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

Capital Budgets: Theory and Practice 107
budget itself, and the argument has been made in some quarters that the
government may not need to have a budget at all, because the private sector
does its business without the fanfare and ritual associated with one. This
argument ignores the fundamental features of a public budget, namely, its
expression of a policy intent and its signal to the national economy about
what the government intends to do in the next year. If the capital budget is to
serve the purposes associated with it, however, more effort is required to
address some of the controversial issues and to bring about greater convergence
of the different perspectives.
It is argued, for example, that the scope of expenditure items included
in a capital budget is somewhat narrow and that outlays on social capital,
education, health, research and training, and poverty alleviation measures
should be included. In this regard, it must be recognized that the scope of
the capital budget conforms to the scope of capital formation included in
national accounts. Capital itself is a concept that has undergone change
through public discussion. In illustration of the subtle differences between
physical, financial, and social capital, distinctions are made between capital
formation and investment in a broader sense that brings returns for society
as a whole. The existing scope of capital items facilitates a tie-in with
national accounts.
In most central governments, the bulk of the capital budgets are in the
form of transfers to autonomous agencies and other levels of government;
therefore, asset formation takes place at the receiving end. As such, capital
budgets may be more useful at the local rather than the central level of
government. A capital budget at the central level of government, however,
would facilitate the establishment of a more organized buyer-seller relationship
and, to that extent, would contribute to a smoother financial
management system.
The good, old argument that capital budgets contribute to greater
emphasis on bricks-and-mortar projects raises a more philosophical issue,
analogous to the chicken-first or egg-first variety. In the context of the formulation
of medium-term plans and detailed scrutiny by the legislature and
the public alike, it could be difficult to introduce projects except after proper
scrutiny and capital budget planning. If this emphasis persists, it would illustrate
the triumph of politics and logrolling, pork barrel approaches over the
organized process of budget formulation. If anything, a capital budget raises
the threshold for the consideration and inclusion of projects for funding,
rather than reducing it.
Depreciation is another item about which controversy abounds. Should
governments follow corporate practice and depreciate all assets (including