Budget Performance Report of ADA to the District Chief Executive

Introduction:
This report provides you with the revenue budget performance analysis for the first quarter of 2021 and some suggestions for improving the budget reliability of the Assembly.

Revenue Performance for the period
The performance assessment relates to the revenue budget and execution for the first quarter of 2021. In all, it is only grants/donations that recorded a favourable budget outturn of GH¢20,000 more than the budget, resulting in an outturn percentage of 6.67% with a budget reliability score of B under the PEFA framework. This shows that donors lived up to their promises during the period. All IGF revenue lines recorded adverse variance, that is, below budget. However, in terms of PEFA Reliability score, the performance was good. This implies, there was a high-level accuracy in the revenue estimates for the Assembly. On the other hand, the budget reliability in terms of property rates and basic rates were poor, all scoring a D. The budget outturn of property rate was as high as GH¢310,000 and that of Basic Rate is GH¢105,000. This indicate that the Assembly must pay attention to its revenue generation efforts in these regards.
In conclusion, revenue performance of internally generated revenues is not encouraging and therefore, the following strategies were recommended:

• There should be effective registration and identification of immovable properties in the jurisdiction to make the mobilisation of property more effective and less cumbersome.
• An effective register of basic rate payers should be maintained electronically to help in levying and collecting basic rates. This will also help in ensuring the collection of arrears on basic rates from defaulting ratepayers.
• An effective internal control system over revenue should put in place to check and avoid leakages resulting in malfeasance and operational inefficiencies.
• Outsourcing of difficult-to-collect revenues to private firms to increase the commercial motivation to improve collection.
• Revenue collectors should be well motivated and given clear budget targets to achieve.

Introduction = ½ mark
Body= ½ x4 = 2 marks
Suggestion=3 points @1 mark = 3 marks
Conclusion= ½ marks
Total =6 marks

• Revenue source identification and planning.
• It offers the opportunity to the Assembly to review its existing revenue sources and identify the potential revenue sources. This will help to improve the revenue net of the Assembly.
• Set target
• Revenue budgeting provides targets for implementation, and this target may motivate the responsible officer to achieve those targets.
• Communication
• It set out the revenue policies and strategies of the Assembly, which may serve as effective communication to the citizens.
• Proper cash management
• It enables the Assembly to plans and manages its cash need for the period, as the budget provides the total revenue that will be available for spending in the budget period.
• Performance measurement
• It provides a performance management tool that can assess the performance of responsible officers in executing the revenue budget.

(Any four points @ 1 mark each = 4 marks)

1) Accounting policies
Relevant accounting policies applied to the preparation of the financial statements include the following

• Basis of accounting. The financial statements have been prepared on accrual basis where transactions and events are recognised as and when they occur.
• Cost measurement. Assets are measured on historical cost basis except for motor vehicle donated to the assembly which was measured and recognized at fair value.
• Consumption of fixed assets. Consumption of fixed assets are charges using the straight-line basis. The estimated useful life of the assets are as follows:
  .                       Assets                                         Estimated useful life
                          Motor vehicle                                  5 years
                          Furniture and fittings                      5 years
                          Premises                                          10 years
                          Equipment                                       8 years
• Valuation of inventory. Inventory of office consumable was valued at lower of cost and current replacement cost in compliance with IPSAS 12: inventory
• Compliance with IPSAS and PFM Act. The financial statements have been prepared in conformity with the IPSAS and the Public Financial Management Act 2016.

Government needs to plan its activities, programmes and projects by setting clear objectives and targets for a given period. Fiscal planning refers to government’s anticipation of revenues, spending and financing within the planning period. Fiscal planning involves determination of government revenue, spending and borrowing for the ensuing year. Fiscal planning is very important in government budgeting as it provides the macroeconomic and fiscal framework within which budget is implemented.

Therefore, planning relates to fiscal planning which entail policy making stage of the budgeting process. It is the fiscal policies that influence the budget statement. Budget on the other hand is the expressing of government policies and programmes in some quantitative terms. It relates government spending to the attainment of fiscal and economic policies of government.

Government Fiscal Policy is the term used for government’s policy of taxation. The primary fiscal policy objective of government is to ensure macroeconomic stability within the macroeconomic and fiscal framework of the country.
Under the PFM Act 2016, the following principles guide the formulation of fiscal policy objective.

• sufficient revenue mobilisation to finance Government programmes;
• maintenance of prudent and sustainable levels of public debt;
• ensuring that the fiscal balance is maintained at a sustainable level over the medium term;
• management of fiscal risks in a prudent manner; and achieving efficiency, effectiveness and value for money in expenditure

• Mid-year review
• Budget performance report
• Supplementary budget
• Virement
• Reallocation of funds
• Cash forecasting

Budget Guidelines seek to provide clear instructions about the processes and procedures MDAs and MMDAs should use to prepare their budget proposals and budget estimates.
Below are the importance of Budget Guidelines in Public Sector Accounting and Finance

• control of aggregate expenditure to ensure affordability; that is, consistency with the macroeconomic constraints;
• effective means for achieving a resource allocation that reflects expenditure policy priorities;
• efficient delivery of public services (productive efficiency); and
• minimization of the financial costs of budgetary management (i.e., efficient budget execution and cash and debt management practices).

Incremental budget is derived from the current year’s budget by adding amounts expected to be required or decreases resulting from shrinkage in the scale of operations forced by pressures such as spending limitations mandated by the electorate, or cuts in capital expenditure. In arriving at the budgeted figure for an item in any given year, consideration is given to past period item and any change expected, either increase or decrease. The magnitude of change is determined by using either general inflationary rate or specified price indexes as a benchmark.

Advantages of incremental

• The process of preparing this type of budget saves time and does not generate volumes of paperwork especially for the decision package.
• Drawing decision packages and ranking operations does not require management skills which may not exist in the organization.
• Incremental Budget is always acceptable to staff or management or trade unions who may prefer the cosy status quo and who see the detailed examination of alternatives, cost benefits as a threat rather than a challenge.
• There are considerable advantages in ranking packages and its associated subjective judgements. Political pressures within organizations does not contribute to the problem of ranking different types of activities.
• It may emphasize longer term benefits which is more important in the end.
• It requires little information system in an organisation to provide the informational needs of the budgetary process.

Disadvantages of Incremental Budget

• It does not make for a complete, specific and detailed scrutiny of the objects of expenditure. If anything at all it is the incremental amounts that are justified. It may therefore contain expenditures which are not reasonable, inefficient items may also remain financed for a long time.
• There is the tendency of favouring existing programmes at the expense of new ones because budgets are built on inputs or instrumentalism without considering whether it is worth spending on the existing programme.
• It encourages budget controllers to spend whatever amount is allocated for the year, whether that entire amount is needed or not. This stems from the fact that the incremental budget stresses the potential loss of annual unspent monies; i.e. return to government chest any unspent monies. Coupled with this is the fear of budget cuts in subsequent years in areas of under expenditure.
• Incremental budgeting encourages the carrying forward of past inefficiencies this problem could have prevented by adopting Zero-Based Budgeting.

The best alternative to be adopted is Zero Based Budgeting (ZBB):
It is a method of budgeting whereby all the activities are re-evaluated each time a budget is formulated. Each functional budget starts with the assumption that the function does not exist and is zero cost. Increments of cost are compared with increments of benefit, culminating in the planning of maximum benefit for a given budget cost.
NB: other methods including Activity Based Budgeting, Programme Based Budgeting and Zero base budgeting may be prescribed by candidates.

The reasons for adopting this approach is as follows:

• It ensures better allocation and utilization of resources because of the prioritisation procedure adopted (i.e. the ranking of projects).
• ZBB focuses attention on value for money and makes explicit the relationship between the input of resources and the output of benefits.
• It develops a questioning attitude and makes it easier to identify inefficient, obsolete or less cost effective operations. That is, it is possible to identify and remove inefficient or obsolete operations.
• ZBB leads to increased staff involvement, which may lead to improved motivation and greater interest in the job.
• It is a systematic way of challenging the status quo and obliges the organization to examine alternatives existing in cost behaviour patterns and expenditure levels.
• Zero-based budgeting addresses and supports comprehensive planning, shared decision making, the development and application of strategies and allocation of resources as a way of achieving established goals and objectives.
• It helps to create an organizational environment where changes are accepted.
• Zero-based budgeting prevents the carrying forward of past inefficiencies that can be a feature of incremental budgeting

Calculation of subvention required for the 2015 fiscal year:

The following are the differences between ABB and PBB

• ABB links resources allocation to the activities required to be undertaken in order to achieve a desired output but PBB assigns resources to measurable result to be achieved.
• ABB emphasis the relationship between activities and cost thereby producing much detail on overheads whereas PPB focus on the linkage between programme funding level and expected result of the programme.
• ABB produces detail information on cost on each activity thereby making control cumbersome but PPB aggregates cost information at programme level rather than activity level.
• ABB provides full costs of programmes and services which are more transparent and available for planning, budgeting and decision making whereas PPB consolidates the cost information thereby limiting transparency and available of full cost information for planning, budgeting and decision making.

• It provides a framework for measuring the performance of the MDA expenditure programmes.
• It enables effective management of resources to achieve government outcomes or objectives since the emphasis is on programmes attainment rather than a mere performance of activities
• It promotes process accountability and transparency that enables the public to judge the fiscal stewardship of the managers.
• It provides a specific linkage between resources allocation and strategic policy objectives of the MDAs. That is, it establishes closer link between resources allocated and what has been done with it.
• It makes budget evaluation and control much focus and conclusive. It becomes very easy to measure which programme outcomes are achieved and those that are not.

• The MDA budget should not be a new political proposal which will lead to incremental or radical changes in the government macroeconomic framework;
• There should be certainty in the budget outcomes of the MDA budget proposals;
• It is important to determine whether there are new commitments or there are alternative choices that do not conflict with government policies,
• All relevant costs in the MDA budget proposals must be captured so that incremental costs do not extend beyond one fiscal year;
• MDA budget proposals must not conflict with existing laws or legal rules of the nation;
• It is necessary to establish whether projects or programmes in MDA budget proposals will lead to variations of costs.

• Adherence to fixed targets (expenditure ceilings)
• Adherence to spending on intended purpose of programmes;
• Reduction of spending overruns, that is, spending within legally binding appropriations;
• Stricter prioritization to achieve objectives of public organizations;
• Greater efficiency in spending to improve economic sustainability;
• Reduction of volatility of spending in order to create a degree of predictability in fiscal policy and making fiscal policy less stabilizing.

• Annual budget is designed as a plan for implementing government policy;
• Annual budget is designed to translate government policy into financial outlays and inputs and outputs;
• Annual budget is designed to serve as a guide for managing the economy;
• The budget document is used as a means of looking for possible directions and reactions or changes to the implementation process.

• Budgeting involves public sector managers in the budget process;
• Budgetary process is used to assess whether activities of public sector entities are the most effective means of achieving their objectives;
• The budget is used to assess the cost effectiveness and cost efficiency of operations of public sector entities;
• The budget is used to plan the cost of inputs, outputs and activities linked to the objectives of public sector entities;
• The budget is used to determine not only recurrent expenditures but also development and investment expenditures.