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Budget

In: Business and Management

Submitted By liyana190
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1. Introduction and Background of Budget
The Capital Budget of the public sector or sometimes also known as Public Budget concerns how the government plans its revenues and expenditures at the Federal level, State level, and Local government level, to carter for the needs of its development programs and projects. In a democratic society, the division of resources between the public and private sectors is roughly determined by the desires of the electorate. But because it’s such a complex and time-consuming task to acquire adequate political information, the electorate is chronically ignorant. Since the Revolutionary War, democratic system of governance has forever been looking for better ways to inform the public and to design more sophisticated techniques for deciding how best to allocate scarce public resources. Despite the good sense it makes to “budget to a plan”, public expenditures are frequently approved based on who supports what, rather than on a clear understanding of what exactly the expenditures will accomplish. Public Budgeting is not about numbers; it is about making Democratic governance work. During the debates leading to the creation of the American Constitution, taxation and public expenditures were one of the driving forces leading to the creation of our peculiar and complex system of separation of powers and checks and balances. Our various state and local democratic constitutions give the executive branch the power to propose a budget and collect taxes, but the authority to authorize and appropriate funds is lodged in the legislative branch. For other words, budgeting is focusing or pay attention to higher efforts to exist the financial sources to fulfill the needs of society. Caused money is limited, budgeting is one part of alternative to choose the sources and when the chosen are made by government to achieve one goal, its call one planning.

1. Definition of Budget
Budgeting is a universal and essential activity of governments and it being define in several terms by many scholars. Among them are: Based on Webster’s Dictionary;
“Budget is a plan that clearly defines the estimate Expenditure and Revenues of a program (or Project).” According to Sullivan and Steven (2003):
“Budget is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending.” Coe (1989) defined budget as:
“Budget is a projection of future revenues and expenditures and can also be viewed as a plan for spending and receiving funds”. While according to Beardon and Yawson (2000):
“Budget is the outcome of systems and relationship through which the varying needs and desires of a nation are heard, prioritized, and funded”. Wildavsky, A. (1978) in other hands define budget as:
“Budget is a document, containing figures that propose expenditure for certain items and purposes. In addition that a budget is also a statement about the future, and it attempts to link proposed expenditures with desirable future events.” Nigro (1980) said that:
“Public budget is the financial plan of the government, which determines the proposed revenues and expenditures, so as to achieve the goals and objectives (of the nation).” Goode (1984) provide the meaning:
“Public budget is the process, which involves the planning, preparation, legislation, approval, and evaluation of government resources (revenues) and expenditures.” Also Gildenhuys (1997):
“Public budget is a document indicating how a public entity spends the financial resources in order to realize specific public goals.” The Chartered Institute of Public Finance and Accountancy (CIPFA, 1996) also define:
“Public budget as a plan quantified in monetary terms prepared and approved prior to a defined period of time, usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective.” So, we can provide an understanding that budget is financial plan that consist of expenditure and revenue, and also there are program of receiving, saving, borrowing and spending funds, to achieve the public goals and objectives. It becomes a legal financial plan after it has been approved through the legislative process.

2. The Function of Budget
Gildenhuys (1997) recognizes the functions of a pubic budget as follows: 1. The budget is a policy statement declaring the goals and specific objectives an authority wishes to achieve by means of the expenditure concerned. It is public policy expressed in amounts of money and is the actual embodiment of policy and of implied policy objective. In policy-making, realization of the most important objectives and aims should receive priority. As a policy-making document, the budget generally contains a definition of both the quantity and the quality of the envisaged service delivery. However, no normative guidelines exist by which priorities may be scientifically determined, thus that is the result of political expedience. 2. The redistribution of wealth is one of the most important functions of a public budget. In order to comply with a fiscal policy for the redistribution of wealth, it requires that total integration should exist between the two sides of the budget which is the revenue policy and the expenditure policy 3. For the administrative authority, the budget is a work program on which each department can base its own operational work program. This function of the budget demands that the structure of objectives, the activity schedule, the resource schedule and the financial schedule is clearly expounded in the budget documents. 4. The budget serves as a source of information for everyone concerned, the information contained in the draft budget document is necessary for its consideration and, after approval, serves as the most important source of information to the administrative authority for executing its functions. 5. The budget also serves as a coordinating instrument by which government activities can be integrated, because it is supposed to contain all the information on the policies, objectives and activities of the government in one document. 6. The budget is also a control instrument to be used by the legislative authority over the executive authority and by the executive authority over the administrative authority and even for internal control within a single component of the administrative authority. Two types of administration control are important in this regard, namely, a priori control and ex post control. Therefore, budgets are often the basis of performance standards, where the service will be measured. The functions above cover budgeting and financial management processes to be flexible but responsible on fiscal period.

3. Budgeting Process
Budgeting process are aspects of the two-way influence namely the bottom-up and top-down. From top-down, the senior management, who will communicate the goals and objectives of the organization and expect all the functions of the lower level in the organization to align according to their purpose of budget. From bottom-top, all personnel will be involved in the development of the budget, especially the construction of the budget items. Regardless of the kind of budget that was developed, the budget process is an ideal time for personnel to inform and engage in a complete financial planning service. Traditionally, budgets have been formulated according to a bottom-up approach. Line ministries submitted their budget requests, which were usually in excess of what they realistically expected to obtain in the end, to the finance ministry at an early stage of the budget process. Based on the requests, negotiations would begin between the finance ministry and line ministries and would go through several rounds until they reached an agreement. Following further discussions on resource allocation issues in ministerial meetings, the government finalized its budget proposal in the cabinet meeting. This system conferred centralized authority for resource allocation on the finance ministry, which managed public finance by controlling individual appropriations and budget items of line ministries. In the early 1990s, most countries suffered from growing fiscal deficits which, in some countries, deteriorated into fiscal crisis. As the public finances worsened and led countries into or up to the brink of fiscal crisis, governments decided to reform their existing budget formulation systems to achieve efficient management of government debt and fiscal consolidation, namely top-down budgeting system. In this system, the budget was formulated in a different way from the bottom-up approach in which, such reforms emphasized tighter control of public expenditures and fundamental principles of fiscal discipline. The top-down budgeting system as a fiscal management reform initiative allows the government to manage fiscal deficits more efficiently than the bottom-up budgeting system. In the top-down system, the first priority of the finance ministry lies in setting the fiscal management target for fiscal sustainability and ensuring compliance with this target, in contrast to the emphasis on allocating financial resources to individual appropriations in the bottom-up system. Once the fiscal target is confirmed in the cabinet meeting in an early phase, it becomes a rule that is binding upon every cabinet member during the budget process and defended vigorously by the budget office staff. With the fiscal management target enforced as a rule and backed by an influential budget office, the government is able to regulate public expenditure and thereby control the fiscal balance efficiently (Ljungman, G., 2009). Furthermore, the top-down budgeting system helps to reduce the inefficient budget formulation practices that can usually be found in a bottom-up system. While top-down budgeting generally delegates the authority for allocating financial resources among individual appropriations to line ministries, the bottom-up approach is a centralized system in which the authority for resource allocation remains vested primarily in the finance ministry. Budget formulation in the bottom-up budgeting system begins when all agencies and ministries send their requests for funding to the finance ministry. These requests typically far exceed what the agencies or ministries realistically expect to get. Starting from these requests, the finance ministry and line ministries will go through iterative rounds of negotiation until some common point is found. This is time-consuming and essentially a game between the finance ministry and other line ministries. Therefore, there is no system for reallocation of resources within line ministries (Ljungman, G., 2009). In contrast, in the top-down budgeting system, the finance ministry is able to concentrate on setting the expenditure ceilings and controlling additional requests by setting rules, while line ministries are able to devote themselves to allocating financial resources efficiently to individual programmes within their assigned spending ceilings. The roles of the finance ministry and line ministries are clearly differentiated. The finance ministry does not need to intervene in detailed resource allocations made by line ministries if they conduct them in line with the rules. Line ministries can make the best use of their expertise in allocating financial resources to their various programmes in order to achieve their policy objectives. Therefore, the budget process will not only be less time-consuming, but the secondary allocation within each line ministry can now take place because this system creates ownership in line ministries for the actions they take (Ljungman, G., 2009). In addition, the top-down budgeting system makes it easier to have the budget aligned appropriately with policy priorities. In the bottom-up budgeting system, the finance ministry reviews individual programmes based on the requests from line ministries and agencies, and financial resources are allocated to individual programmes according to the result of programme reviews. The aggregate and sectoral expenditure limits emerge at a later stage of the budget process as the sum of all individual appropriations. Therefore, it becomes very difficult in the course of budget formulation to allocate resources among the different policy sectors in accordance with the policy priorities. In contrast, the top-down budgeting system makes it possible to have policy priorities included as a key factor to consider in allocative decisions from the very first stage of budget formulation. If the government wants to put high priority on a certain sector, say social security, and low priority on another sector, say national defence, it can achieve the priority objectives easily just by allocating more financial resources to the social security sector and less to the defense sector (Ljungman, G., 2009). In conclusion, the move toward top-down budgeting among countries began as fiscal reforms for overcoming the fiscal crises in the early 1990s. The primary motivation for these reforms was to promote economic growth through more disciplined, sustainable public finances. It was believed that these goals could be accomplished through the delegation of authority in budgeting for lower-level decisions, while enforcing strict limits at the aggregate levels. In addition, it was believed that top-down budgeting could better reflect political priorities in resource allocation. However, the bottom-up approach still enjoys widespread use as the common budget formulation method in many countries.

2. Functions of Government on Economy
The importance of government in the operation of the economy has been explicitly recognized by the economists, politicians and the public at large. The public budget generally reflects the policy of the government toward the economy in which, the public budget is a forecast of governmental expenditures and revenues for the ensuing fiscal year, which may or may not correspond to the calendar year. Thus, it leads to the public budgets to have wide implications for the national economy. The budget is the key instrument for the expression and execution of government economic policy. This is due to the interrelated between the economy and the budget. Economic conditions significantly affect the budget in various ways. Because of the complex interrelationships between the budget and the economy, budget estimates depend to a very significant extent upon assumptions about the economy. Furthermore, the budget as an instrument of economical policy indicates the direction of the economy, expresses intentions regarding the utilization of a community’s resources, and promotes economic growth, and balance in the national economy. Besides that, budget provide assessment of the economic conditions of the country, for example, if economy is growing, it means that all the sectors of the economy are growing. If the production of the economy is increases, the incomes of the people will also increase. We can say that the budget as an instrument of economic. Most developing countries, generally, have faced some problems such as unemployment and inflation. These problems could be overcome if the government had the ability to manage the economy through varying the rate of public spending in order to achieve efficiency. Based on Musgrave, R. A. (1959), the government has three economic functions, which include allocation, distribution and stabilization. Thus, by budgets governments exercise their allocation, distribution and stabilization functions. The functions of government on economy are being discussed as below.

2.0.1. Allocation Function
Allocation is the provision of public goods or collective. That means the government should be able to provide public goods to society. Public goods such as national defense, public administration, and so on. Public goods that cannot be provided through the market mechanism, but it is very important to consumers and, therefore, the government should provide them. Therefore, the government should allocate resources between private goods and public goods. Allocation function refers to how much of the government budget will be allocated to specific projects. For example, the government may decide that, as part of their economic policies, need to spend more money on military development and health care. Allocating funds can be obtained from the tax, it also allows the government to create jobs or public places. Budget policy ensures optimal allocation of resources that will result in the production of public goods and the determination of the optimal quantity. But to determine the optimal quantity of public goods is to some extent a difficult task because no one wants to pay for public goods. But the problem was solved through tax or spending decisions. The verdict may be centralized or non-centralized. Therefore, in these circumstances government intervention becomes indispensable. Thus the problem of optimal allocation of resources to the production of social goods resolved through budget policy.

2.0.2. Distribution Function
Distribution is a correction of injustice felt by the public in the use of wealth. Through taxes and spending, government policies affecting the distribution of personal income households with just and fair manner. Therefore, the tax derived from the rich will then be utilized for the scheme more favorable to the poor. Budget policy can affect the distribution of income in society. Taxation and expenditure are adopted and implemented to modify the existing distribution, in order to reduce and erase economic disparities in society. In this way, through budget policy, income distribution and the distribution of resources will certainly run optimally. Steps that can be taken by the government such as, where resources can be diverted to the poor, most of the heavy levies income tax the rich and subsidize basic goods, for example, food, housing, education, health, etc.

2.0.3. Stabilization Function
Stabilization is something that involves the fight against unemployment and inflation, as well as provisions in the improvement of living standards for the people. The economy of a country can be affected by fluctuations in the economy, such as the condition of boom and depression. These changes benefit some and harm others. In a situation such as the steps appropriate policies required by the government to influence the level of aggregate demand. The actions are called stabilization measures. These measures aim to avoid the situation of inflation and unemployment. Governments can use the stabilization function to stabilize the nation’s economy by controlling interest rates or inflation. When the budget into deficit, the government needs to stabilize the economy, this is usually done through monetary control. Budget policy can also be used to maintain a reasonable level of stability of the price level, the appropriate level of economic growth, fiscal policy, etc. In stabilization function, we can see the performance of the economy. In this function ensures that the controlled inflation or deflation, and the GDP growth rate are higher or at least stable.

3. Type of Budget and Their Performance on Economy
Public budgeting systems are intended to serve several important functions. These include setting of budget priorities consistent with the mandate of the government, planning expenditures to pursue a long term vision for development; exercise of financial control over inputs to ensure fiscal discipline; management of operations to ensure efficiency of government operations; and as tools for performance accountability of government to citizens. The most fundamental function of budget is to control public expenditure, which is commonly carried out by financial control over inputs. Typically, a budgeting system cannot achieve these purpose equally well at the same time. The relative strength of each function depends on budgeting tool and technique, but most critically depends on political decision on which issues are the government keen on, and try to orient the budget around those issues, or develop hybrids that work to achieve multiple goals. Thus, there are many types of budgeting system that being used to achieve those purposes. Among them are Traditional Budgeting System, Program Performance and Budgeting System (PPBS), and Zero-Base Budgeting (ZBB) which is being briefly discussed as follow:

3.0.1. Traditional Budgeting System (TBS)
The Traditional Budgeting System (TBS) or sometimes also known as the Classical Budgeting System is among the earliest form of formal budgeting system used by the Finance Ministry in most countries, especially before World War II. The TBS emphasized on “Line-Item Budgeting” which means to say that all the public budget (revenues and expenditures) is being itemized according to the objectives as highlighted in the budget (Zaherawati Zakaria, 2004). It focuses on what is to be purchased rather than what services are to be provided. The objective of public budgeting is to ensure the most cost effective allocation of the limited funds. Wildavsky (1978) mentions, that traditional budgeting is annual (repeated yearly) and incremental (departing marginally from the year before. Also according to Babunakis (1976), the line-item budget is a financial plan of estimated expenditures expresses in terms of the kinds and quantities of objects to be purchased and the estimated revenues needed to finance them during a specified period, usually one year. It focuses on what is to be purchased rather than what services are to be provided which means that the budget expenditures are being presents by inputs or resources purchased. Traditional budgeting uses the incremental approach. It begins with previous year’s budget and adjusts up or down from that budget to reflect changing assumptions for the New Year in which, the budget is being classified by disaggregated objects of expenditure and by operating and capital expenditures. For instance, if previous year’s budgeted expenditures for a department were $1.8 million, the department may request a 4 percent increase ($72,000) to maintain the same level of service for next year. The justification for increased expenditure is the increased cost of inputs, such as materials and labor. This incremental approach may not incorporate a careful evaluation of the level of services being offered.

A. Advantages and Disadvantages of Traditional Budgeting System The Traditional Budgeting has a number of positive and negative elements that can be identified. A prominent feature of a line item budget system is to specify the line item ceiling in the budget allocation process and to ensure that agencies do not spend in excess of their caps. Hence the budget facilitates tight fiscal grip over government operations. The strengths of such a system rest on its relative simplicity and potential control of public spending through the detailed specification of inputs (Babunakis, 1976). The line item approach embodies several impediments to promoting efficient and effective public planning and management as well as fostering results-oriented accountability in public sector institutions. Line-item budget emphasizes inputs and provides information on how much is spent and how it is spent rather than what for it is spent. It does not link inputs with outputs, and hence it says nothing about how efficiently resources are being used. The line item budget tends to focus decision making on details, whether the general office expenses such as pencils used, printing paper consumed are appropriate and how much they have gone up or down compared to last year’s budget rather than on the efficiency and effectiveness of the program (Babunakis, M. 1976).

B. The Performance of Traditional Budgeting System on Economy The objective of public budgeting is to ensure the most cost effective allocation of the limited funds. But the performance of this traditional budgeting system toward economy was not addressing this objective due to the no guarantee funds that have been spent for what they were originally intended for.
3.0.2. Program Performance Budgeting System (PPBS)
The PPBS was developed in the private sector, and then transferred to public and non-profit organizations in the early 1950s. It was adopted by the US Department of Defense, and extended to all Departments of the Federal Government by President Lyndon B. Johnson in 1965. It was implemented, or at least experimented, with in many state and local governments, both in the USA and the UK. Like Doh (1971) said that the Program Performance Budgeting system (PPBS) was pioneered at the Rand Corporation in connection with weapons system analysis for the United States Air Force in the 1950s; the Department of Defense implemented the system in 1961. Later, PPBS was popularized by President Lyndon B. Johnson, when he directed all federal agencies to use this budgeting technique in 1965. Besides that the PPBS is a “Performance Budget” and was used intensively till today in some parts of the world, and also is basic from United Nations Manual for Programmed and Performance. Also the PPBS are also known as the “Rational Comprehensive Budget.” It tries to look at the subject matter of public budget from a rational point of view. Based on Savoie (1996) defines programme budgeting as follows:
“Programme budgeting is designed to focus on making budget decisions based on important policy questions that relate to the allocation of resources between competing activities and also optimize the anticipated outputs in line with the defined organizational objectives”. According to Griesemer (1983) defines performance budgeting as follows:
“Performance budgeting approach seeks to present a clear relationship between the input of resources and the output of services”. The PPBS emphasize on the detail planning of the various development programs of the government, in order for any budget to be approved, but it is not as rigid as the ‘Line Item Budgeting System’ as used earlier. So, we can say that the PPBS are link between the line-item and program budgets and the more complex performance budget. The PPBS is very similar to zero-base budgeting, but it does not assume that all programs must be re-justified during each budget cycle. By referring to the Education Department as the example, the essential steps of Program Performance Budgeting System include the following: i. Specifying Goals The process begins by analyzing and specifying the basic goals in each major activity or program area. The starting point of Program Performance Budgeting System is to answer such questions as "What is our basic purpose or mission?" and "What, specifically, are we trying to accomplish?" For example, a school district goal might be to improve management information systems through the implementation of computer technology district wide. A school building goal might be to improve all students’ performance on the state mandated achievement test. ii. Search for Relevant Alternatives Through Program Performance Budgeting System school administrators assess as fully as possible the total costs and benefits of various alternatives. Program budgeting endeavors to determine rates of return for programs, as well as the rate of return to be foregone when one program is chosen over another. The implementation of a computer network, for example, may be the most efficient way to improve management information systems in the school district. iii. Measure the Costs of the Program for Several Years An essential feature of Program Performance Budgeting System is long-range planning and budgeting. For example, in budgeting for additional schools, decision makers would need to consider not only the initial costs of construction but also the costs of operating and maintaining the facilities in future years. In addition, long-term enrollment projections must be made to determine the future need for school facilities. iv. Evaluate the Output of Each Program Program Performance Budgeting System focus on the outputs of programs, whereas traditional budgeting approaches tend to emphasize expenditure inputs. Program budgeting enables school administrators to compare program proposals, relate them to current activities, evaluate them in terms of priority, and then to increase or decrease allocations of resources to them. In other words, it is an attempt to answer the question "How effectively and efficiently are we achieving our goals?" The PPBS is nice in theory, but it is quite difficult to implemented, because to implement it, require substantial cost; because need sophisticated technology, advanced information system, as well as good human capital. So, this some steps on process to implementing PPBS include: 1. Define the general objectives and organizational goals with clear organizational unit. 2. Identify programs and activities to achieve stated goals. 3. Evaluate various alternative programs to compute cost-benefit of each program. 4. Selection of a program that has great benefits for a small fee. 5. The allocation of resources to each approved program. 6. Requires an organization to plan long-term to achieve organizational goals through programs.

A. Advantages and disadvantages of Program Performance Budgeting System The Program Performance Budgeting System has several great benefits among them are (Zaherawati Zakaria, 2004): i. Focused on effectively resources in produced output and encouraging the government and agencies to evaluate the function, responsibility and their roles to achieve goal and purpose in developing country. ii. Encourage the produced of smooth information’s in right timing. iii. Have a performance measurement that frame and using to public benefits. iv. Having a program evaluation that important to gain reaction from public about the government programs. v. Can help the other agencies to manage, organizing and control with better planning, efficiency and effectively. vi. Try to fits the lack of Traditional Budgeting System with assume to one ‘basis for making program decision in the operating agencies would be improved Despite its benefits, the Program Performance Budgeting System has not been the great tool in practice that its logic would imply. There several reasons for this are (Zaherawati Zakaria, 2004): i. Difficulties to decide clearly goal because it must involve many research and development to knowing the public needs and expertise to making research ii. Difficulties to choose fits program that connecting with social values. iii. The performance is tough to measure since there is many public agencies with diversity of goals iv. Difficulties to hired the expertise and experiences (even having many staff but the expertise a little bit).

B. Performance of Program Performance Budgeting System on Economy How the performance of Program Performance Budgeting System on economy? The Program Performance Budgeting System is a practical, rational and comprehensive budget introduced to solve the problems of wants and demands of the people since there is effective allocation of resources through the cost benefit analysis of program or project. While in the process to fulfill the goals and objectives of the government, there is also fairness in resource distribution since the Program Performance Budgeting System considering of all cost that occur, and eliminating the program or project that overlapping or contrary to the objective and this lead to the stabilization of nation economic. Besides that, the PPBS were developed to provide with objective information to aid in planning programs and for making choices among the alternative ways of allocating funds to achieve the goals (Brimley and Garfield, 2008; Odden and Picus, 2008).

3.0.3. Zero Based Budgeting System
The zero-based budgeting (ZBB), introduced at the U.S federal level in the 1970s. Based on Griesemer (1983), the Zero-Based Budgeting was first introduced in Georgia in 1972 and subsequently to the federal government of the USA in 1976. The ZBB system was made famous and implement by President Jimmy Carter of the United States of American. Before transferring to public sector and not-for profit activities, ZBB originated from US private industry. As Pyhrr (1977) asserts ZBB is an emerging process which has been adopted by a variety of industrial organizations in many sectors of the economy, as well as by the state and local governments. Unlike in incremental budgeting, zero-based budgeting does not start from the previous year’s budget level. Existing operations are studied, and continuance of the operation or activity must be justified on the basis of its usefulness and its need to the department. The manager requesting the budget is responsible for this justification. As a result, each department begins from zero and prepares a series of budgets, one for each decision package under consideration (Jones and Pendlebury 1996). The ZBB system operates by examining the possibility of decreasing some programs while increasing other more prudential ones. Based on Fremont and Earnest definition of ZBB is one process that focused on management accountability for planning, budgeting and evaluation. The ZBB is provided to analysis the alternative approach to implementation in diversity of level. It’s including the frame of new program with suitable policies and what the priority of the social needs. Jones and Pendlebury (1996), argue that the zero base budgeting process forces managers at all levels to identify their specific objectives, to quantify them, and to evaluate the cost effectiveness of the alternative ways of achieving them. Statement by David W. Singleton, ZBB is trying to change the traditional budgeting system through the one process of resources distribution that include the recommendation activities to related with small units to operating. A ZBB system demands that the manager justify the entire budget in detail and explains why the company should spend the money in the manner proposed. Thus according to Graehme M.Taylor (refer to Peter A. Phyrr, 1970), he stated that the ZBB has 3 basic elements: 1. Identification of decision units. This stage requires the government (Finance Ministry) to identify the important development Budget (and programs), and to put them down in writing. Determined of ‘decision units’ (the bigger capital and giant projects, the special purpose, the determined the priority of the agencies purposes). 2. Analysis of the decision units or decision packages and its functions. This stage requires the Finance Ministry to analyze the Budget, with regard to its benefits and costs – to the society. Analyze the each unit decision in ‘decision package’ (one documentation that including of determined and explanation of each decision units to evaluate and approved the validity or not). 3. Ranking the decision packages, in order of importance. This stage requires the Finance Ministry to prioritize the various development programs (and Budget) in order of importance and urgency. Evaluate and listing or give the level for all ‘decision package’ for smooth in demand of aggregate. Also provide and details in way of expenditure that show-off the agree decision making by all participants. Investopedia Dictionary explains because of its detail-oriented nature, zero-based budgeting may be a rolling process done over several years, with only a few functional areas reviewed at a time by managers or group leadership. Jones and Pendlebury (1996), state that the mechanics of zero-base budgeting require that all the functions of an organization are re-evaluated annually from a zero base. . Each plan is justified in terms of the total cost involved and the total benefits. Past performance is not referred to as a building block. Zero-based budgets are set to prevent regular budget creeping behavior that emphasizes inflationary adjustments. New and old work tasks are treated equally. Every managerial activity is properly identified and then evaluated by analyzing alternative levels of operation for the same activity. These alternatives are ranked and relative priorities are set for achieving effectiveness and efficiency. As we know, it quite difficult to get the balance of budget between expenditure and revenue. According to Cichocki, et al (2012), there is no doubt that the clean-slate approach to cost reduction can be daunting. However, we have found that companies that transform their cost structure through ZBB generally follow a common set of actions. 1. Build a winning team. A ZBB program is only as good as the people running it. That’s why a program begins with forming a core team of high-potential and experienced project leaders from various parts of the organization. The team reports to a corporate steering committee and an executive sponsor. As the program gains momentum, more people take part in initiative teams, with as much as 5% of staff providing input on the work. In other words, ZBB is not a hands-off exercise. 2. Define the new mission to reflect evolving market conditions. The new ZBB team begins by redefining the function’s mission and orienting the function to up-to-date objectives, given current business challenges. For example, a finance function’s mission might shift from “provide world class financial support to management” to “provide efficient low-cost transactional support while providing top-quartile decision support services.” Having identified the mission, the team then designs principles that support the new mission. 3. Aim high. While redefining the mission, the team works to set an ambitious cost target-large enough to ensure transformational rather than incremental thinking. The team determines a realistic cost goal by collecting both internal benchmarks across business units and regions and peer company benchmarks. However, the cost goal is not yet a firm commitment. That commitment comes from the bottom-up analysis later in the ZBB process. 4. Document the existing state. The company needs a baseline for all its costs and processes. Creating that fact base means listing and defining all the existing activities and processes and creating a database of all the costs and headcounts associated with each activity and process. 5. Create the ideal state that will best support the company’s strategy. Putting aside the existing state of the company, the team envisions each function in an ideal state with a blank sheet of paper. This is the opportunity to explore which activities can be removed or which service levels can be reduced to match evolving company needs. This task allows the team to describe the activities that can become more efficient and update the organizational structure to match those changes. 6. Compare the existing and ideal state. Comparing the existing with the ideal state, the team can identify the savings opportunities and associated risks and costs of moving from the existing to ideal state. The team then assigns priorities to each initiative based on the size of the opportunity and the difficulty of achieving it. 7. Build the future state from the bottom up. This is a more pragmatic and thorough version of the ideal state that takes into account practical constraints like transition costs and risks. Working from the bottom up, teams project future costs and resources for each prioritized activity and service, yielding firm cost and savings commitments. 8. Refine the organization. Company leadership then takes all the data and analysis collected by the various teams and designs the organization needed to support the future state. At this point the leadership must ensure that the design is consistent with organizational best practices for spans, layers and effective decision making. 9. Create an implementation plan. At this stage, the team begins a quarter-by-quarter implementation plan (including the formation of an implementation team), and an internal and external communication plan. Finally, there is a new program office to champion and communicate achievements, monitor savings, embed new capabilities and sustain the cultural change.

A. Advantages and disadvantages of zero-based budgeting Zero-based budgeting provides distinctive advantages over traditional incremental budgeting. These include (Zaherawati Zakaria, 2004): i. The planning mechanism needs budget setters to examine every budgetary item as if it were new. ii. It allocates financial resources basing on planning requirements and results. iii. It prevents incremental budgeting simply based on the previous year’s figures with an estimated percentage increase. iv. It helps the budget setter to develop a questioning attitude; inefficiencies and wastage can then be reduced. v. To obtain efficiency, it encourages managers to look for alternative operation plans. Nevertheless, there are some disadvantages to zero-based budgeting (Zaherawati Zakaria, 2004): i. This budgeting is sophisticated and can consume a lot of managerial time. ii. Short-term benefits may take precedence over long-term planning as the latter is less prominent in the planning process. iii. As a new budget allocation is started every year, there will be annual conflicts over budget allocation.

B. The Performance of Zero-Based Budgeting System on Economy The Zero-Based Budgeting System performance also gives an impact on Economy. Easier in program justification that can reduce the expend for not priority activities caused the ZBB more flexible in determined expenditure for implement the government activities because the less important and less urgent development programs and projects can be delayed, and the necessary budget can be utilized for other more important and urgent programs and projects. In addition to that, the Zero-Based Budgeting is said to be more efficient and effective as compared to other Budget method or system in hastening the pace of development and fulfillment of the goals and objectives of the nation. Zero-based budgeting aims to justify resource allocation in an individual budget scheme, regardless of prior period budgets. It is not based on historical data and begins each budget period afresh. The budget is first allocated as zero unless the manager responsible makes the case for resource allocation. The manager must justify the reasons for the financial resource allocation.

4. Performance of Budget In Indonesia and Malaysia
4.0.1. Performance of Budget in Indonesia
Budgeting in Indonesia as a system is a process that governs the preparation of the budget document. The budgeting process in Indonesia is a description of the budgeting process and the mechanism that starts from limit to the determination of the indicative budget allocation ministry which is final. Budgeting system should be properly understood by stakeholders in order to produces the Budget of State Revenue and Expenditure which credible and accountable. Matters set forth in the budget process, especially regarding the process of preparing a set budget into three subject matter, namely: • Budgeting approach. • Classification of the budget. • Budgeting process.

Budgeting approach used in the budgeting process in Indonesia using an integrated approach to budgeting, which includes performance-based budgeting and medium-term expenditure framework. The approach used in the preparation of the budget consists of approaches:
Integrated Budgeting is the most fundamental element for the implementation of other budgeting approaches, namely, Performance-Based Budgeting and Medium Term Expenditure Framework. In other words, an integrated approach to the budget is a condition that must happen first. Integrated budgeting is done by integrating the entire process of planning and budgeting in the ministry to produce documents Work Plan and Budget, with the budget classification according to the institute, function, and type of expenditure. Integration of planning and budgeting process is intended to avoid duplication in the provision of funds for ministries both investment and operational cost. On the other hand, the application of integrated budgeting is also expected to create a unit of work as the sole entity responsible for accounting for its assets and liabilities, as well as the income and expenditure account for one deal so ensure there is no duplication in its use. Refers to an integrated approach to budgeting mentioned above, the preparation of the Work Plan and Budget using the results of restructuring, which in relation to the budget classification according to the programs and activities, as well as the arrangement of the budget and work units for the management of the budget, which in terms of budget classification according to the institute. Performance-Based Budgeting Approach Performance-based budgeting is a system approach in budgeting, linkages between funding and expected performance, as well as attention to efficiency in the achievement of such performance. Medium Term Expenditure Framework Approach Medium Term Expenditure Framework is a policy-based budgeting approach, the decision-making implications of the budget in a period of more than one fiscal year. In general, the preparation of the medium-term expenditure framework requires a comprehensive planning stages of the preparation of the medium term include: – Preparation of projections /plans or assumptions macroeconomic framework for the medium term. – Preparation of projections / plans or targets medium-term fiscal (such as tax ratio, ration deficits and government debt). – Plan budget framework includes income, expenditure, and financing of medium-term (medium term budget framework), which produces limit total government expenditure. – Limit the distribution of total medium-term expenditure each line ministries.

The concept of local fiscal policy in Indonesia based on the implementation of regional autonomy.
Decentralization in Indonesia are not only associated with the model rule alone, but also about economic paradigm called economic decentralization. Decentralization economy includes economic activities and responsibilities that are implemented at the level of regions in Indonesia. In this regard, fiscal decentralization became a major component of the decentralization process in Indonesia. As part of an integrated and cannot be separated from national fiscal policies, fiscal policy area should also consider the principles of budgeting. There are two approaches used in the preparation of the budget, which is a hard budget constraint and the soft budget constraint. Based on the approach of a hard budget constraint, first identify areas of income (revenues) and then determine spending. Instead, based on the soft budget constraint, estimated spending first and then seek local revenues to fund these expenses. In the first approach, the potential is a primary consideration, while in the second approach, the important needs are the dominant factor (Kadjatmiko: Hofman, 2006). In addition, as an important part of the planning and budgeting reforms, the Government of Indonesia was implementing a multi-year performance based budgeting and medium term expenditure framework in the period 2010-2014 under the guidelines published by the Ministry of Finance as well as National Planning and National Development in 2009. Besides used top-down approach in the process of budget or financial plan, Indonesia also develops bottom-up estimates of the cost of providing for local needs in Indonesia. A bottom-up approach was used to developing a formula for the allocation and distribution of resources. The bottom-up approach focuses on the cost of providing of essential services in a typical district in each of the 34 provinces of Indonesia.
4.0.2. Performance of Budget in Malaysia
Basically, the ruling government has rights in drafting and implementing economic policies including the budget policy. In the case of Malaysia, through the general elections, the National Front (Barisan Nasional) has controlled and the managed country’s economic resources since 1957. Since then, Malaysia had undergone the economic expanded through it medium term development planning which has been going through into five phases, starting with the pre-New Economic Policy, the New Economic Policy, the New Development Policy, the New Vision Policy and the New Mission. The formulation of budget policy is associated with the long or medium term economic development plans that are drafted, thought of economic policies and additional measures that would be introduced probably related to major economic events such as the impact of financial or global economic crises. Also the budget includes economic policies according to the ruling party’s manifesto and promises made during the election (Gulam, H., et al 2012). Even though the budget is the ruling government’s privilege but the government’s financial plan, which is the allocation and the manner of spending, taxation and borrowing are subject to law, acts, rules and procedures. The ruling government cannot simply utilize economic resources for its political means or interests. In Malaysia, the budgetary policy is governed by the Federal Constitution in which the constitution has specifically spelled out a set of rules pertaining to financial provisions. The Financial Procedure Act 1957 provides specific requirements concerning the control and management of public finance as well as the financial and accounting procedures. Besides, the procedures and practices of accounting and reporting are governed by a set of rules, among the regulations are the Federal Constitution (Revised 1972), Financial Procedures Act, 1957 (Revised 1972) and Audit Act 1957 (Revised 1972).

A. The Budget Process in Malaysia The budget formulation motion includes the budget requests, budget examinations, budget recommendations, and budget approvals. Initially, the agencies from different sectors will prepare their written suggestions for the coming year budget. By January of the year, “a call circular” is issued to all ministries and related agencies for the New Year Budget Estimates for the preparation of the coming year budget. The Ministry of Finance shall then receive the fiscal suggestions by March. It is then followed by a preliminary hearing by April of that year and later followed by the Budget hearing between May and July. Once the New Year Estimates are approved by the Ministry of Finance and the Cabinet, the budget reading shall be carried between the months of August to September. Upon agreement of the Cabinet, the budget document will be printed and tabled to the parliament in September. This budget document will then pass through the Lower House of Parliament from September to December for debates and approval (Ministry of Finance Malaysia, 2012). Members of Parliament are usually given a sufficient amount of time to debate on the spending proposals. Also, in certain circumstances they are given opportunities to amend necessary government priorities and intended spending plans, with full access to ministers and the bureaucrats for further details on the budget proposals. After every subject matter arising on the budget has received approval from the Lower House and the Senate (Dewan Negara) thereafter, the Minister of Finance shall then proceed to issue a Warrant of the Expenditure for the various government agencies to execute the budget. The Executive or the Cabinet and the law makers of the Lower House of Parliament are the ultimate arbitrators of policy matters. The Ministry Of Finance is the main centre of drafting, implementing and executing the budget plan. Before the budget is formed, the Ministry Of Finance will seek input from various groups such as members of parliament of the ruling government, business associations, ministries and non-governmental organizations (NGOs). In general, every ministry has to prepare their budget plan and submit it to the MOF. Every year the Finance Minister, senior officers (civil servants) of the ministry and corporate leaders will convene a Budget Dialogue to discuss what possible policies should be introduced or to extend current policies in the coming year budget. Most of the opinions and recommendations are roughly from the corporate leaders (sector) however the Ministry Of Finance has an ultimate power in deciding whether suggested policies should be adopted or not (Gulam, H., et al 2012). . From the above mention budgeting process, Malaysia having evaluation in its budgeting system, starting from the incremental line-item budgeting system, Program Performance Budgeting System (PPBS), Modified Budgeting System (MBS) and currently towards the Outcome Based Budgeting as to ensure that the performance of the budget system will give an impact towards the economy performance. From the Traditional Line Item Budgeting System, Malaysia implemented the Program Performance Budgeting System in 1969 through to 1990. However there were several weaknesses in the implementation of the Program Performance Budgeting System. The focus of the budgetary process was on line items although information on the performance of Program and Activities was available. Budget process was used more as a tool for funds disbursement rather than a strategic management tool. Little if no relationship was established resource management and performance management. Empowerment and delegation of authority to make decisions on resource utilization was limited. There was a dichotomy in the decision making process on financial matters and matters pertaining to policies and implementation of Programs or Activities and the approach to planning and budget preparation was bottom-up (Ministry of Finance Malaysia, 2012) Then, the Malaysian Budgeting System (MBS) also known as the Modified Budgeting System was introduced in 1990 and implemented in phases to cover all government ministries and departments by 1995. The MBS is a system of management designed to establish logical linkages on the relationship between inputs, outputs and impacts. The Modified Budgeting System is based on fundamental management principles of “letting managers manage” in which, managers nearest to where outputs are produced should be given as much flexibility or authority as practicable to manage their resources, however this authority must be matched with requisite accountability at all levels of management. Modified Budgeting System was implemented with the explicit objectives of trying to improve resources allocation by bringing about more efficient management of government programs by way of improved accountability up (Ministry of Finance Malaysia, 2012). The government always desires to improve the structure of budget allocation and expenditure to be more efficient and effective. Accordingly, the Outcome Based Budgeting (OBB) system that being developed in 2010 was started to be implemented during the 10MP period to replace the existing Modified Budgeting System. Currently, under the Outcome Based Budgeting approach, the emphasis will be given to the impact and effectiveness of projects and programmes, compared with expenditure and outcome. It explains why the money is being spent through the statements of missions, goals and the objectives. In addition, government expenditure will emphasize value for money as well as programmes and projects with high multiplier effect. This enables the policymakers to determine what activities are cost-effective in reaching their end outcome (Ministry of Finance, 2012). Therefore, the national budget’s success relies on what extent the budget creates economic reactions among various economic agents and social sectors. The budget should be unbiased to various groups of people, races and corporate sector. There should be no skewers in the budget or favoring certain groups that are closely linked to the ruling government. There should not be a heavy weight on the economic sector while other sectors such as welfare of the available and the budget will guarantee that the economic and social welfare of the people will be maintained or enhanced. Therefore, the policy makers have to ensure that the budget plan drives economic growth development for the well-being of the people. The budget is a comprehensive economic plan or an economic blue print and in drafting the plan a bargaining process is involved. Every ministry and government agency will bargain for public funds in the coming year. There will be politicking in drafting the budget plan. The politics of the budgeting process is essentially linked to the distribution of power within the process. During the budget formation and implementation process a disparate power relationship exists which gives rise to the exclusion or immediacy in the course of decision making.

5. Conclusion
The government plays an important role in the economic life of the state through the revenue and expenditure measures of its budget. The economy and the budget are interrelated. In addition, the economic consideration indicates that the budget has some functions such as in allocation, distribution and stabilization. Besides that, budget provides assessment of the economic conditions of the country. If the productions of the economy are increases, the incomes of the people will also increase. As a concluding remark, it is not brisk to say that Public Budget is the backbone of every governmental organizations and departments, without which the smooth operation of an organization can be totally disrupted. Thus, proper and prudential planning on the Federal government, State government, and Local government sides with regard to project feasibility and urgency of projects are highly encouraged.

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...the budgeting process and primarily focuses on the planning problems with budgeting. The other advocates abandoning the budget and primarily focuses on the performance evaluation problems with budgeting. This paper provides an overview and research perspective on these two recent developments. We discuss why practitioners have become dissatisfied with budgets, describe the two distinct approaches, place them in a research context, suggest insights that may aid the practitioners, and use the practitioner perspectives to identify fruitful areas for research. INTRODUCTION udgeting is the cornerstone of the management control process in nearly all organizations, but despite its widespread use, it is far from perfect.1 Practitioners express concerns about using budgets for planning and performance evaluation. The practitioners argue that budgets impede the allocation of organizational resources to their best uses and encourage myopic decision making and other dysfunctional budget games. They attribute these problems, in part, to traditional budgeting’s financial, top-down, commandand-control orientation as embedded in annual budget planning and performance evaluation processes (e.g., Schmidt 1992; Bunce et al. 1995; Hope and Fraser 1997, 2000, 2003; Wallander 1999; Ekholm and Wallin 2000; Marcino 2000; Jensen 2001). We demonstrate practitioners’ concerns with budgets by...

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