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

Capital Budgets: Theory and Practice 95
durability considerations are common to both economists and accountants.
Unlike the accountants’ approach, however, the economists’ approach places
more emphasis on the self-liquidating nature of the activity as an additional
feature of assets. Furthermore, from the economists’ perspective, certain
activities of a distinct nature (such as defense) are treated as consumption
expenditures even if they technically contribute to assets and thus to capital
formation. The accountants’ approach makes no such distinctions. 2 Taking
account of an asset’s life span also poses problems, in that the government
acquires several items of equipment for day-to-day use that have a life span
longer than a year but are not treated as capital expenditures because they do
not meet the productivity criterion. In practice, governments follow a form of
case law to determine which items to include. It is quite likely, however, that
initial expectations about the criteria may not be fulfilled. In such situations,
the nonremunerative projects may be written off through the current account.
Resource Allocation
The first and major part of public financial planning, regardless of whether a
capital budget exists, relates to the determination of resources to be allocated.
The criteria for this purpose need to be rigorous and applied consistently. The
costs and benefits associated with government policies, programs, and
projects need to be identified in detail and evaluated because these costs
imply real opportunities forgone. Capital budget planning was not an essential
component of capital budgets during their initial stages of application,
largely reflecting the relative lack of required techniques at the time. Over the
years, however, these methodologies have grown, and their application has
become an accepted integral part of governmental financial planning. More
specifically, such planning enables the following elements:
Public determination of the optimal level of public stock
Allocation of public receipts between debt and taxes—and the implicit
need to keep the ratio of debt to gross domestic product (GDP) at a
constant level, to the extent possible
The role of compensatory fiscal policy.
The last element requires determination of three items: in which directions
amounts are to be spent, whether recession is to be addressed, and how
outlays are to be reduced if persistent inflation is the problem. Financial
planning is therefore essential for determining economywide policies and
strategies and sector development approaches.