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 Public Sector Budgeting | Government and Public Sector Budgeting

 Public Sector Budgeting | Government and Public Sector Budgeting

 Public Sector Budgeting | Government and Public Sector Budgeting

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Public Sector Budgeting

Session 1: Meaning and objectives of budgeting in the Public Sector (PS)
Session 2: Budget cycle and approaches to budgeting in the public sector
Session 3: Regulatory framework of Budgeting in Ghana. For instance,

IPSASs 24.
Session 4: The Content of a National budget.
Session 5: Budgeting in the Central Government.
Session 6: Budgeting in the Local Government.

READ ALSO: Sources of Government Revenue in Ghana

Dear Learner, you are welcome to Unit 2. In this unit, we share be
looking at public sector budgeting. One of the tools for control in
any organisation is budgeting which is a financial projection of the organisation’s future
activities. The public sector also uses the budget for financial control and their budgeting
process is similar in many respects to that of the private sector. So in this unit, we shall
be concentrating on the budgeting process of the public sector. You may now read on…

Unit Objectives

At the end of this unit, you should be able to:
1. Explain public sector budgeting and its importance.
2. Identify and explain the various approaches to public sector budgeting.
3. Identify and explain the relevant regulations that govern public sector budgeting
4. Discuss the public sector budgeting process for local and central governments in


This is a blank sheet for your short note on:
• Issues that are not clear: and
• Difficult topics if any



READ ALSO: Expenditure-public sector accounting in Ghana

In this session, we begin our discussion on public sector budgeting with a
look at the meaning and objectives for the preparation of such budgets. As
indicated earlier, budgeting is the same irrespective of the sector of the economy
engaged in it. So your knowledge in budgeting principles for the private sector would
be very much needed. You may have to revise them if you have forgotten them. Now,
you can read on….


At the end of this session, you should be able to:
a) Define and explain public sector budgeting
b) Identify and discuss the importance of preparing public sector budgets.
Now, you can read on…

Definition and Meaning of Public Sector Budgeting

Public sectors have missions which define the reason for their existence. Based on these
missions, the public sectors develop goals and specific objectives, which when achieved would lead to the achievement of the mission of the sector.

Achievement of the objectives for any period requires the commitment of resources that are properly managed. Meanwhile, resources are not in abundant supply. A budget is a control tool that can enable managers of organisations to allocate scarce resources and ensure its judicious application.

While a budget is the outcome of the budgetary process, budgeting generally is a translation of the plans of an organization into financial
projections that facilitate planning, resource allocation, and controlling of activities.

In order to secure the desirable outcome from budgets, they should have the qualities being specific, measurable, motivating, and support of all members that would be involved in their development, implementation and evaluation.

Budgeting is difficult in the public sector because of the difficulty in defining quantifiable budget objectives and outputs. Public sector budgeting is the process by which the public sector goes through in the preparation of financial plans that facilitate the implementation of strategies for achieving the objectives of an entity in a specified

Public sector budgeting could therefore be taken as the process of developing financial plans for central government, MDAs and MMDAs. The budget generally would cover the various sources and application of state funds.


It would include all the taxes that the state plans to collect, the total amount of grants envisaged to be received, loans that would be contracted for a period, compensation for all public sector workers, goods and services to be acquired, assets to be bought, etc. So even though budgeting in


the public sector is similar to that of the private sector, it is a complex activity for the public sector given its size relative to the private sector.
The preparation of the public sector budget is the responsibility of the Minister of Finance.

The Minister is assisted by the Director of Budget who is responsible for the
central budget agency (CBA) of the Ministry. The responsibility of these state officers and agency with respect to the preparation of budgets for the state would be discussed in the subsequent sessions.

Now, we want to turn our attention to the features of public sector budgets

Features of Public Sector Budgets

The following are the disguising characteristics of public sector budgets

Budget Objective: the purpose for which the budget is being prepared must be clearly identified and should inform the preparation of the budget. Public sector budget objectives are driven by national interest rather than the profit motive.

The general objective should be to ensure the socio-economic development of the state. It should reflect the medium-term (3 to 5 years) developmental agenda of the state.

Budget Period: Budgets can be prepared for any period (days, weeks, months, a year). Generally, public sector budgets are read for one fiscal year. The introduction of the medium-term expenditure framework (MTEF) means that each year’s budget must be supported with a three-year rolling plan outlining the general expenditure framework for the ministry, department or agency of the government.

Budget Presentation: Public sector budgets may be prepared based on sectors within the public sectors which are then consolidated into the main budget. Sometimes, each sector is supposed to organize the budgets according to the programmes that the sector plans to
undertake for the ensuing period.

For instance in Ghana, the budgets may be organised according to the MDAs or MMDAs that the budget relates and at the same time each MDA or MMDA is required to organize its budget according to the programmes that
would lead to the budget.


The commission on human rights and administrative justice
(CHRAJ) has management and administration, promote and protect fundamental human rights, administrative justice and anti-corruption as their key programmes for the 2018 fiscal year.

Supplementary/review budgets: Public sector budgets are subjected to a review in the course of the year. Where necessary a supplementary budget may be presented to revise the initial budget to factor in adjustments in revenue targets, revision in macroeconomic assumptions and adjustments to expenditure budgets.

Public Involvement: Public sector budgets involve the views of the public in its preparation through the use of a bottom-up approach, the administration of public expenditure survey and budget hearing (A meeting often open to the public, where individuals can comment or ask questions about a proposed budget).

Budget regulations: Budgeting in the public sector is highly regulated. In Ghana, the constitution, public financial management Act and IPSAS 24 regulates the preparation of public sector budgets. These laws cover all public sector institutions in Ghana. Private sector budgets are firm-specific. Also, as at 2018, there is no existing an international standard that regulates private sector budgeting.


Benefits of Public Sector Budgeting

Communication of government policies and programmes: the managers of the state inform the public and all stakeholders through the budget prepared. For instance, the 2017 budget of Ghana made it clear that the state was going to roll out the free Senior High School Policy of government as well as other programmes.

Planning for government policies and programmes: Public sector budget instils the culture of medium-term planning in the public sector through the medium-term expenditure framework. All annual budgets must be accompanied by at least a three-year broad expenditure framework.

Allocation of a scarce resource: the nation’s scarce resources will be properly allocated through a public sector budget. Given the size of the public sector, budgeting contributes greatly to making sure that resources are fairly and equitably distributed to the various MDAs and MMDAs.

Accountability and Transparency: Ensuring accountability and transparency in the appropriation of government funds is achieved through budgeting for the public sector. The public sector budgets are widely distributed and discussed.

Several versions of it including the citizen’s budgets in some major local dialects open up the public financing system for public scrutiny. Based on the budget, the public is able to assess whether
manages of state funds plan to use state resources judiciously and assess at the end of the period whether the funds were actually used for its purpose.

Controlling cost: Public sector budgets are used as the basis for controlling expenditures within budgets. The various levels of authorization for public budgets and public spending as well as the establishment of cost constraints facilitate public sector cost control.

Importance of Public Sector Budgeting in the Public Sector 

The basis for performance measurement: Budgets are bases for assessing how well managers of state resources have been able to operate within the confines of plans or how they have achieved state objectives with the allocated resources.

Motivation: Budgets motivate public sector workers and the private sector to contribute their best towards the achievement of state objectives. Well communicated state objectives should energise the populace to contribute their best towards the development of the nation.

Fulfilling relevant regulations: Public sector budgeting enables the managers of the state to fulfil their regulatory requirements. It shows proof that the required laws on budgeting have been followed by the managers of state resources.





Types of Public Sector Budgeting

Welcome, Dear Learner. We believe you have refreshed your minds on
the basics of budgeting as well as the importance of budgeting with
particular reference to the public sector. Remember that there are several ways of preparing a budget.


Some budgets are prepared from scratch while others are built on previous budgets. Furthermore, there are others that are organised according to activities and programmes. These will be our concentration in this session.
By the end of this session, you should be able to:
a) Explain the various stages of the budgeting cycle for the public sector.
b) Discuss the various approaches to preparing public sector budgets.

Now, you can read on…
Budget format and Budget Approaches


Budget formats may be line item budgeting or programme based budgeting while
budget approaches may be incremental, zero based , performance based and activity

Line item Budgets

A budget prepared by grouping individual financial statement items by cost centres or departments. In the process of its preparation, the organization identifies the various sources of revenue to fund the various expenditure sources for the organization without clustering these revenue sources and expenditures according to activities or programmes.

Once these revenue and expenditure sources are identified, they used consistently. So line item budgets are mostly prepared on incremental bases, i.e. by adjusting existing line expenditures by the expected increases in the budget period, needless to say, the first line budget for an organisation would be prepared using zero-based budgeting approach.

Let us consider an example of a line item budget
In the budget the government agency considers its expenditure lines to include compensation for employees, goods and services and assets. The budgets are prepared based on these expenditure lines.

Table 2.1 presents an example of a line item budget.


Table 2.1: Hypothetical Example of Line Item Budget for KKBA District







Goods and Services


Travelling and Transport



Utility Services



Telephone Services






Maintenance of Vehicles



Maintenance of Capital Assets



Staff Training and Development





Land and Building





Advantages of Line Budgets

  1. Relatively easy to prepare. Since the process involves consolidating the itemized revenue and expenditure sources of each unit within an organization, preparation of line item budget is relatively easy for units as well as the entire organization
  2. Easy to justify budgets. Because it is mostly based on previous years
  3. Identification of revenue and expenditure sources: Line item budgets identify the various sources of revenue and expenditure that an organization earns or incur without linking them to any projects or programmes. This enables the organization to identify their key funding and expenditure sources, the amount involved in them and how to manage these sources
  4. Control over income and expenditure: since revenue and expenditure sources and amounts can be easily identified, assessment of the sufficiency of revenue for expenditure can be done relatively easily for control purposes.


  1. it is difficult to assess budget performance: Line item budgets match revenue with expenditure without classifying the expenditures and revenues according to programmes/projects to assess the performance of the budget in achieving the outputs of those programmes/ projects.

For instance, an increase in expenditure may be justified because of a compensating increase in revenue or improvement in other performance indicators. Performance-based and zero-based budgeting
could be useful in addressing these defects in line budgets

2. Possible inefficiencies when prepared on an incremental basis. Because
incremental budgets adjust the previous year’s budget when line item budgets are incremental in nature they allow inefficiencies in previous years to be rolled over to subsequent periods.

Zero-based budgeting could help the organization to overcome this defect.

3. Sub-optimal spending. Managers may spend amounts in budgets when they could have been saved for fear of having their budgets reduced for subsequent years if currently approved budgets levels are not spent. This normally happens to get to the end of the fiscal year.

Activity Based Budgeting (ABB)

CIMA (2003) official terminology describes activity-based budgeting as a method of budgeting based on activity framework, using cost driver data in the budget setting and variance feedback processes. It is a Budgeting technique where individual activities within the organisation is assessed in terms of their contribution to the achievement of the organisation’s objectives.

In this form of budgeting, the revenues generated by an activity undertaken by a unit in an organization are assigned directly to that unit while expenditures incurred are analyzed to identify the activities that lead to that cost so that the assignment of costs would be based on those cost drivers.

An organization that uses an ABB needs to: identify the various activities that lead to cost; accumulate costs into cost pools (put
together similar cost); find out the events that lead cost to either increase or decrease(cost driver) and assign cost on the; calculate the cost per cost driver and assign cost on the basis of the cost drivers.


  1. It enables control to be exercised at the exact unit that actually incurred the cost. Activities and they’re associated are placed directly under the responsibility of the unit that incurred it so control can be easily and effectively administered to achieve the budget goals.
  2. ABB ensures efficiency because justification should be offered for incurring certain activities and in certain magnitudes and not on previous levels of certain functions.
  3.  It is useful to organisations that want to use low-cost leadership strategy to achieve competitive advantage. Since costs are anaylised into activities, it is easier to eliminate non-value adding activities and bottlenecks which then help the organization to perform better than others, in terms of low cost.


  1. It is expensive to prepare activity-based budgets because it consumes a lot of time and requires resources to analyse costs into activities.
  2. It is a complex budget which makes preparation and administration cumbersome.
Programme based budgeting (PBB)

The budgets are prepared from the point of view of specific programmes that the organization or its units plan to undertake in a specific period and not on the various expenditure lines (not grouped into programmes).

Each programme would contain specific line items that it purports to generate revenue from and/or spend on. When the budgets are eventually approved, appropriation is made to specific line-items in the programmes.

In Ghana, the programme based budgeting (PBB) was introduced in 2014 after it was successfully piloted the previous year. The PBB replaced the activity-based budgeting approach which had been in force since 1998

A well-functioning MTEF was thought to be better associated with a performance-based budgeting approach such as PBB even though MTEF could work with any budgeting approach such as activity-based or programme based.

 PBB identifies a series of programmes and the associated activities within the organisation and formulate the budget in terms of the programmes
and then links the budget expenditure to clearly defined programme results. An example would be where the Ministry of Health (MOH) may have preventive health programme which is broken down into malaria control/ prevention, cancer prevention, etc

Programme based budget is a form of performance-based budgets.
Performance-based budgeting is the practice of developing budgets based on the relationship between programme funding levels and expected results from that programme.

Funds are allocated based on results from programmes that contributed to the achievement of the overall objectives of the organization.

Thus, evidence and data are used as bases for allocation of scarce resources to achieve goals of the broader society It emphasizes on progress towards measurable goals as the basis for allocating funds and this should not be misconstrued as a reward or punishment bases.

It is also referred to as outcome-based, results-based or priority-based budgeting

Example of a Programme Based Budget
Shown below is the 2018 programme based estimates for the Commission on Human Rights and Administrative Justice’ programme based estimates for the year 2018.

The document first identifies the policy objectives, mission, core functions, policy outcome indicators and targets, expenditure trends for the medium-term and summary of key achievements in 2017.

The programmes of CHRAJ for 2018 were identified as management and administration, human rights, administrative Justus and anti-corruption. These formed the bases for the programme budgets presented below.

Table 2.2 for an example of a programme based budget.

READ ALSO: Introduction to Public Sector Accounting in Ghana

Table 2.2: 2018 Programme Based Budget for CHRAJ
2.6.1 Budget by Chart of Accounts
6.1 – Programme, Sub-Programme and Natural Account Summary
Entity: 035 – Commission on Human Rights and Administrative Justice (CHRAJ)
Funding: All Source of Funding
Year: 2018/ Currency: GH Cedi

Version 1



Programmes – Commission on Human Rights and Administrative


03501 – Management and Administration


03501001 – General Administration


21 – Compensation of employees


22 – Use of goods and services


31 – Non financial assets


03502 – Promote and Protect Fundamental Human Rights


03502000 – Promote and Protect Fundamental Human Rights


22 – Use of goods and services


03503 – Administrative Justice


03503000 – Administrative Justice


22 – Use of goods and services


03504 – Anti-Corruption


03504000 – Anti-Corruption


22 – Use of goods and services


Source: Ministry of Finance and Economic Planning (2018)


  1. Since the budgets are presented based on programmes, it is easy to prioritise programmes and concentrate on the programmes that are found to be viable helps the organisation to achieve its objectives.
  2. It enables the organisation to link budget inputs with outputs. In other words, the MDA that prepared the budget can assess whether the achievements (proposed or actual) from the budgets are worth the cost associated with them.
  3. Easy identification of budget cost control targets. Since the budgets are grouped into programmes, it is relatively easy to identify each programme contributes to the entire organisation’s cost build up. Subsequently, appropriate cost control measures could be developed for the targeted programme or programme cost.
  4. PBB facilitates the management of future service delivery. When an
    the organisation prepares a budget based on programmes, it facilitates the planning for each programme, proper allocation of resources and enhances the benefit of division of labour and accountability

Disadvantages of PBB

  1. It takes time and effort to develop and administer a programme based budget. Each programme budget virtually goes through a complete budget cycle. There is also difficulty in fixing budget outcomes for the public sector which deals predominantly in qualitative budget outcomes.
  2. Incorrect programme based budgets lead to appropriate budget decisions such as
    wrongful allocation of scarce resources.

Zero-Based Budgeting (ZBB)

Traditional form of budget is prepared on an incremental basis but zero-based budgeting is budgeting from the scratch without reference to previous budgets. This means that all activities are assessed to offer a justification for their inclusion before they are included in the current year’s budget.

As the name implies the base for preparing the budget is zero so any unit or function would have to analyze its needs and costs so that the budget is prepared on that bases.

Thus the budget does not build on any base-year budget as it’s done in the case of incremental budgeting. On this basis, every line item finds its way into the budget because it would be earned as revenue or incurred as expenditure in the current budget period.

Advantages of ZBB

  1. It leads to budget accuracy and efficiency since it eliminates redundant activities of previous years as well as deals with previous budgets inefficiency. Also, budgets are likely to be achieved since it is based on current activities that the organization plans to undertake.
  2. It facilitates goal congruence through coordination and communication among various units of the organization.
  3. Variances are likely not to be too wide since the current year’s budget does not have previous year’s inefficiencies and are based on expectations for the current years.
  4. Budget preparers and implementers are better motivated because their decisions create the budget.
  5. ZBB enables organisations to constantly assess how well their budgets support the achievement of their objectives and mission

Disadvantages of ZBB

  1. ZBB is expensive in terms of time, effort and cost that must go into its
    preparation and execution.
  2.  It requires adequate manpower with the required skill and ability to analyse activities in detail as well as assess the cost implications of these activities.

Incremental budgeting
In incremental budgeting, previous period’s (base year’s) budget informs the preparation of the current year’s budget by adjusting the base year by an expected variable in the current year.

The preparation of the budget is based on the premise that previous year’s activities would repeat in the current year and the magnitude of the increase is based on the size of the previous year’s.

The size of the current year’s increase is influenced largely by inflation and changes in activity levels.

 So, specific income and expenditure lines are adjusted by the change magnitude. For instance, if we assume that the information in the line item budget (Table 2.1)

Above would increase by 5%, for simplicity, the current year’s budget would look as follows:

Table 2.3: Hypothetical Example of an Incremental Budget


Budget for This Year









Goods and Services


Travelling and Transport




Utility Services




Telephone Services








Maintenance of Vehicles




Maintenance of Capital Assets




Staff Training and







Land and







Advantages of Incremental Budgeting

  1. It is simple and less expensive to prepare because it is based on current actuals or recent budget.
  2.  It improves on the transparency of the since budget figures can easily be verified by applying the expected change on the base.
  3. It ensures consistency in operating activity which facilities comparability.

Funding for medium-term and long-term programmes could be secured and
easily monitored.

Disadvantages of Incremental Budgeting

1. Previous year’s inefficiencies are automatically carried to subsequent years. It is less motivating since there are minimal inputs from budget preparers and implementers.

2. It is easy to build budgetary slack into the budgets. Managers are likely to
underestimate revenue and overestimate expenses by assuming a small
percentage increase in revenue and a bigger increase in expenditure for the
budgets to be easily achieved.

3. It can encourage overspending since previous year’s activities that may not be needed in the current year are automatically rolled into the current year.

4. Incremental budgeting approach may discourage innovation and risk-taking since it encourages adjusting previous levels which indirectly leads to maintaining the status quo.

Eric Adjei

Eric Adjei

A professional with six (8) years’ experience in finance and accounting. Demonstrating expertise in accounting procedures, computerized accounting system management and financial operations. Financially astute with excellent analytical, problem solving, management, people supervision, organizational, business administration, operation and commercial management and teaching skills.

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