TOPIC 2

PUBLIC BUDGET/BUDGETING SYSTEM

 SYLLABUS CONTENT
• Definition of public budget
• Role of public budget
• Principles of budgeting
• Components of budgets
• Budgeting system in Malaysia
o Elements of Program Performance Budgeting System
o Elements of Modified Budgeting System
o Principles and strategic process of Outcome Based Budgeting System
 DEFINITION OF PUBLIC BUDGET
• Budget is a detailed plan, expressed in quantitative terms that specify how resources will be
acquired and used during a specific period of time (Hilton, 2009).
• A statement containing a forecast revenue and expenditures for a period of time (Leaner,
1984).
• A detail statement of a government’s expected expenditures and revenues (Otto Eckstein,
1974).
• A financial planning that includes revenue and expenditure that have been framed and
interpreted to achieve a goal of
• a specified purpose (Nigro and Nigro, 1970).

‘Budgeting is a statement of revenue and expenditure for the future

which is used as planning and management tools of national economic
sources to fulfil the people’s need’
 PURPOSE OF BUDGETING
• It acts as a Policy Statement (Blueprint or Master Plan) for the government
o It entails the revenues and expenditures estimations
• Implementation of government policy
o The procedures how to collect revenues and how to use/ spend them (public) and
as management tool to control & monitor the government administration process.
• Important sources of information to the public
o Revenue is collected from the public through taxes, thus the public has the right to
know how revenue is collected and how it is used/ spent.
• System of legal controlling and monitoring
o The legislation and implementation of budgeting are bound by the Federal
Constitution, legislation procedure and executives instructions.
CHARACTERISTICS OF BUDGETING

• Financial planning for an organization.

• It has forecasted revenues and expenses.
o What is the resources and what is the expenditure
• Formulated to achieve specific purposes.
o National objectives / policy / program
• It has specific duration.
o Must have the time-frame. Eg: one year
ROLE OF PUBLIC BUDGET
• As a Fiscal Policy Tool - to accomplish development goals and to stabilize the
economy of the nation through effective and efficient financial management
and revenue system.
o Allocation Function
▪ To provide socio-economic development for the public such as preparing infrastructure &
facilities.
o Distributing Function
▪ Fair distribution of wealth. Eg: NEP, progressive tax
o As an Economic stabilizer Function
▪ Eg: Price control, reducing unemployment and to increase the economic growth.

• Management of financial sources

o To manage, monitor the public money to ensure the objectives of government is achieved.
 ROLE OF PUBLIC BUDGET
• Budgeting and financial control document
o As a control device with regard to legislative control over executive body, and executive control over
agencies..

• Performance measuring
o Compares the budgeted and actual revenue. Any variance must be explained and corrective action must
be taken.

• Accountability tool
o To ensure all the government officers are accountable.
• Statement of Government Expenditures/ Policy Tool
o It portrays the spending for policy implementation of the government
• As a Financial Statement of the government
o Must be before 31st December and it is only for one financial year.
PRINCIPLES OF BUDGETING
• Annually
o It is tabled annually and it must be a unified budget.
• Comprehensiveness
o Must be clear and precise.
• Specificity
o Must be specific and detail.
• Accuracy
o The amount of the budget must be accurate, in terms of revenue and expenditure.
• Prior Authorization
o Must be authorized by the ultimate power of the state /country.
COMPONENTS OF BUDGETS
Federal Revenues

State Revenues

Local Government
Revenues
National Revenue
Borrowing
government budget
Components of the

Inter-government
grants

Direct sale of goods

and services

Charged
Expenditure
Operating
Expenditure
National Supply Expenditure
Expenditure
Development
Expenditure
 NATIONAL REVENUE
Direct Tax

Tax Revenue

Indirect Tax

Receipts from registration payment

All income earned or received by Federal Government

Receipts from sales of goods

Federal Government

Non-Tax Revenue Licences Fees and Permits

Revenue

Receipts from licences and Rents, Interest and returns on investment locally
permits and abroad

Premium and quit rents Penalties, contribution and reimbursement from

foreign government and international agencies

Sales of assets
Revenue from Federal Consist of tax and non-tax
Territories revenue collected on behalf
of the government
Rentals

Service fees

Entertainment duties
NATIONAL REVENUE
Revenue from licences
Treasure Revenue other than connected
trove from Revenue from with water supplies and
toddy lands, mines services
shops and forest

Zakat, Fitrah and Baitulmal and Entertainment duty

similar Islamic religious revenue

Fees in courts other than

State Government federal courts
Fines and forfeitures in courts other Revenue- According to
than federal courts
Part III, Tenth Schedule
of the Federal
Constitution
Fees and receipts in respect of
specified services rendered by
departments of the State Governments

Receipts from land sales

and sales of State
property Revenue of town boards, town
councils, rural boards, local
councils and similar local
Rents on State authorities
property
Interest on State
balances Receipts in
respect of raw
water
 NATIONAL REVENUE

Local Government Revenues – According to Section 39, Part V of the

Local Government Act 1976

All interest on any All other revenue

All charges or
All taxes, rates, rent, profits monies invested by accruing to the local
licences fees, dues any trade, arising from the local authority authority from the
and other sums or undertaking service or and all income federal or state
charges payable to carried arising from or out government,
the local authority on by the local of the property of statutory body,
authority the local authority other local authority
or other sources
 NATIONAL EXPENDITURE

Any grant, remuneration or other moneys so charged by any other article or

federal law (Capitation Grant, AG’s remuneration

All pensions, compensation for loss of office and gratuities for which federation is liable
Charged expenditure (Article 98
of FC)
All debt charges for which the federation is liable (public
debt)
Operating Expenditure

Any moneys required to satisfy any judgement, decision or award against

the federation by any court or tribunal

Royal allocation or allowances

Payment for emolument

Supplies and services

Supply expenditure (Article 100 of Acquisition od assets

FC)

Grants and fixed charges

Other expenditure
 DEVELOPMENT EXPENDITURE

Requires Approval was given

Usually non- Made in relation to Big amount/capital Funded by supervision and through issuance of
repetitive the Five year – involves strategic borrowing- long maintenance – general allocation
expenditure Malaysian Plans decision making term return implication to the warrant according
public to the Development
Fund Act 1966
 BUDGETING SYSTEM IN MALAYSIA – PROGRAM PERFORMANCE
BUDGETING SYSTEM (PPBS)
• PPBS was introduced in 1969 under TC 5/1968.
• Helps management make better decisions on the allocation of resources among
alternative ways to achieve government objectives thru the selection of best feasible
alternatives or a combination of alternatives.
• Programme budgeting refers to a planning-oriented approach which emphasises
programmes, functions and activities (less emphasis on evaluation or control).
• Under PPBS, the term programme and performance were used for operating
expenditure only and it includes various components.
• The components of programme are functions, objectives, activities and
responsibility centre.
• The components of performance are appropriateness, adequacy, effectiveness and
efficiency of the programmes.
 BUDGETING SYSTEM IN MALAYSIA – PROGRAM PERFORMANCE
BUDGETING SYSTEM (PPBS)

• PPBS comprises of four elements

• Identifying Objectives
• Programme Planning and Structuring
• Developing Performance Indicator
• Performance Evaluation
IDENTIFYING OBJECTIVES
• Setting out in clear terms the purpose for which an organization exist
• It forms the framework towards a better and meaningful planning to achieve
objectives
• Also
enables management to avoid duplication of functions within various
department.
• Also enables the manager to make a better and firm decision
• Since it based on planned objectives, management shall identify and
formulate objectives in a clear, precise and concise manner
PROGRAMME PLANNING AND STRUCTURING
• Programme is a set of activities that have common objectives
• It is a combination of resources, which are formulated to realise
definite objectives and capable of being related to identifiable
outputs
• Program planning involves the selection of best feasible alternatives
for the purpose of achieving identified objectives
• Program structuring refers to the hierarchal listing of programmes,
activities and subactivities, which contribute to the achievement of
objectives
EXAMPLES OF PROGRAMME PLANNING AND STRUCTURING
 DEVELOPING PERFORMANCE INDICATOR
• The purpose is to evaluate financial & physical performance of the programmes
• It involves the identification and selection of the suitable units of measurement, which
reflects the output – quantitative/qualitative terms
• Comparison will be made between actual output and the planned or targeted output
and identifying the causes for any variance between the two.
• An example of performance indicator is annual target setting which refer to the
quantification of output year by year.
PERFORMANCE EVALUATION
• The main purpose is to asses the relevance, results and impacts of the
programme
• This involves the process of making comparison between the actual output for
a given period and the planned or targeted output for the same period and
identify the cause for any variance between the two
• The result provide information as whether the programme is realistically
planned & properly managed.
• Comparison between the planned and actual output as below:

Planned Output
Actual Output

Below target On target Beyond target

OVER ESTIMATE WELL PLANNED UNDER ESTIMATE
 PERFORMANCE EVALUATION

• Performance evaluation is an important elements for purposes of revising

and modifying plans
• Through performance evaluation, the agency can identify whether:
o The objectives of the programmes are realistic and reasonable
o The programmes have been properly selected and it is the best alternatives for
achieving the objectives
o The programmes have been properly planned in terms of time and adequately
provided with the necessary resources.
o The programmes were effective in relation to the objectives
BUDGETING SYSTEM IN MALAYSIA – MODIFIED BUDGETING SYSTEM
(MBS)

• This system was the modification to PPBS through TC No. 11.

• It was implemented in 1990 through the issuance of TC No. 8
• MBS is a management system that focuses on the relationship between
input, output and impact.
Input Process output
Efficiency Effectiveness
BUDGETING SYSTEM IN MALAYSIA – MODIFIED BUDGETING SYSTEM (MBS)

• Input can be categorised into emolument, supplies and service, assets, grants and
fixed charges, and other expenditure.
• Output refers to the product or services produces by the agencies
• The efficiency of input and output are measured in terms of quality (customer’s
satisfaction), quantity(final output produced), timeliness (output is produced on time)
and cost (cost per unit for produce products or services)
• Impact can be reviewed from three perspectives:
• Positive or negative changes on the targeted activities
• Achievement level of actual objective (efficiency of the activity)
• Changes to overcome the problem (compare the situation before and after)
BUDGETING SYSTEM IN MALAYSIA – MODIFIED BUDGETING SYSTEM (MBS)

• The objectives of MBS are as follows:

o To improve allocation of resources to government programmes via the budget
process in order to best satisfy the government’s policy objective within its fiscal
constraint
o To improve the effectiveness and efficiency of government programmes by fostering
a more conducive management environment
o To strengthen mechanism for the accountability of controlling officers and programme
managers
o It is a tool for the Controlling Officer to assess his managerial performance and in
challenging his management team to achieve higher level of excellence
 BUDGETING SYSTEM IN MALAYSIA – MODIFIED BUDGETING SYSTEM
(MBS)
• MBS comprises of FOUR (4) elements:

Expenditure target

Programme Agreement and Exception

Report

A Cycle of Programme Evaluation

A More generalised Approach to

Expenditure Control
EXPENDITURE TARGET (ET)
• ET represents the Treasury’s estimate of the base level of resources requires by each
government agencies to conduct existing policies/ programmes in the same manner
as in the previous year
• Through ET, Treasury provides each Ministry with a single, specific, numerical target
for expenditure
• The amount of ET is fixed by the Treasury at the beginning of budgetary process
• However, Treasury can review the ET if there are changes in government policy
before the total allocation is finalised
• Excluded from this targets are charged expenditure, one-offs and major new policy
changes
EXPENDITURE TARGET (ET)
• Preparation of estimates for operating expenditure:
o Based on TC No. 2/2009 on Guideline for Preparation of Estimated Expenditure, the formula
to calculate ET is as follow:
o ET (2010) = [Existing policy (2009) + (New Policy 2009 - Allocation for Assets) – New
Policies 2008 not implemented] + 2% Increment for Emolument – 2% Efficiency Dividend
o Following should be considered in calculating ET:
▪ Allocation for statutory bodies is excluded from the existing and new policies and is calculated
separately
▪ The 2% increase is based on emolument allocation (Standard/General Objects 10000) for
the year
▪ Efficiency dividend obtained through government investment in human capital, technology etc.
▪ Existing policies refer to the programmes already approved by laws or constitutions
▪ New policies refer to the new programmes or activities to be carried out by the agencies
▪ One-off is the unavoidable and non-annual expenses (eg: office renovation, painting of
building, GE)
▪ Threshold budget is the amount fixed by treasury to determine the allocation for new policy &
one-off expenditure- if exceeded the threshold amount, additional allocation will only be
considered up to the amount that exceeded the threshold limit
▪ Efficiency dividend is expected efficiency improvement with the learning effect and with
implementation of improved methods of programme delivery
 PROGRAMME AGREEMENT AND EXCEPTION REPORT
• PA is a contract between a manager & a subordinate manager to whom certain
authority has been delegated
• At federal level, CO responsible to disclose relevant information to the Treasury
• At agency level, the lower level management is accountable to the top management
to submit periodic reports on progress performance
• This reports are prepared on an exception basis
• The purpose is to identify the performances that are inconsistent with the agreed
target
• It also include explanation on the extent, reasons for inconsistent performance and
remedial actions to be taken
 A CYCLE OF PROGRAMME EVALUATION (PE)
• PE is an important elements to make systematic analysis on the effectiveness,
efficiency, relevancy and economy of the programmes
• PE emphasises four aspects:
• Appropriateness- measures to what extent the objectives fulfilled the client’s need
• Effectiveness- measures to what extent objectives been achieved
• Economy- measures to what extent can the cost be reduced without wastage
• Efficiency- measures to what extent resources utilised optimally to produce required
output
• PE can be used as a tool for management and decision making
 A MORE GENERALIZED APPROACH TO EXPENDITURE
• This approach emphasises on two main elements:
• Provision of greater flexibility/authority to managers throughout an organisation
• Stricter control over aggregate resources whereby supplementary allocations are
rarely provided or even considered
• Both are based on two principles of MBS, namely ‘Devolution of Authority’ and
‘Accountability to Match Authority’
• MBS is based on the principle ‘let managers manage’, so Treasury has devolved
authority in respect of virements of funds as part of generalised approach
• In return, CO devolve authority to lower level managers to control and manage
resources
• Their accountability not just in term of compliance to rules and regulations but also in
terms of efficiency and effectiveness of programmes within strict aggregate
allocations
BUDGETING SYSTEM IN MALAYSIA – OUTCOME BASED BUDGETING
SYSTEM (OBBS)
• OBB is a continuous process under Outcome Based Approach (OBA) to determine results under
national result Framework (NRF)
• The MOF issued TC No.2 Year 2012 to introduce and give guidelines regarding the policy
and implementation of OBB.
• OBB is a strategic management tool designed to improve resource management and public
sector accountability
• OBB explains why the money is being spent by using statements of missions, goals and
objectives
• This is in line with government’s emphasis on outcomes rather that output
• OBB is a subset of an integrated approach to results-based management (RBM)
• RBM emphasises on the importance of achieving results through systematic goals and
objectives and clearly states how results should be attained
BUDGETING SYSTEM IN MALAYSIA – OUTCOME BASED BUDGETING
SYSTEM (OBBS)

• Objectives of OBBS
o Provide structural mechanism to translate policy and concept of NTP to outcome and
results
o Empower CO to manage resources under their control
o Increase accountability at all levels through strengthening of governance framework
o Ensure government will achieve the concept of value for money for budget expenditure
management
BUDGETING SYSTEM IN MALAYSIA – OUTCOME BASED BUDGETING
SYSTEM (OBBS)

Principles of Designing OBBS

• Based on TC No. 2 Year 2012, the designing of OBB based on eight principles:
o Planning and constructing of budget is based on programme-based approach
o Roles and responsibility of MOF, EPU and PSD is examining ministry’s budget
o Ministry’s programme aligned to the NRF
o Medium-term perspectives in planning and budget
o Strengthen performance management
o Empowering controlling officer
o Incentives for results achievements
o Continuous development of ability
BUDGETING SYSTEM IN MALAYSIA – OUTCOME BASED BUDGETING
SYSTEM (OBBS)

Implementation Structure of OBB

• OBB Committee consists of:
o National OBB Steering Committee (NOSC)
o Central Performance Management Committee (CPMC)
o Programme Rationalisation Committee (PRC)
o Ministry OBB Implementation Committee (MOIC)
o Programme Performance Management Committee (PPMC)
o Activity Performance Management Committee (APMC)
STRATEGIC PROCESS OF IMPLEMENTING OBB

Outcome
based
planning

Strategic Budget
Reporting of
results Cycle of preparation
OBB

Monitoring
and
evaluation
OUTCOME-BASED PLANNING
• 5 years planning need to be prepared based on outcome to be achieved
• Planning begins with development of result framework by setting the agreed output
and expected outcome
• The combination of expected performance, programme and activity levels will form
ministry result framework (MRF)
• Ministries have to determine outcomes and identify programmes and activities that
contribute to the national outcome under NRF
• The focus on outcome is to enable programmes to be planned while maximising the
utilisation of resources
• The top management has to be actively involved in planning and consultancy
• Planning process requires expected results to be coordinated so that it is aligned with
the NRF
 TOP-DOWN AND BOTTOM-UP APPROACH FOR BUDGET PLANNING AND
PREPARATION
Top-down approach for budget planning

Integrated national plans to Programs needed to achieve Activities required to complete Resources required to complete
achieve long term objectives integrated national plans programs activities and the cost of
resources

National level Program level Ministry/Agency level

Activity 1 Resources 1
Program 1 Ministry 1 budget budget
budget budget
Resources 2
Activity 2 budget
budget Resources 3
National
budget Activity 3 budget
budget Resources N
Ministry 2 Activity N budget
Program 2 Bottom-up approach for
budget budget budget
budget preparation
Ministry 3
Program 3 budget
Activity 1 Resources 1
budget
budget budget
Ministry N
Resources 2
Program N budget Activity 2
budget
budget budget
Resources 3
Activity 3
budget
budget
Resources N
Activity N
budget
budget
BUDGET PREPARATION
• Begins when the MOF issues TC on Guidelines for Preparation of Proposed
Estimated Expenditure for the year
• It also specify the budget preparation period, and date for budget submission
• The ministry’s budget is prepared using the bottom-up approach, starting at
the activity level and ending at ministry level
• Planning process through MRF must be clear to ensure proper planning and
allocation of resources achieving the expected results
• All resources for budget preparation process (financial and human resources)
need to be rationalised and integrated under each programme
MONITORING AND EVALUATION (ME)
• Ministry should monitor and evaluate programmes to measure expected performance
achievement and effectiveness of activity via ‘MyResults’ application
• This process involve aspects of results achievement, financial and physical
implementation of the project
• Ministry will evaluate overall programme at least one in five years to determine the
continuity, additions, amendments or elimination of programmes or activities
• M&E need to be well planned and must have clear objectives and methodologies
• The framework for M&E consists of these elements: input, process, output, outcome
and impact
 PERFORMANCE MONITORING AND EVALUATION FRAMEWORK

Input Process Output

Resources used by Operation or work Direct product and Outcome Impact
program/activities to process where input is services produced Effect and result from The final outcomes as
generate output and utilised to produce from activities under program output results from program
achieve outcome specific output program

Source: Treasury Circular No. 2 Year 2012, p. 26

• The evaluation process under OBB emphasises on the following:

Appropriateness Effectiveness Efficiency Economy

• How far • What are the • Is the input fully • Can the input cost be
program/strategy output/outcome utilised? minimised?
fulfil basic contributions towards • Can the program be • Can wastage be
requirements or solve achievement of implemented more reduced?
client’s problems? impact? efficiently? • Is the program output
• Is the • What are the • Is the input utilised produced through
program/strategy negative/unexpected adequately? value for money
objective still impacts? • Are the programs principle?
relevant? • How far are the complete, conflicting
• Are the existing achievements of or/and coincide with
policies acceptable programme other programs?
and sufficient? objectives?

Source: Treasury Circular No. 2 Year 2012, p. 27

There are two methods of evaluation that need to be performed:
Formative evaluation and Summative evaluation
 REPORTING OF RESULTS
• Ministry should submit achievement of results and financial performance to
MOF through the following reports:
o Quarterly and Annual Ministry’s Performance Report
o Quarterly and Annual Projected Cash Flow
o MOIC Report
o Quarterly and Annual Monitoring of OBB Programmes or Activities Report
o Formative Assessment of OBB Programme or Activities Report
o Summative Assessment of OBB Programme or Activities Report
RESPONSIBILITY OF CENTRAL AGENCIES UNDER OBB
• Coordination of central agencies responsibility is vital to ensure effectiveness of OBB
policy and implementation both at national and Ministry level thus increase the
quality of service provided by the public sector. The agencies involves are:
o EPU- Prepare policy and strategic framework for socioeconomic development and proposed
national development project through NRF
o MOF- Coordinate, evaluate and approved ministry’s budget proposal to be presented in the
parliament
o PSD- Look at the improvement of human resource management aspect
o ICU- Coordinate, monitor and evaluate performance of projects development
o MAMPU- Act as driving force and consultancy expert on organisational and ICT management
o NAD- Perform audit on identified Ministry’s programme from time to time
o Accountant General Department- Continue to develop, manage, control and improve the
government accounting system
TUTORIAL DISCUSSION

• Discuss and provide examples for each Federal Government revenues.

• With relevant examples, explain each components for operating
expenditures.
• Explain strength and weakness of PPBS, MBS and OBBS.