Over-spending and under-spending of the public sector budget

Over- handing and under-spending of the public sector cipherThe over-spending and under-spending of a budget is the positive or negative disagreement between what was actually spent and what was budgeted.OverspendingBudgets overruns are the underestimation of costs and time or by the nonconformity of budget managers with the spending maximum defined in the budget, when projected.There are several explanations for overspending. Sometimes, it is simply bad foretelling on part of the budget manager. There was incomplete information or poor forecasting methods that led to an underestimation and/or unreal optimism of costs, expenses and revenues. Often there is change in scope of the project and costs associated with scope change are uncomplete captured nor covered in the risk mitigation or contingency plan.Funds are allocated to the cost centers for spending, it is ruleled. Overspent fund accumulate in arrears. Overruns could also be a consequence of off-budget spending which not considered part of the budget and is not included in budget totals. Off budget spending is often for political reasons. For example, later a request from President Reagan, Congress placed strategic petroleum reserve spending off-budget in 1982. Instead of using other means to control the deficit raising revenues or cutting spending placing this program off-budget gave the appearance of a smaller deficit, even though the government still needed to finance this spending. Source Office of Management and Budget, Budget of the United States Government, Historical Tables and Mid-session Review, FY2006.Sometimes the expenditure processes are complicated and difficult. To circumvent this process exceptional procedures are ripening to speed to the process to release the funds. These exceptional procedures are tolerated by the treasury for politically sensitive expenditures. The procedures are frequently ab utilize and should be discouraged. These procedures are used my officials to order supplies without making a formal request and much later the family un-forecasted invoices appear. Sometime fund are unavailable to make this invoices which leads to generation of arrears for the pursual year. The compounding of exceptional procedures also has long-term implications, incentivizing spending agencies to go outside the budget system to avoid control altogether. Such procedures are associated with or result in corruption.Often past experiences fecal matter lead to overspending. If a department head under spent the previous year and the budget for the following year was lost. The department is highly likely to spend the entire amount for the fear of losing funds for the next year. The way in which performance is reported can meet a significant effect on the camaraderie and coordination between departments.If participation of the managers implementing the budget was absent, so managers can blame this for the file to abide by the budget. In summation impact of inflat ion and a sense of entitlement towards certain funds are also factors to be considered in budget planning. Overruns can be caused by such deficiencies in budget preparation. on a lower floor spendingMany governments do not spend their full annual budget. The reasons for this under spending can be various and can result in many outcomes. Lack of timely spending or under spending can affect the citizens not receiving natural government services. Certain areas have more economic impacts such as jobs created through the timely initiation of new infrastructure project. Under spending can often obstruct resources from other departments/managers which/who are spending their budget more productively, preventing them to reach their complete potential of success in take overy of the intended service.Under spending in particular year frequently leads to rollovers and modifications in the subsequent years. These modifications are irregular and are cumbersome to be forecasted leaving the depa rtment unequipped to spend these rollovers.Factors that result in under spending include insufficiencies in budget preparation and project/program planning, unrealistic projections of revenues, poor governance and off-budget spending.Virement is another(prenominal) factor that fuels under spending It is the transfer of funds from one budget head to another. To achieve efficiency or prevent the need for a auxiliary estimate as an under spending from one head may be transferred to another head which has overspending. One problem with unrestricted virement is that managers would inevitably spend al their budget allocation for fear of a budget reduction in the subsequent year. Example Within the ministry of raising budgets are transferred from primary education to higher education it can result in the delay of programs starting in the K-12 grades.ExampleThe latest un-audited expenditure reports from the National exchequer indicate that R3.48 one million million of the national gover nment budget went unspent in 2000/01 financial year- about R1.7billion on both the recurrent and the capital side of the budget. The under spend in provincial government was far greater at R5.5 billion. The latest available data indicate that this picture has not changed significantly in 2001/02. Although the government is pathetic in the right direction, most initiatives to address under spending appear rather general and details have yet to emerge on how the Treasury testament specifically tackle the problem. In the meantime, under-spending seems set to remain with us. Source Government under spending remains a problem February 2002 By Marritt Claassens and capital of Minnesota Whelan, Budget Information Service, Idasa, http//www.idasa.org.za/bis/Different kinds of variancesA variance is the contravention between a budgeted, planned or timeworn amount and the actual amount.Variances can be divided according to their nature of the underlying amounts and is determined by the nee ds of users of the variance information. These include Variable cost variances come out material variance damage variance is the difference between the standard cost and the actual cost for the actual quantity of material used or purchased.Usage Variance is the difference between the standard quantity of materials that should have been used for the number of units actually produced, and the actual quantity of materials used, valued at the standard cost per unit of material.Direct labour varianceRate Variance is the difference between the standard cost and the actual cost paid for the actual number of hours.Efficiency variance is the difference between the standard labour hour that should have been worked for the actual number of units produced and the actual number of hours worked when the labour hours are valued at the standard rate.Overhead variancesFixed overhead variances identifies what proportion of the total obstinate overhead variance is due(p) to actual fixed overhead bei ng different from the budgeted fixed overhead.Variable overhead variance measures the change between actual expenditure and the allowed overhead for actual labour hours.Income variance is the difference between actual income and budget income. It is used to measure the performance of a income function, and/or analyze business results to better understand market conditions. Actual income can differ from budgeted income either due to the variance in volume sold or the variance in the price point of the budgeted price point.Best PracticesThe following are some expose good practice for prevention and minimization of the variancesBroad goals should be established to guide government decision making. Budgeting methods are developed to achieve these goals. An appropriate budget is developed to achieve the goals and the performance criterion is determined at the beginning.Close interaction between the financial information system and the budgeting systems is essential. There should be a co ntrol on collective spending and any deficit, a overarching prioritization of strategies with regards to expenditures and better use of the budgeted resources.The approved budget should be entered into the financial information system. In addition to a full commitment system, memorandum notes should be included the system that capture records of commitment but does not amend the financial records.Timely proportional financial statements on a regular basis. These statements should include original and revised budget, capture variances and explain major variances.The audited and reliable statements are based in stiff accounting standards with regular external reporting.Budget Monitoring Monitoring and controlling consists of those processes are performed to observe that potential problems can be identified in a timely manner and corrective action can be taken, when necessary. The distinguish benefit is that the actuals are observed and measured regularly to identify variances from the budget.During the course of the year, sheath may arise where the income or expenditure is very large that may require and supplementary estimate. The better the level of control and intelligence available the primarily this situations can be detected and more swiftly and appropriate an action can be taken to minimize the variance. However if is determined there has to be a change then the financial information systems can be updated as soon as possible. If a department become aware that it will overspend at any time during the year it must notify the Treasury department immediately. It is possible that a supplement estimate is provided if deemed appropriate.Transparency is key publish the State accounting policies, establish system of internal controls, and keep doors open for public and parliamentary scrutiny.Flexible budgeting is a performance evaluation tool. It is not be prepared before the end of the fiscal period. A flexible budget adjusts the initial budget for the ac tual level of output. The flexible budget answers the interrogative If the department had known at the beginning of the period what would the output volume (units delivered or sold) would be, what the budget would have looked like? If the department actually delivered X units, then treasury should compare actual delivery costs for X units to what it should have spent to make X units, not to what the department should have spent to deliver X-1000 units or X+1000 units etc. The flexible budget provides a better opportunity for planning and controlling than does a static (initial) budget.