Chapter 11: Foundations of Financial Administration and Budgeting Principles

For the government to implement policies, it needs financial resources. Financial administration is the process of deciding how to collect, where to spend, and how much to allocate of these resources.

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1. Concepts and Types of Budgets

A budget is a plan expressed in numbers of the income the government can collect and the expenses it will incur during one fiscal year.

(1) General Account vs. Special Account vs. Funds

Feature	General Account	Special Account	Funds
Resources	Taxes	Specific income	Specific income, contributions
Purpose	Basic state activities	Operation of specific projects	Continuous support for specific fields
Characteristics	Unity and Universality principles apply	Budget principles are relaxed	Most flexible, managed outside the unified budget

(2) Tax Expenditure

This refers to a form of non-taxation or tax exemption where the government reduces or waives taxes for specific groups instead of giving direct subsidies. It’s often called a ‘hidden subsidy’.

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2. Classic Budgeting Principles (Smith & Neumark)

Traditional rules to be followed when formulating and executing a budget.

• Principle of Publicity: The budget process must be open to the public.
• Principle of Clarity: The budget must be classified clearly for public understanding.
• Principle of Prior Approval: The budget must obtain legislative approval before execution.
• Principle of Specification (Limitation): Funds cannot be used for other than the specified purpose or exceed the amount.

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3. Budget Classification Methods

• Item-based Classification (LIBS): Centers on the items purchased (office supplies, travel expenses, etc.). Useful for control.
• Functional Classification (FB): Centers on the work the government does (defense, education, etc.). Easy for the public to understand.
• Organizational Classification: Based on which department is spending the money.

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Key Checklist

• What is managed separately from the budget when the state needs to operate specific funds for certain purposes? (Answer: Funds)
• What refers to the indirect subsidy effect achieved by exempting or reducing taxes? (Answer: Tax Expenditure)
• What principle states that the budget must be voted on by the legislature before the beginning of the fiscal year? (Answer: Principle of Prior Approval)

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