International Encyclopedia of Public Policy and Administration - Vol. 2

By Jay M. Shafritz | Go to book overview

constitutional requirement that public borrowing does not exceed the amount of investments included in the budget. Only four European countries ( Greece, Ireland, Luxembourg, and Portugal) somehow make an actual difference between a current and a capital budget. This classification of outlays appears to present a problem in all countries using a capital budget. Only after long-lasting debates did more or less general accepted definitions emerge, which were later adjusted under the pressure of the topical situation.

In Greece, outlays have to contribute to productive capacity and economic growth has to be recorded on the capital budget. In practice, spending on roads, buildings, infrastructure, and so on are recorded on the capital budget. Capital transfers from central government to lower level governments are only recorded on the capital budget if they pertain to specific investment projects carried out by local governments. In addition, a small part of military investment expenditure pertaining to investments-such as radar stations-also used by the private sector is recorded on the capital budget. The Greek criterion for distinguishing between current and capital outlays resembles the principle of productivity (or indirect return).

Ireland has used a current and capital budget since the 1950s. The following expenditures are recorded on the capital budget: (1) investments by central and local governments, by the semi-public sector, and by health boards, in- so far as their expected life exceeds one year; (2) capital transfers and loans of central and local governments and semi-public sector bodies to third parties; and (3) capital transfers related to international commitments. In addition, these expenditures should exceed a minimum amount. Military investments are recorded as current outlays, conforming to the national account system. The Irish definition of capital outlays concurs with the principle of durable benefit.

Since Luxembourg's constitution requires that the current budget be balanced, it is only permitted to borrow for those expenditures recorded on the capital budget. The criterion applied is that the investments' expected life must exceed one year. In practice, the capital budget contains special funds for investments in telecommunications, the environment, and roads.


Evaluation

The credibility of the main argument for a capital budget, being that it reinforces the allocation function of the budget, seems questionable. An important consideration is that, in principle, there is nothing that prevents politicians and bureaucrats from judging current and capital outlays on their own merits. It is difficult to accept the view that the kind of bookkeeping determines the balance of expenditure. And if it does, it seems to suggest that there is some thing wrong with the quality of political decisionmaking rather than the bookkeeping.

Admittedly, a sound argument for a capital budget seems that a spread of the cost of capital over a range of years permits a better comparison of current expenditure with the annual cost of capital. However, this may also be realized by other means, such as cost-benefit analyses. Thus a formal division of the budget in a current and a capital budget is not a prerequisite for a better comparison of current with capital outlays.

In addition, it is important to be conscious of the fact that a capital budget may not only reinforce the allocation function of the budget but also could hinder it, in particular if the capital budget is coupled with the golden rule. If current expenditures have to be financed by taxes, whereas outlays recorded on the capital budget may be funded by loans, politicians and bureaucrats may widen the concept of capital outlays.

All in all, the formal division of the budget seems less crucial to the allocation function than the politicians' willingness to accept a rational decisionmaking process and to take into account all relevant costs and benefits of public expenditure.

M. PETER VAN DER HOEK


BIBLIOGRAPHY

Boness, A. James, 1972. Capital Budgeting. London: Praeger.

Comiez, Maynard S., 1966. A Capital Budget Statement for the U.S. Government. Washington, DC: Brookings Institution.

General Accounting Office, 1988. Budget Issues: Capital Budgeting for the Federal Government. Washington, DC: General Accounting Office.

-----, 1993. Budget Issues: Incorporating an Investment Component in the Federal Budget. Washington, D C: General Accounting Office.

Hagen, Jürgen von, 1992. "Budgeting Procedures and Fiscal Performance in the European Communities". Economic Papers, no. 96 (October). Brussels: European Commission.

Miller, Gerald J., 1991. Government Financial Management Theory. New York: Marcel Dekker.

Musgrave, Richard A., and Peggy B. Musgrave, 1989. Public Finance in Theory and Practice. New York: McGraw-Hill.

Rutherford, B. A., 1983. Financial Reporting in the Public Sector. London: Butterworths.

EUROPEAN COAL AND STEEL COMMUNITY. The first supranational organization in Western Europe involving the delegation by national governments of decisionmaking power to a higher authority in respect to two key economic sectors, namely, coal and steel. It was the first of the three European Communities established in the post-World War II period. The European Economic Community (EEC) and the European Atomic Energy Community (EAEC) came into operation in 1958.

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