3.1 Budget Function and Purpose

There are four budget functions, which we are going to cover in this section:

1. Financial plan: Financial resource allocation to government programs, projects, and services
2. Operations guide: Specification of activities to achieve policy goals and measures of performance
3. Policy document: Setting of policy priorities by allocating more resources to areas that are considered higher-priority
4. Communication device: Budget as a tool for transparency and accountability to taxpayers

First, the budget outlines the financial implications of governance given the anticipated operating environment. It specifies how revenues will be raised and how those resources will be distributed across various functions (e.g., government programs, projects, and services). The budget projects expected revenues and expenditures over the budget period and limits expenditures to the resources available to ensure solvency. In case that a difference between revenues and expenditures occurs, it outlines steps for remediation. Additionally, the budget reinforces fiscal discipline by controlling expenditures and assigning responsibility for resources to ensure funds are used for their intended purposes. This increases transparency and prevents corruption, which is one of the main reasons for the creation of budgets in the first place. It also provides legal authorization for the government to spend money on specific programs.

Second, as an operations guide, it outlines how public services will be delivered efficiently and cost-effectively. It provides a detailed description of the activities, services, and functions performed by different organizational units, specifying personnel requirements and performance goals for agencies, units, and programs. Importantly, it ensures that all government activities align with legislative intent and conform to legal restrictions regarding the raising and expenditure of funds. This operational function of the budget also serves as a mechanism for ensuring transparency in fiscal operations.

Third, a budget sets priorities through the allocation of resources and thus, acts as a policy document. It articulates long-term, non-financial goals and objectives, presents and evaluates alternatives to achieve these objectives, and identifies long-term financial challenges. The budget allows policymakers to specify priorities by directing more resources toward higher-priority areas, thus reflecting the government’s policy agenda. Finally, the budget serves as a communication device, facilitating discussions among policymakers, informing stakeholders of priorities and policy directions, and ensuring transparency for citizens. This communicative role fosters accountability by keeping taxpayers informed about government activities and the rationale behind financial decisions, making it an essential tool for transparent governance.

Given the function as a communication device with stakeholders, it is important to systematically structure the information provided in a budget. The budget can be structured around administrative units (e.g., agencies) who provide services such as fire department, schools, or police. An alternative way of presenting the information is around economic items (i.e., types of expenditure) such as wages, salaries, or utility charges. And lastly, budgets can be structured functionally around the purpose of expenditure (e.g., education, health, defense).

Recall that at the beginning of this section, we talked about your personnel budget. Similar to your personnel, it is recommend to be prudent in budgeting and account for unexpected events such as economic downturn. Thus, there should be a budget stabilization fund (also known as a rainy day fund) and it is recommended to under-estimate revenues and over-estimate expenditures.