 
each time a budget is made and only if it is established that the activity is 
necessary, are funds allocated to it.  
2. The basic purpose of ZBB is phasing out of programmes/ activities which 
do not have relevance anymore.  
2. Issues in implementation 
1. Because of the efforts involved in preparing a zero-based budget and 
institutional resistance related to personnel issues, no government ever 
implemented a full zero-based budget. 
2. Ideally, prioritisation should be done among all items of expenditure 
whether on-going or new, Non-Plan or Plan. But the system in which 
Plan and Non-Plan expenditure are treated differently and assigned 
varying priorities, ZBB would have to be applied separately to Plan and 
Non-Plan expenditures and hence efficacy limited.  
 
Outcome Budget 
1. Performance budgets lack of clear estimation of unit costs and inadequate 
target-setting. Hence there was a need for tracking ‘outcomes’ and not the 
‘outputs’.  
2. However, the outcome budget experience shows that in many cases the 
measurement of outputs and outcomes seems to have been mixed up. 
Measuring outcomes is difficult given the fact that they could be influenced 
by many other extraneous factors.  
3. It is also seen that in some cases Departments have merely reproduced the 
outputs targets as outcomes and, in many other places, general intents of the 
programmes are described as outcomes.  
4. Outcome Budget cannot be prepared for all Ministries/Departments simply 
by way of declaration.  
 
Programme Budgeting and Result Oriented Budgets 
1. The basic building block of the system was classification of expenditure into 
programmes. Programmes with common objectives are considered 
together. 
2. The question is how well have the reforms worked in introducing result-
orientation into the budgeting process? Not well for the following three 
reasons:  
Page 3


 
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Budgeting Techniques 
 
The Line Item Budget 
1. Here individual items are grouped by cost centers or departments.  
2. It also shows the comparison between the data for the past budgeting 
periods and estimated figures for the current period. 
3. These line items include detailed ceilings on the amount a unit would spend 
on salaries, traveling allowances, office expenses, etc. The focus is on 
ensuring that the agencies or units do not exceed the ceilings prescribed.  
4. A central authority or the Ministry of Finance keeps a watch on the spending 
of various units to ensure that the ceilings are not violated. 
 
Performance Budgeting 
1. Concept 
1. A Performance Budget gives an indication of how the funds spent are 
expected to give outputs and ultimately the outcomes.  
2. A performance budget reflects the goals of the organization and spells 
out performance targets.  
3. These targets are sought to be achieved through a strategy(s). 
4. Unit costs are associated with the strategy and allocations are 
accordingly made.  
 
2. Issues in implementation 
1. It is difficult to arrive at the unit costs while relating them to the 
objective in social programmes. 
2. Its scope is limited to plan programmes and hence utility severely 
curtailed.  
3. Performance budgets were presented on a supplementary basis. The 
departments continued the practice of preparing performance budgets 
annually in addition to their regular budget. The preparation of 
performance budget has become a routine affair without any discernible 
influence on expenditure management. 
4. It is not sufficient to have the performance budget document as a 
supplementary one, as in that case it will not have any impact 
whatsoever on the existing system. For one, the performance budget is 
being evolved to overcome the deficiencies in the existing budgetary 
process. The idea of a supplementary document would inevitably mean 
the continuation of the existing process.  
 
 
 
www.YouTube.com/SleepyClasses 
www.SleepyClasses.com 
 
Zero-based Budgeting (ZBB) 
1. Concept 
1. Unlike the earlier systems where only incremental changes were made 
in the allocation, under zero-based budgeting every activity is evaluated 
each time a budget is made and only if it is established that the activity is 
necessary, are funds allocated to it.  
2. The basic purpose of ZBB is phasing out of programmes/ activities which 
do not have relevance anymore.  
2. Issues in implementation 
1. Because of the efforts involved in preparing a zero-based budget and 
institutional resistance related to personnel issues, no government ever 
implemented a full zero-based budget. 
2. Ideally, prioritisation should be done among all items of expenditure 
whether on-going or new, Non-Plan or Plan. But the system in which 
Plan and Non-Plan expenditure are treated differently and assigned 
varying priorities, ZBB would have to be applied separately to Plan and 
Non-Plan expenditures and hence efficacy limited.  
 
Outcome Budget 
1. Performance budgets lack of clear estimation of unit costs and inadequate 
target-setting. Hence there was a need for tracking ‘outcomes’ and not the 
‘outputs’.  
2. However, the outcome budget experience shows that in many cases the 
measurement of outputs and outcomes seems to have been mixed up. 
Measuring outcomes is difficult given the fact that they could be influenced 
by many other extraneous factors.  
3. It is also seen that in some cases Departments have merely reproduced the 
outputs targets as outcomes and, in many other places, general intents of the 
programmes are described as outcomes.  
4. Outcome Budget cannot be prepared for all Ministries/Departments simply 
by way of declaration.  
 
Programme Budgeting and Result Oriented Budgets 
1. The basic building block of the system was classification of expenditure into 
programmes. Programmes with common objectives are considered 
together. 
2. The question is how well have the reforms worked in introducing result-
orientation into the budgeting process? Not well for the following three 
reasons:  
 
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1. Firstly, even though performance targets are being developed, they are 
actually kept separate from the budget. 
2. When they are included in the budget, often outputs are confused with 
inputs and outcomes remain unconsidered. Targets / objectives are not 
identified effectively. 
3. Thirdly, and the most important point is that even when effective targets 
are provided, the budgets fail to specify who should be accountable for 
the results. 
3. So, programme budgeting by itself may not bring the outcome 
orientation. Unless there are institutional reforms, like bringing in the 
‘agency’ concept, where the heads of the agencies are made accountable 
for delivery of services in an efficient and effective manner, the reform in 
budgeting process would be difficult to implement. 
 
 
Bottom up budgeting 
1. Budgeting has traditionally operated on a bottom-up principle. This 
means that all agencies and all ministries send requests for funding to 
the finance ministry.  
2. These requests greatly exceed what they realistically believe they will 
get.  
3. Budgeting then consists of the Finance Ministry negotiating with these 
ministries and agencies until some common point is found.  
Disadvantages of bottom up budgeting  
1. It is very time consuming and it is essentially a game; all participants 
know that the initial requests are not realistic.  
2. This process has an inherent bias for increasing expenditures; all new 
programmes or expansions are financed by new requests; there is no 
system for reallocation within spending ministries.  
3. Difficult to reflect political priorities in this system as the budget 
“emerges” from the bottom at the end of this process.  
 
Top down budgeting 
1. This has been of great assistance in achieving fiscal consolidation.  
2. The starting point is the government making a binding political decision 
as to the total level of expenditure and then dividing them among 
individual spending ministries.  
3. This decision is made possible by the medium-term expenditure 
frameworks which contain baseline expenditure information, i.e. what 
the budget would look like if no new policy decisions were made.  
Page 4


 
www.YouTube.com/SleepyClasses 
www.SleepyClasses.com 
 
Budgeting Techniques 
 
The Line Item Budget 
1. Here individual items are grouped by cost centers or departments.  
2. It also shows the comparison between the data for the past budgeting 
periods and estimated figures for the current period. 
3. These line items include detailed ceilings on the amount a unit would spend 
on salaries, traveling allowances, office expenses, etc. The focus is on 
ensuring that the agencies or units do not exceed the ceilings prescribed.  
4. A central authority or the Ministry of Finance keeps a watch on the spending 
of various units to ensure that the ceilings are not violated. 
 
Performance Budgeting 
1. Concept 
1. A Performance Budget gives an indication of how the funds spent are 
expected to give outputs and ultimately the outcomes.  
2. A performance budget reflects the goals of the organization and spells 
out performance targets.  
3. These targets are sought to be achieved through a strategy(s). 
4. Unit costs are associated with the strategy and allocations are 
accordingly made.  
 
2. Issues in implementation 
1. It is difficult to arrive at the unit costs while relating them to the 
objective in social programmes. 
2. Its scope is limited to plan programmes and hence utility severely 
curtailed.  
3. Performance budgets were presented on a supplementary basis. The 
departments continued the practice of preparing performance budgets 
annually in addition to their regular budget. The preparation of 
performance budget has become a routine affair without any discernible 
influence on expenditure management. 
4. It is not sufficient to have the performance budget document as a 
supplementary one, as in that case it will not have any impact 
whatsoever on the existing system. For one, the performance budget is 
being evolved to overcome the deficiencies in the existing budgetary 
process. The idea of a supplementary document would inevitably mean 
the continuation of the existing process.  
 
 
 
www.YouTube.com/SleepyClasses 
www.SleepyClasses.com 
 
Zero-based Budgeting (ZBB) 
1. Concept 
1. Unlike the earlier systems where only incremental changes were made 
in the allocation, under zero-based budgeting every activity is evaluated 
each time a budget is made and only if it is established that the activity is 
necessary, are funds allocated to it.  
2. The basic purpose of ZBB is phasing out of programmes/ activities which 
do not have relevance anymore.  
2. Issues in implementation 
1. Because of the efforts involved in preparing a zero-based budget and 
institutional resistance related to personnel issues, no government ever 
implemented a full zero-based budget. 
2. Ideally, prioritisation should be done among all items of expenditure 
whether on-going or new, Non-Plan or Plan. But the system in which 
Plan and Non-Plan expenditure are treated differently and assigned 
varying priorities, ZBB would have to be applied separately to Plan and 
Non-Plan expenditures and hence efficacy limited.  
 
Outcome Budget 
1. Performance budgets lack of clear estimation of unit costs and inadequate 
target-setting. Hence there was a need for tracking ‘outcomes’ and not the 
‘outputs’.  
2. However, the outcome budget experience shows that in many cases the 
measurement of outputs and outcomes seems to have been mixed up. 
Measuring outcomes is difficult given the fact that they could be influenced 
by many other extraneous factors.  
3. It is also seen that in some cases Departments have merely reproduced the 
outputs targets as outcomes and, in many other places, general intents of the 
programmes are described as outcomes.  
4. Outcome Budget cannot be prepared for all Ministries/Departments simply 
by way of declaration.  
 
Programme Budgeting and Result Oriented Budgets 
1. The basic building block of the system was classification of expenditure into 
programmes. Programmes with common objectives are considered 
together. 
2. The question is how well have the reforms worked in introducing result-
orientation into the budgeting process? Not well for the following three 
reasons:  
 
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www.SleepyClasses.com 
 
1. Firstly, even though performance targets are being developed, they are 
actually kept separate from the budget. 
2. When they are included in the budget, often outputs are confused with 
inputs and outcomes remain unconsidered. Targets / objectives are not 
identified effectively. 
3. Thirdly, and the most important point is that even when effective targets 
are provided, the budgets fail to specify who should be accountable for 
the results. 
3. So, programme budgeting by itself may not bring the outcome 
orientation. Unless there are institutional reforms, like bringing in the 
‘agency’ concept, where the heads of the agencies are made accountable 
for delivery of services in an efficient and effective manner, the reform in 
budgeting process would be difficult to implement. 
 
 
Bottom up budgeting 
1. Budgeting has traditionally operated on a bottom-up principle. This 
means that all agencies and all ministries send requests for funding to 
the finance ministry.  
2. These requests greatly exceed what they realistically believe they will 
get.  
3. Budgeting then consists of the Finance Ministry negotiating with these 
ministries and agencies until some common point is found.  
Disadvantages of bottom up budgeting  
1. It is very time consuming and it is essentially a game; all participants 
know that the initial requests are not realistic.  
2. This process has an inherent bias for increasing expenditures; all new 
programmes or expansions are financed by new requests; there is no 
system for reallocation within spending ministries.  
3. Difficult to reflect political priorities in this system as the budget 
“emerges” from the bottom at the end of this process.  
 
Top down budgeting 
1. This has been of great assistance in achieving fiscal consolidation.  
2. The starting point is the government making a binding political decision 
as to the total level of expenditure and then dividing them among 
individual spending ministries.  
3. This decision is made possible by the medium-term expenditure 
frameworks which contain baseline expenditure information, i.e. what 
the budget would look like if no new policy decisions were made.  
 
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www.SleepyClasses.com 
 
4. The political decision is whether to increase expenditures for a high-
priority area, for example education, and to reduce expenditures, for 
example defence programs.  
5. Once this decision is taken, the Finance Ministry largely withdraws from 
the details of budgetary allocations for each ministry. The Finance 
Ministry concerns itself only with the level of aggregate expenditure for 
each ministry; not the internal allocations.  
6. Each minister becomes his own Finance Minister. Each ministry has a 
total amount and it can freely reallocate that money among its various 
programmes.  
Advantages 
1. It serves to hamper creeping increases in expenditures as new 
policies are funded by reallocations within the ministry.  
2. It creates ownership in the respective ministries.  
3. Decisions are also better informed as spending ministries are in the 
best position to judge the relative merits of their programmes.