Variability and Opportunities in Flexible Budgeting: A Local Government Approach

By Beckett, Julia; Doamekpor, Francois K. | Public Finance and Management, April 1, 2011 | Go to article overview

Variability and Opportunities in Flexible Budgeting: A Local Government Approach


Beckett, Julia, Doamekpor, Francois K., Public Finance and Management


ABSTRACT

The context of budgeting determines the extent of exposure to disturbances and establishes its boundaries and opportunities. Further, budgets that bear the brunt of market and social or national external forces need to be made flexible to ensure success in execution. This study uses historical data on key budget items of local governments to establish boundaries drawn by prior budget policies, and suggests frameworks for ensuring accuracy in the development and execution of a flexible budget.

1. INTRODUCTION

Budget preparation and execution in individual governments, and within the public sector in general, is both empirically driven and influenced by political and social variables, including significant market factors. Market and social forces tend to be the most disruptive when preparing and executing budgets in governments. Effective resource allocation and program implementation require a significant amount of budgeting policy making variability and flexibility to sufficiently respond to dynamic market and social forces. More specifically, government budgeting success depends on how sensitive the estimates and assumptions are to changing market and social circumstances. Flexible budgeting can provide the ability to minimize the effect of shortfalls due to deviations from revenue forecasts resulting from severe market disruption. The ability to adjust to both sudden occurrences and large shortfalls is very important to both policy makers and practitioners. In short, local governments must engage in flexible budgeting.

This study contributes to the literature by emphasizing the need to better tie budgeting to market and social realities, especially significant jolts and disturbances. By harnessing these forces from the onset, and integrating them into the budget preparation process, the resultant estimates and assumptions can be made sufficiently flexible to accommodate significant deviations from expectations.

The ability of local government to succeed in budgeting depends on how quickly it reacts to market and social disturbances, including shocks. Hence, the accuracy of budgetary estimates and assumptions depend on their sensitivity to dynamic national external factors. This accuracy is needed to avoid service and activity disruptions, and to enable governments to operate at closeto-expected or optimal levels.

To sharpen the focus of this study, we briefly examine the four key approaches found in the budgeting literature. First, politics has always been an influencing factor in how budget problems and programs are framed and implemented. Its effects on the policy making process and on resource allocation decisions are immeasurable. Some contributors submit that budgeting is a political process (Wildavsky, 1984; Rubin, 2010; and Lewis and Hildreth, 2011). Others argue that the political aspects of budget occur within a largely decentralized context governed by highly stylized rules for negotiation (Bozeman and Strausman, 1982). Second, internal budget management practices and fiscal philosophy play major roles in shaping debates on fiscal issues and policy direction. Third, government bureaucracy, and fourth, globalization also affect budgeting.

These four approaches are important and influential in budgeting policy making and implementation. They provide context to budget studies and aspects of their influence are covered elsewhere in the literature.1 This study of flexible budgeting aims to add another approach to the existing literature. It focuses on:

(a) Clarifying the processes involved in tying projections, expectations and assumptions to significant economic and social realities.

(b) Identifying the critical market and social forces, or national external measures, that affect expectations.

(c) Linking the critical measures to segments of fiscal plans and budgets to illustrate accuracy and flexibility in execution.

(d) Integrating fiscal plans and measures to ensure government sensitivity to changing circumstances including jolts and shocks. …

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