CHAPTER FOUR

BUDGET STRUCTURES AND PRACTICES

Introduction
During budget preparation, trade-offs and prioritization among programs must
bemade to ensure that the budget fits government policies and priorities. Next, the
most cost-effective variants must be selected. Finally, means of increasing
operational efficiency in government must be sought. None of these can be
accomplished unless financial constraints are built into the process from the very
start.
Accordingly, the budget formulation process has four major dimensions:
1. Setting up the fiscal targets and the level of expenditures compatible with
these targets.
1. Formulating expenditure policies.
2. Allocating resources in conformity with both policies and fiscal targets.
3. Addressing operational efficiency and performance issues
4.1. The Federal Budget

The federal budget is one of the most important policy instruments of government. Through their
budget decisions, the elected leaders fulfill their constitutional responsibilities, signal their policy
priorities, and manage the federal purse. The budget reflects their decisions to tax and spend, to
borrow and lend, and to consume and invest. These decisions define the size of the federal
government and its role in the national economy.

Policymakers use the federal budget process to establish spending priorities and identify revenue
to pay for those activities. The size and scope of the decisions make the budget process one of
the most important and complex exercises in public policy making.

Over the coming decades, there will be a growing structural mismatch between revenues and
spending. This poses significant challenges for our budget, as well as our political system.
Politically, it is always easier to cut taxes and increase spending than it is to raise taxes and cut
spending. Yet addressing our rising debt will require policymakers to face those choices, and
delay will make them even more difficult
A budget (derived from the old French word meaning purse) is a quantified financial plan for a
forthcoming accounting period.

A budget is an important concept in microeconomics, which uses a budget line to illustrate the
trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in
monetary terms.

In summary, the purpose of budgeting tools is to:

1. Provide a forecast of revenues and expenditures. This is achieved by constructing a model of

how a business might perform financially if certain strategies, events and plans are carried
out.
2. Enable the actual financial operation of the business to be measured against the forecast.

4.1.2. Budget Preparation Process

   4.1.2.1. Budgeting at the Federal Level
The recurrent budget is not defined in the financial law or the financial regulations. The financial
law does provide a definition of the capital budget thereby residually defining the recurrent
budget. There is considerable uncertainty amongst budget staff as to what expenditures should be
placed in the recurrent or capital budget. The financial law defines the items of expenditure for
the capital budget as fixed assets or consultancy services.
Analysis of recurrent budgets though show that fixed assets which are not associated with an
external assistance project are frequently budgeted in the recurrent budget. It is also not clear
how to budget those externally financed projects which build capacity (training, technical
assistance) as opposed to those that install or build fixed assets.
There are a variety of criteria that can be used in defining recurrent and thus capital budgets. The
three most common are source of finance (domestic, external), status of expenditure (project
versus program), and object of expenditure (fixed asset, consultancy service, etc). The financial
law has defined the budget through the object of expenditure making the recurrent budget
residual to the definition of the capital budget.
The recurrent budget at the federal level, which consolidates and coordinates the recurrent
budgets of all Federal Public spending bodies, is prepared by the budget department of the
ministry of finance.
The Ministry of Finance are authorized by the Federal Government during the 1996 (G.C) fiscal
year under the proclamation No 358/2003. Some of the authority issued to MOF are quite
illuminating and worth discussing.
Article 3 of proclamation no 358/2003 states that: The Ministry of Finance and Economic and
development is here by authorized to grant advance of salary to permanent federal civil servants
for necessary cases in accordance with directives issued thereon, and to fix the period of
repayment thereof, and to collect interest thereon, at the rate fixed by the directives to be issued
by the Ministry of Financ
Preparation of Budget in the MOF

1. Preparation of the macro framework

2. Allocating public expenditure between the federal and regional governments
3. Allocating between recurrent and capital budget at federal level
4. Budget call and ceiling notification by ministry of finance
5. Submission of the budget proposal to the ministry of finance
6. Budget hearing with the ministry of finance
7. Review and recommendation by ministry of finance
8. Submission to the council of ministers
9. Submission to the council of peoples' representatives
10. Submission to the council of peoples' representatives
11. Allotment
1. Preparation of the Macro Framework 
This is an assessment of the economic situation and establishment of fiscal balance
(GDP, growth rate, etc). This stage includes two steps:
a) collecting and analyzing information regarding the performance of the economy in
the previous fiscal years,
b) economic protection such as growth, revenue estimating for the next year which is
done by the coordinating ministries (ministry of economic development and
cooperation and ministry of finance) with consultation with the National Bank of
Ethiopia, the central statistics authority and other relevant institutions. The macro
framework is reviewed and approved by the prime minister's office.
2. Allocating Public Expenditures Between the Federal and Regional Government 
This step determines the amount of subsidy to regional governments. After preparing
the revenue estimation of total government expenditure (fiscal plan) a decision
usually is made by prime minister's office for allocating the shares to the federal and
regional governments. The distribution among regions is done by the Federation
council with consultation of the Prime Minister's office, Ministry of Economic
Development and Cooperation, and Ministry of Finance. Allocation between regions
is based principally upon a formula, such as population, level of development,
revenue generation capacity. The price minister's office reviews the split and then
presents to the federation council.
3. Allocating Between Recurrent and Capital Budget at Federal Level
Depending on various factors, the PMO with consulation of ministry of economic
development and cooperation and the ministry of finance determines how much is to
be allocated to recurrent and capital expenditure. The decision is based on the
following factors:
   a) government prioritized sectors
   b) non-discretionary expenditures
   c) ongoing projects, and
   d) institutional capacity

4. Budget Call and Ceiling Notification by the Ministry of Finance 

The ministry of finance provided each spending public body a recurrent ceiling in the
budget call.

  a) The ministry of finance prepares a proposal for the total recurrent budget and
allocations to spending public bodies.
  b) The prime minister's office reviews the ministry of finance's proposal and makes
adjustment.
  c) The ministry of finance releases the budget ceiling to the line ministries in a
budget call.
  d)The budget call provides each ministry the following information: the macro
economic environment, an aggregate recurrent budget ceiling, and priorities to
budget.  

5. Submission of the Budget Proposal to the Ministry of Finance 

Prior to a formal budget hearing, spending public bodies submit their budget
proposals to the ministry of finance. The budget submission is given to the budget
 department of the ministry of finance for study. The ministry of finance prepares an
issue paper on the major issues at each head level in the proposed budget. Spending
public bodies can submit above the ceiling but have to have a compelling justification
for a higher ceiling such as new priority activity.
6. Budget hearing with the Ministry of Finance 
Spending public bodies defend their budget submission in a formal hearing with the
ministry of finance. The budget hearing includes ministers and/or vice ministers,
heads of public bodies and relevant department heads and budget experts from the
spending public bodies and their ministry of finance.
Spending public bodies can challenge the ceiling at the budget hearing. The heading
focuses on policies, programs, and cost issues.
 
7. Review and Recommendation by the Ministry of Finance 
The budget committee of the ministry of finance reviews the discussion and make a
recommendation. If there is an increase in the spending public body's ceiling this has
to go to the prime minister's office for approval. Usually the ministry of finance
recommends the budget to the council of ministers.
8. Submission to the Council of Ministers
The recommended budget is submitted to the Deputy prime ministers in economic
affairs summon individuals from each ministry as required. Once reviewed, the
budget is then presented to the prime minister along with a brief. The prime minister
may or may not make amendments and then the budget is sent to the council of
ministers for discussion.
9. Submission to the Council of Peoples' Representatives
Once approved by the council of ministers, the prime minister presents both the
capital and recurrent budgets to the council of peoples' representatives. The budget
committee of the council reviews and makes recommendations to the council.
10. Notification and Publication
The budget is appropriated by the council of peoples' representatives and is published in
the Negaret Gazeta. Spending public bodies are formally notified of their budget for the
next financial year by the release of Form 3/1 from the ministry of finance. Until Form
3/1 is received, spending public bodies are authorized to spend one-twelfth of the
previous years budget with no provision for new expenditures (e.g., new staff posts).
Form 3/1 is sent to the Treasury Department of the ministry of finance which disburses
funds to spending public bodies.

11. Allotment
The public bodies are required to prepare salary allotment, work plan and cash flow
and submit to the ministry of finance. The allotment is verified by the ministry of
finance and then sent to the treasury department along with Form 6 which authorizes
the disbursement.

4.2 State and Local Government Budgets

There are governments representing cities and governments representing rural areas. There
are some governments, for instance counties that represent both cities and rural areas. In
some states, municipal governments provide public education, while in others education is
provided through a special purpose government separate from municipal government.
Generally, in any given area, local governments normally exist, for the purpose that
governments intended to provide a wide range of public goods and services.

Local budget systems, processes, and structures within and among nations reflect historical
tradition and diversity in culture, capacity, national governance, and institutions. Thus, no
single model of local government budgeting is best. That said, all effective sub national
budget systems must contain certain elements that advance the three key objectives of public
expenditure management: fiscal discipline/expenditure control, prioritized/strategic resource
allocation, and operational (managerial) efficiency/effectiveness.

Prescription for effectiveness include systems and processes that emphasize

 Transparency in the definition of roles and responsibilities and decision making, the
availability of information, openness of the budget process, and assurances of
budgetary integrity
 Comprehensiveness in the incorporation of all revenues and expenditures and full
accounting of all budgetary transactions
 Processes and methods to establish policy and priorities, including an outward-
looking fiscal framework, focus on service outputs and outcomes, and a classification
system that links expenditures to organizational units and purposes
 Expenditure planning based on established priorities, relating spending to service
levels and allowing flexibility in the use of resource inputs
 Accountability and control reinforced by comprehensiveness; prioritization; and
systematic budget and expenditure reviews, execution controls, and post-execution
reporting and auditing
In many general purposes of local governments, the budget is composed of three separate, but
connected parts: (1) annual operating budget; (2) capital budget; and (3) the enterprise or
utilities budget.

The annual operating budget lays out the anticipated spending that will be done by all public
agencies during the upcoming year. Here, for example, spending for public safety, planning
and development, social services, and so forth are identified. The annual operating budget
also lays out the revenues that are expected to receive by the local government during the
upcoming year. Here, for example, intergovernmental revenues such as state or federal aids
are identified, as are special charges for services such as use of public facilities or public
approvals (e.g. impact fees). Most importantly, the annual operating budget identifies the
amount of property tax revenue that will be (hopefully) collected during the upcoming year.

The capital budget reflects anticipated expenditures on needed infrastructure projects that will
have a useful life that extends into the future. The capital budget is the result of a major
planning exercise that can be extensive and shows the amount of spending that will occur on
capital items during the upcoming year and the revenues that will be used to finance these
expenditures.

General purpose local governments often break out public services that have identifiable
beneficiaries into separate enterprises or utilities. For example, public water is supplied to
specific homes or businesses and public charges for water use can be tied to specific
customers. Local government enterprises often are self-financing, that is, annual revenues
cover annual costs, but also can commonly receive an operating subsidy from the general
local government budget. Revenues of local government enterprises, thus, can be composed
of both user charges and general-purpose revenues (such as property taxes)

Procedures to Prepare Budget at Region and Sub-region Level

The procedures followed to prepare the budget at region and sub-region levels follow the
series of steps which are as follows.

1. Pre-ceiling Budgeting by Woredas

The woredas prepares a budget with no indicative or final ceiling from the zone or the
region. There is no ceiling yet from the zone or the region because the federal
government has not yet notified them of their grant, which covers approximately 85%
of ther regional expenditure. The woreda sector office prepares a budget. The woreda
executive committee forms a budget committee to review the budget submission.
2. Review of Woreda Pre-ceiling Budgets by Zones
The woreda budgets are sent to the zone through two channels. The woreda executive
committee submits to the zone executive committee and the woreda sectoral offices
send to the zone sectoral departments. The executive committee will set up a budget
committee which reviews the woreda and one sectoral budget submissions.
3. Review Zone Pre-ceiling Budgets by Regions
The zone budgets are sent to the region through two channels. The zone executive
committee submits to the region sectoral bureaus. The sectoral bureaus then prepare a
budget submission to the region plan bureau. The sectoral bureau can change the
budget submission from the zone. The submission is the combined budget of the
sectoral bureaus, departments and offices.
4. Determination of the Regional Expenditure Envelop
The region is notified of the federal grant between March and May. The total regional
public expenditure envelope is then determined based on the federal grant, local
revenue and local borrowing.
 5. Allocation of the Region Envelop Between Capital and Recurrent Expenditure
The region allocates the expenditure envelop between capita and recurrent. The
allocation begins with recurrent expenditure specifically non-discretionary
expenditure expenditures (debt, legal liabilities, pension, salary). The largest share of
recurrent expenditure is for salary and the region can determine this total because all
staff are managed from the region level. The balance of the envelop or the upper
bound residual of he expenditure envelop is reserved for capital expenditures. The
trend shows that government emphasizes capital expenditure.
6. Allocation to Bureaus and Zones
The capital envelope is allocated to the region bureaus by increment. First, the share
of ongoing projects, inter-regional projects and those projects administrated by
bureaus at zone and woreda level and included first.
7. Allocation to Zone sector Departments
In this step, the lump sum zone allocation is distributed by sector to the corresponding
zone and woreda departments and offices. Once the sahre of the zonal allocation is
known the sectoral budget allocation is made by the following criteria: ongoing
projects, new priority projects, the 5-year plan and inter-zonal projects.
8. Allocation to Woredas
The woreda's are allocated on a sectoral basis from the zone. Allocation is done
through discussion by the woreda council with the assistance of two planning officers
who are assigned to the council and experts from the zone who will make allocations
to sectroal offices.

 4.4 Local Government Budget Processes in Ethiopia

Ethiopia is a Federal State and the Constitution of 1994 mandates a federal structure with
considerable autonomy to the regions in administrative and fiscal matters. It consists of nine
Regions and two City Administrations (Administrative Councils) that are treated as regions.
These entities are Sub-National (SN) Governments accountable to their citizens and have
wide-ranging revenue and expenditure responsibilities. Most of their resources come from
transfers from Federal government via a block grant system. At the centre of the financial
management structure in each region is the Regional Bureau of Finance and Economic
Development (BOFED) responsible to the Regional Council. BOFEDs are required to
prepare annual budgets and accounts of the Regional bureau and the consolidated accounts of
the Region. These have then to be audited by the Regional Auditor General and submitted to
the Regional Council. At a lower level there are woreda (or district) Sub-National (SN)
administrations. Basic service delivery relating to health and primary education is delivered
by woredas.

The regions’ budget planning processes start by estimating the budget sources. The budget
estimates made by Regional Bureaus of Finance and Economic Development (BOFED) of
the available sources of own revenue and the amount resource coming from the federal block
grant. These estimates are usually based on the regions’ three- or five-year plans and on the
Federal Government’s three-year estimates of the subsidy.

The Regional budget calls is issued and sent to sector offices and Woreda office; Finance and
Economic Development (WOFED) between January and May. With the budget call,
directives, a manual for budget preparation and the federal and regional policy priorities for
the coming fiscal year are included and distributed.

BOFED prepares two indicative budget figures; one for the sector bureaus at regional level
and one for the Woredas and urban administrations. In most regions, zones are merely
serving as a bridge for transfer of information and money, and in yet others they have no
function in relation to the budget process.

After getting the actual amount of federal Block Grant, BOFEDs allocates budget to regional
sector offices and Woredas. Allocation to sector offices is based on (a) last year expenditure,
and (b) new recurrent activities and capital projects. Allocation for Woredas is based on the
regional transfer formula. Regions allocate more than 2/3rd of their budget shares to Woredas
administrations.

The annual budget process at regional level has to go through the following six basic stages
for the cycle to be complete:

Budget Preparation; BOFED estimates physical resources available: federal subsidy, and
own revenue. Regional bureaus, zonal offices, Woredas and urban administrations submit
draft budget plans to BOFED, with careful distinctions made between recurrent and capital
budgets.

Review; BOFED reviews the draft budget and then passes to the Regional Cabinet for
endorsement.

Approval; The Regional Cabinet discusses and endorses the budget and transfer formula.
The endorsed budget is then presented to the Regional Council (elected representatives of
citizens from Woredas and urban administrations) for appropriation and allocations to sector
bureaus, zonal offices, Woredas and urban administrations.

Appropriation; After approved budgets have been determined and adjusted, allocations are
made. BOFED notifies each sector office of its respective budget. After receiving the Budget
Notification, sector bureaus, Woredas and urban administrations are supposed to finalize their
budgets within approximately one month’s time by making minor adjustments on their
programs within the limit of their budget.

Expenditure; Budget implementation by different bureaus, offices, Woredas and urban

administrations takes place and detailed records are kept.

Auditing; Regional BOFED auditors reconcile expenditures with approved budgets and
make sure that there have been no financial irregularities.

Indicators of Budget Size

To determine the budget requirements of the regions and sub regions, certain factors needed
be considered. The following factors are quite illuminating:

1. Population
Every economic plan should be based up on the population. The planner must centre
the total number of populations. The planner must centre the total number of
populations, the birth rate, economic concentration, housing etc while planning, this
variable must be considered, and accordingly the budget need will be determined.
2. Expenditure Requirements
While determining their expenditure requirements, region and sub regions must
compare their regions with others in view of the economic development. That is,
backward regions must assess the budget size requirement according to the activities
that they are intending to take.
3. Agriculture
Agriculture is the backbone of the regional economy. In assessing of the budget size,
the agricultural development of the region is indicator while assessing the
development, the following factors needed to be considered:
   - workforce (development agent)
   - number of a household in extension package program
   - number of veterinary clinics
4. Health
Health sector development program must consider the primary health care – curative
as well as preventive. While trying to foster the health economy, the planner must
look on to the following variables.
A. Number of Health Center
    - Number of health center/ thousands of populations
    - Number of clinics/ thousand population etc
B. Health Professionals
    - Number of Doctors/ thousand population
    - Number of Nurses/ thousand population
    - Number of Laboratory Technicians/ thousand population
5. Education
The other factor to be consider while budget is the education center. The regions must
compare the level of education compared to the other regions before determining the
budgets. The factors to be work under this is:
   A. Number of primary schools
   B. Correlation between students and teachers
   C. Class size of the primary school etc
 6. Water
Water supply is one of the basic needs that a human being requires to live. To avoid
water cause diseases, regions must work in supplying pure water to their fellow
citizens. Accordingly, they must work on the need assessment of water supply etc.

 Regions and sub regions will have to take the various factors discussed above, while
submitting their budget proposal. According to their economic development, and the budget
requirement, the federal government may endorse the number of subsidies granted to them.