Public Sector Governance and Accountability Series: Budgeting and ...

Capital Budgets: Theory and Practice 91
The second stage reflects a different background, one that provided an
impetus for the application of capital budgets to government transactions.
During the late 1930s the colonial government of undivided India introduced
a capital budget to reduce a revenue deficit by shifting some items of
expenditures from the current budget. It was believed that the burgeoning
budget deficit did not reflect well on the creditworthiness of the colonial
government; the introduction of a dual-budget system provided a convenient
way to reduce revenue or current account deficits while providing a rationale
for borrowing.
The third stage refers to the growing importance attached to capital
budgets as a vehicle for development plans. The countries that had become
independent since the late 1940s recognized that the budget systems they
inherited did not properly serve their needs for development. Partly influenced
by the Soviet model of central planning, many developing countries
formulated massive five-year plans and considered capital budgets the primary
vehicle of economic development. Where capital budgets did not exist,
a variant known since then as the development budget was introduced.
The fourth stage reflects the growing influence of economists on the
allocation of resources in government. With a view to ensuring more efficient
and rational allocation, quantitative appraisal techniques (hitherto applied
to multipurpose river valley projects) came to be applied on a wider scale
during the 1960s. These techniques established a trend of more rigorous
application of investment appraisal and detailed financial planning. This
feature, common to all government program or project transactions, came to
be a condition for the inclusion of projects in the capital or equivalent budget.
The fifth stage saw a revival of the debate about the need for a capital
budget in government, particularly in the United States. Along with the
growing application of quantitative techniques during the 1960s came the
view that the introduction of a capital budget could be advantageous. But
this view did not gain much support. A president’s commission investigating
budget concepts in the United States concluded that a capital budget could
lead to greater outlays on bricks and mortar, and as a result, current outlays
could suffer. Having rejected capital budgets, the commission advocated the
introduction of accrual accounting (as distinct from accrual budgeting) in
government accounts. The introduction of accrual accounting, which did
not make any progress in the United States until the early 1990s, would have
meant the division of accounts into ordinary accounts and investment
accounts. Such accounts were intended more as a source of information than
as a basis for budgeting. Meanwhile, however, a development cast more serious
doubts on the need for capital budgets. Sweden, which had made pioneering
efforts in the 1930s, undertook a review of its budget system in the early