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

92 A. Premchand
1970s. It found that excessive focus on capital budgets would need to be
tempered by a recognition that the overall credibility and creditworthiness
of a government depend more on its macroeconomic policy stance and less
on its net worth. Although the application of capital budgets for quasicommercial
transactions was necessary, it was not to be considered as a main
basis for the borrowing program.
This shift in emphasis contributed to a decline in the popularity of the
capital budget until the late 1980s, when it came to be revived in a different
form. By then government officials recognized that the management of
government finances required a radical approach, and this radical approach
was the application of accrual accounting. During this sixth stage, partly
because of the experiences of Australia and New Zealand, there were
renewed pleas from the professional bodies and, from the late 1990s, the
international financial institutions for the introduction of accrual budgeting
and accounting. These pleas found an echo in the United States, where advocates
held that the absence of a distinction between investment outlays and
ordinary or current outlays led to unintended neglect of infrastructure or
accumulated assets. Ensuring proper asset maintenance (as important as
asset creation) required a division of outlays into current and capital outlays,
as a part of day-to-day budget management.
Capital Budget: Conceptual Framework
Although corporate practices provided the basic inspiration, planners recognized
from the start that the nature and rationale of capital budgets would
be different in public bodies. Apart from the basic distinction arising from
the lack of profit motive, the structure of a government and the diversity of
purposes served also differ. Unlike in the corporate sector, an entity in government
may not have separate assets and frequently its power to borrow
may be limited. The power to borrow and the assets created belong to the
whole government. In addition, the government may not engage in direct
asset creation but may frequently transfer the borrowed resources to its more
specialized agencies, including state-owned enterprises, so that they can
create the assets.
The more important differences lie in the rationale for capital budgets
in governments. From the viewpoint of financing, it was to explore the alternative
to taxation and to engage in borrowing that could bring about a
better distribution of government services among taxpayers and beneficiaries.
Borrowing also could contribute to a better distribution between
consumption and investment, although there were clearly limits on the
extent of borrowing. Moreover, investments by governments tend to be