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

Capital Budgets: Theory and Practice 93
lumpy in the years in which they are incurred, contributing in turn to
uneven revenue mobilization measures and tax revisions to match the
growth in expenditures. Capital expenditures necessarily tend to be
unevenly spread, reflecting, in large part, the projects to be financed. But
properly organized and financed, they had the potential to bring about a
smoother tax and revenue regime. From an accounting point of view, capital
budgets have depreciation provisions and capital charges that reflect the
asset over its full life span rather than just the fiscal year in which expenditures
are incurred for its acquisition or completion. Finally, from the point
of view of overall financial credibility, capital budgets force more rigorous
examination of the impact of expenditures. To the extent that they result in
corresponding assets, the net worth of government is ensured, permitting it
to maintain its creditworthiness in the market.
Structure of a Capital Budget
The structure of the capital budget that has evolved from the application of
the preceding considerations is laid out in table 3.1. Contrary to general
belief, a capital budget also has an extensive portfolio that goes beyond
borrowing—although depending on the situation, borrowing may be the
most important source of funds. In principle, taxes levied on property,
although paid from current income, are considered levies on capital and
included in capital receipts. In some countries, income from natural
resources (including oil) may be earmarked for capital projects and therefore
included in receipts. In countries with development plans, surpluses from
the current budget (relatively less during recent years owing to the significant
growth in current outlays) are yet another source of receipts. Depreciation
allowances represent, in accounting parlance, a contra or a balancing entry,
in that allowances that are charged to the current account are treated as capital
receipts. Charging depreciation allowances has the short-term effect of
contributing to an increased current account deficit (or reduced surplus)
and to an overall higher deficit. However, this practice must be tempered by
recognition that depreciation allowances are not, in many cases, maintained
on a cash basis but are more in the nature of a book entry. The receipts section
includes capital transfers from external sources and proceeds from the sale
of property and privatization.
The determination of capital expenditure is more complex. The first
question that arises is what are capital expenditures and how are they
determined? Accountants and economists’ approaches to answering this
question have some common and some different elements. From an
accounting point of view, outlays incurred in the acquisition or creation of