Principles of Budgeting

There are a few principles followed in budget preparation exercise. These are as follows:

Principle of Annuality

This implies that a budget is prepared every year on annual basis. One year is considered ideal period for budget because it’s an optimum period for which the legislature can afford to give financial authority to the executive. Further, executive also needs this much time to implement the budget proposals effectively. Further, a year corresponds with the customary measures of human estimates.

Annuality in budget formation is a widespread phenomena. In some countries of OECD, yearly budgets are now framed within a multi-year framework.

Rule of Lapse

Principle of Annuality also implies that the money left unspent in a year must also lapse to the public treasury and government should not be able to spend it unless it is re-sanctioned in next year’s budget. This is called Rule of Lapse and is useful as an effective tool of financial control.

Fiscal Discipline

Budget should be balanced and should be able to display congruence between the income and expenditure. This is known as Fiscal Discipline and it adheres to the Keynesian School of Thought. Fiscal discipline helps to eliminate fiscal deficits and offset fiscal surplus.

Inclusiveness

Budget should be comprehensive and inclusive of diverse budget estimates. An inclusive budget includes all government revenue and expenditures and helps evaluating the much required trade-offs between different policy options.

Accuracy

Budget figures are essentially predictions of the amount of money to be generated in the forthcoming year and its expenditure. The Finance Ministry is accountable for its formulation with the help of the data and material from the various departments. These estimates need to be accurate and precise. The preciseness is dependent real and credible input data, information and unbiased information.

Transparency and Accountability

Budget transparency and accountability are two of the eight basic indicators of good governance as propounded by United Nations. Budget transparency implies that government gives out all data regarding budget. These two traits of budget also involve ethics on the part of the Government. For the sake of clarity and transparency, the revenue and capital portion of the budget are kept separate.