Budgeting is a very important process, which can be aimed at the maximization of all the benefits, which can be got from the public spending with the use of all available resources. The budgeting process might not meet all the objectives, but the budgeting allocations. All budget processes often contain a bottom-up and top-down elements. A top down budgeting is the budget process where there is shifting the balance issue with the main of making sure that all the decisions at the budgeting process reflect all the aggregate priorities of the fiscal policies.
The top down budgeting does not limit the democratic institutions discretionary powers. It also does not eliminate any process, which is conflict-ridden in the making of the choices regarding the activities and programs which are supposed to be considered for an additional funding as compared to the funding that the programs and activities received during the previous year and also the cuts of funding of some activities and programs. This paper mainly discusses the implications of the top-down budgeting approach in federal countries.
What Kinds of Budgeting There Exist?
Budgets are used by governments and business entities to help them to stay within their limits, to control, forecast, delegate, organize needs, and prioritize wants. There are two main types of budgeting methods, which include the following:
- Top-down budgeting
- Bottom-up budgeting
What place does the top-down approach take between the other budgeting approaches?
The bottom-up budgeting approach is the most common traditional budgeting approach, which is commonly used in budgeting companies and projects while the top-down budgeting approach is an approach, which became popular in the 1990s in the governments and businesses. The top-down budgeting is often used by the governments and companies in the times that the companies and the governments are facing a financial stress. This makes this budgeting approach to be advantageous over the bottom-up budgeting approach.
It takes less time as compared to the other budgeting approaches as it promotes an upper-level commitment. This approach also does not involve any multilevel participation as the management on the lower level has a better understanding on the expectations of the upper management.
The top-down approach is a budgeting method, which is very easy to work with as when a government or a company is making the decision on the type of budgeting to use, it has to put in mind the finances and the funds, which are available for the budgetary allocations and if the funds are limited, then it is wise enough to keep a good budgeting approach. In this case, it makes the top-down approach the best budgetary approach to use as it can keep a company or a government from overspending as it has set ceilings. The top-down budgeting approach gives the finance managers the ability to have a centralized budget, which is aimed at controlling of all the organization’s spending and the project managers, on the other hand, are able to establish all the projects, which consume the centralized budget set by the financial managers and help in the controlling of the spending of the projects.
There is accuracy in the aggregate budget, in this budgeting approach although some activities by the individual may be erroneous. The budgets are very stable, because the statistical distribution and the total allocations of the budget are very stable, which can lead to a high predictability. Top-down budgeting is not costly as it can be factored into an overall approximation.
What place does the bottom-up approach take between the other budgeting approaches?
The bottom up approach is often called the zero based budgeting as it begins with the identification of all the tasks and activities, which can be involved in the implementation of a project and the working out of the required funding and resources, which are required by each task and activity.
The bottom-up approach provides an opportunity to create an organizational level budget through the rolling up of budgets of several projects. This creates a project level budget, which is centralized from the budgets of the sub-projects.
This approach provides the project managers with the flexibility to independently define their budgets of their projects and it also gives the financial managers the ability to make a review of the total budgets of all the projects.
What Might Be Implication of the Top-Down Budgeting in the Federal Countries? Research Question
Analysis of top-down approach procedure
There are procedures, which are required in the establishment of the level of aggregate expenditure and the sectoral budgetary allocations in the top-down approach. It brings about changes in the dynamics and the focus of the negotiations, which take place between the line ministers and the finance ministry. In order to be able to analyze all the factors, which are relevant in the determination of the evolvement of the government finances ever time, there is the need to come up with a stylized budget process characterization. In the designing of the frameworks of the institutions, it is very important to get the balance which exists supposedly stringent model and logical compromises, which may be needed in the survival of the framework (Kim & Park, 2006).
The decisions in a budget process usually are as a resultant negotiation, which takes place between many players who may include the president, the prime minister, the finance minister, the line ministers, civil servants, agency executives and the parliamentarians. The top-down budgeting procedure has two steps:
The ceilings are the aggregate numbers and make a decision on the deficit and the total spending levels, which is termed as the aggregate ceiling and the inter-sectoral allocation in the main policy areas where the sectoral ceilings are about thirty.
- Intra-sectoral allocations
The intra-sectoral allocations are the details, and they include the ministry or the agency budgets.
The role of top-down approach in the scope of budgeting reforms
The ceilings are determined by the decision of the finance minister and the prime minister, and they mainly focus on the policy priorities, the medium term perspective, which is commonly termed as the multi-year ceilings, and the aggregate fiscal management.
- Intra-sectoral allocations
In this intra-sectoral allocation, the different ministries have to come up with their budgets and they must follow all the rules.
What are the advantages of the top down approach over the other budgeting approaches?
The top-down approach is very advantageous over the other budgeting approaches. This approach helps in the reduction of the aggregate expenditure as it helps in the bringing of a fiscal sustainability in the budget process as it promotes informed decisions on the levels of aggregate expenditure in the projected revenues, which are given. This internationalizing of the aggregate fiscal considerations in the prioritization sectors makes this top-down budgeting approach to address all the common pool problem resources, which are as a result of decision making by the public. This makes this type of budgeting approach to change the budget process outcomes as it does not really have to lower the total levels of expenditure (Clements et al., 2005).
Through the altering of the individual preferences of the parliamentarians or the ministers, the top-down approach can boost a fiscal sustainability as the determination of the total level of expenditure can be determined through only the use of one decision, which is explicit instead of many decisions, which are based on the decisions by the individual. This approach creates a broader considerate support and understanding of the issues concerned with the aggregate fiscal policy among the decision makers.
The top-down budgeting approach also promotes and improves sectoral efficiency as it has a clarity promotional potential when it comes to the priorities setting of the main sectors of the government thus ensuring that all the allocations of the budget are inconsistent with the priorities of the sectors. In the weighing of the policy alternatives, there is the need for creating trade-offs amongst the different types of objectives as the total sum of all the sector ceilings must not exceed the total expenditure’s limit and each sector’s appropriated expenditure must also not go beyond the respective ceiling. This approach puts up a premium, which is aimed at the improving the public sector efficiency, which makes it advantageous over the bottom-up budgeting approach where there are no incentives aimed at the making of any changes. Consequently, it can lead to a reduction in the activity current level as it never gives an allowance of freeing any resources for the agency or the ministry concerned (Ljungman, 2009).
Top-down budgeting approach is very effective in the fiscal consolidation. This approach is very easy to integrate with the MTBF as the ceilings are multi-year limits; it ensures that the aggregate spending is in line with the priorities. It is very efficient in effort and time, and it utilizes and makes proper use of the ministries’ expertise.
Comparative analysis of the top-down and bottom-up budgeting approaches
The table below gives a comparative analysis of the two major budgeting approaches:
Table 1: comparative analysis
|Top-down Approach||Bottom-up Approach|
|Delegated authority||Time consuming|
|Ownership of proposals is joint||Specific ownership of proposals|
|There is a ministry analysis which ignores all the economic forecasts||There is an aggregate fiscal analysis which normally takes into account all the economic forecasts|
With the bottom-up spending, it is very difficult to keep a multi-year budget perspective, the allocations in most cases are not optimal, and it can be very difficult to be able to control the aggregate spending.
Von Hagen about the benefits of the top-down approach
According to the empirical study by von Hagen (1992), the top-down approach is more advantageous as compared to the bottom-up approach, which is evident from the hypothesis in this study, which stated that decision making in the top-down approach is very conducive in the parliamentary approval to promote and enhance fiscal discipline. This study by von Hagen (1992) proved that a significant relationship existed between the debt and the deficit levels. This study was further extended by De Haan and Sturm (1994) who had the main aim of controlling the stability of the government and also make the confirmation that budget institutions are correlated with a strong fiscal position.
Woo (2003) expanded Von Hagen’s study to include nine countries from East Asia where he confirmed the existence of a very strong relationship, which existed amongst the fiscal outcomes and the institutional arrangements. Gleich (2003), on the other hand, concentrated on Eastern and Central European countries where he included top-down character indices for the draft budget preparation and the approval process by the parliament. In this study, Gleich (2003) made the conclusion that there existed an affirmative impact of the toughest budget institutions on debt and deficit hold for the countries.
Shortcomings of the top-down approach
The top-down budgeting approach can translate the long-range budgets into unplanned short-range budgets. In this approach, there are problems, which are incurred in the scheduling of the projects so as to be able to meet all the strategic goals. The top management may have a very limited knowledge or expertise on the specifics of the activities and tasks of the project, which can make it a shortcoming of the top-down budgeting approach.
Role of institutions in the top-down approach
Budgetary institutions can help in the shaping of the fiscal outcomes, very strong institutions enhance fiscal performance through the highlighting of all the needs for the policies, which are sustainable by exposing the public intervention full costs, emphasizing sectoral interests collective responsibility and the raising all the deviating costs which deviate from the fiscal objectives, which are stated (Pereira, Maravall, & Przeworski, 1993). These strong institutions are the most important in the fiscal retrenchment period when there are tensions, which exist between the long-term and the short-term sectoral interests. Through the increase in the announced policies credibility, these robust institutions can help in the fostering of macroeconomic conditions, which are very favorable like the lowering of the interest rates, the lowering of the inflation expectations, and the improving of the market confidence can restore fiscal sustainability (Alesina et al., 1999).
The main role of the institutions in the top down approach is to ensure that it is very difficult to diverge from the set appropriate policies, because it is possible to manipulate fiscal reports, there can be the circumventing of the fiscal rules, there can also be the changing of the budgetary procedures and regulations, and there can be the ignoring of the consolidation plans.
Ministerial powers and sectoral division after applying the top-down approach
The budgetary preparations begins after the budget policy has been established as the policy priorities, which have been reflected in the ceilings of the sectors, can be further translated into activities, which are concrete so as to correspond with all the budget allocations. Ceilings are set so as to restrict the expenditure extend in each of the sectors as the ministers are given the powers and the mandate to be able to determine the best way on how to allocate the resources in their respective sectors so to achieve a policy objective in the respective sector that they represent (Ljungman, 2008). This line ministers often have a greater knowledge on the administration’s operational aspects. In this case, the finance ministry has the power to have very strong arguments in opposing a resource reallocation proposal in a sector ceiling. This flexibility in this top-down approach procedure gives the potential of improving efficiency as it preserves an appropriate expenditure control (Reddick, 2003).
The finance ministry has a very important role in the top-down approach in the budget preparation process as the ministry is mainly focused on the monitoring and the establishment of the levels of total expenditure instead of the negotiation of all the details of the operations of the spending proposals by the individuals. The prime minister and the finance minister are given strategic dominance over all the other sector ministries to encourage fiscal discipline (Yl?outinen, 2004).
Power of the parliament and the top-down approval system
In the parliament, there are voting procedures. They have a top down decision making sequence and it is mainly aimed at the promotion of the collective irrationality in the presence of an environment, which is characterized by many decision makers who have interests, which are conflicting and different budget outcomes potential.
An approval by the parliament actually begins with a debate and the voting on the expenditure’s sub-categories like estimated revenue and the budget balance results, expenditure, and all the borrowing requirements.
The parliament, in most cases, has no limitations to the powers that it has in the introduction of amendments to the budget proposals by the government where the parliament can do so through the power of the majority vote. Top-down approval system of the budget in countries like Norway is strengthened as the budget, which is submitted to the parliament; then submitted to the economic affairs and finance standing committees to make a detailed scrutiny on all the budget aggregates and the overall fiscal policy.
The parliament can have restrictions in the budget changes as there are requirements, which state that any proposal, which intends to increase the expenditure in a budget has to be accompanied by another proposal, which has to make a reduction of the same amount in the expenditure of another item in the budget. These restrictions to the parliament are normally aimed at the helping to maintain a fiscal discipline in the approval of the budget by the parliament.
Top-down approach in federal countries
The top-down approach in federal countries involves the determination of the level of aggregate expenditure where the process requires the respecting of the total expenditure decision all through the budget process where it can only be reviewed and revised in the cases of an extreme crisis situation. In the promotion of the fiscal sustainability, there should be the setting of the level of aggregate expenditure to a level, which is consistent with the main objectives of the aggregate fiscal policy of the government, and also the economic conditions, which are prevailing (Hendrick, 1992).
The sectoral allocation often bears in mind the inertia of all the existing policies, any government policy commitments, and any other new government made policies, which the government might be having the intention of launching them. The sectoral ceilings are set in the initial stages of the budget process and have to be respected in all ways through the allowing any generated savings to be relocated and used for brand new emerging initiatives and the promotion of the efficiency gains. This makes it necessary to establish very strong principles for the redistribution of the resources, which are made within the respective sector so as to make sure that there is fiscal discipline and the key policy priorities are strictly observed.
Top-down budgeting in OECD countries (case analysis)
A very tough top-down budgeting procedure has the assumptions that all the decisions are earlier made in the process of coming up with a budget and the sectoral allocations and the overall ceilings are politically realistic. A minimum accepted funding level in the many sectors of the government must be made available during the budgeting process, and they have to be fully supported by a large number of decision-making body members. A sectorial allocation endorsement is also required as it can be referred in the budget process later stages. The policy agenda in some cases can be dictated by a few executive individuals, but the allocative phase has to involve the participation of the whole cabinet ministers, which is a clear indication of how a meeting of cabinet budget meeting takes place in Sweden.
Sweden is an OECD country, which operates central government minimal expenditure multi-annual ceiling. The binding ceilings in Sweden are normally established in three year duration before each budget year begins where the budget of the government has to conform to the total limit, which is pre-determined. The government budget is normally structured into about a total of 27 expenditure areas where there are about 500 appropriations.
The budget policy directions are discussed in a cabinet budget retreat taking place in mid-March on each year where at this time there is the presentation of the overall ceilings in the multi-annual framework to the cabinet. The expenditure area budget ceilings are determined and established mainly based on the finance minister’s proposal. The decisions, which are made on the expenditure areas, are collective as there are no deals existing between the prime minister and the finance minister and the sectoral ministers. In the cases, where there is a minister who wishes to adjust upwards the allocations in the finance minister’s expenditure area must be able to convince the other sectoral ministers so that they can be able to cut down in their expenditure areas. As a result, they can ensure there is compliance with the ceilings of the overall expenditure.
Sweden’s cabinet budget retreat is responsible for enabling the government to lay down the major budget policies in a manner, which is coordinated in the early stages of the preparatory processes of the budget. Collective decision in the budget process enhances discipline and is responsible for the creation of peer-pressure on the sectoral or the individual ministers so as to try to justify all the policies in their sectors. The allocations of the expenditure area could give a firm continued budget preparation structure as it provides a reference point, which is widely accepted in the negotiations taking place between the line ministers and the finance ministry.
Top-down budgeting in the European Union countries and the countries of IMF agreement (case analysis)
European Union countries and the countries of the countries IMF agreement like Norway have a top-down approval where the procedure begins with the debating and the voting on the many expenditure subcategories (Hallerberg, Strauch, & von Hagen, 2004). The budget approval is organized in an ascending manner where there is the initiation of the parliamentary debate through the voting on the fiscal parameters like the total expenditure, the resultant budget balance, and the estimated revenue. After the determination of the aggregate aspects, the parliament then votes on the major policy directions (von Hagen & Harden, 1995).
In the Norwegian parliament, there are unlimited powers, which allow the introduction of amendments to a budget proposal by the government through the majority vote. Since the 1997 budget reform in Norway, the budget adopted the use of the top-down budgeting approach, which helped in the strengthening of the fiscal discipline in the country (Dubois, 2002).
A budget bill is presented to the parliament where it is then forwarded to the economic and finance affairs standing committee, which scrutinizes the budget aggregates and the overall fiscal policy. A total expenditure recommendation, spending ceilings for the 22 sectoral and the estimated revenue is then presented to the parliament after the standing committee’s debate for adoption.
The sectoral allocation decision made through a single resolution can be binding in the budgeting procedure and mostly in the 12 sector committees which are permanent. These sector committees have the ability to propose a change in the expenditure allocation of the proposal by the government, although it has to comply with the sectoral sectors, which have been determined in the earlier voting in parliament.
The committee makes the presentation of the increase in any one of the appropriations where it must make a proposal, which corresponds to a reduction of the same amount in another appropriation, which is also under the same sectoral spending ceiling. These recommendations made by the standing committees are then presented in parliament for the approval before the 15th of December, which is the latest date of submission where the sectoral spending ceilings are collectively adopted through a one single resolution.
The rationale, which is behind the top-down-budgeting approach, is very clear in the general budget process as coordination is one of the main problems. Since the central government has thousand cases and it involves many decision makers who have different views and preferences. This decision making process in the top-down budgeting approach is mainly characterized by the asymmetrical and imperfect information and the time limitations for the negotiations and the preparations.
This top-down budgeting process helps in the reduction of the early budget decision dimensions to a level, which is easily manageable in order to give room for more informed decisions on the aggregate policy. Through the subjecting of the expenditure decisions by the lower level to the restrictions, which are decided at the pre-stages of the budgeting process, there is the internationalization of the fiscal sustainability in the detailed sector policies’ preparation, the reduction in the risks, which are assisted with the over expenditure of the aggregate fiscal policy as it is accommodated in the initial preparation and the approval of the budget.
In conclusion, a top-down budgeting approach is applicable in the budget approval process in parliament as it gives a stability and structure to a high risk process, which can be easily trapped by strategic gaming or sector interests. The benefits of the top-down approval depends on the voting procedures of each country and the possibilities of introducing changes, amendments or even blocking the passing of the budget.
The Effectiveness of the Top-Down Approach
The top-down approach is very effective in fiscal consolidation. The top-down approach gives a provision for effective tools and frameworks, which can fit very well with the rules, based on budgeting and the multi-year fiscal discipline, although the discipline may slacken with an improve in the public finances.
Many countries find this type of approach to be very useful as it gives the country the mandate to have about 30 sub-ceilings, which are for the inter-sectoral allocations, have separate ceilings for the capital and the operating expenditures, have budget margins acting as bumpers against contingencies, have the flexibility to adjust to all the new policy initiative ceilings, and have an omission of obligatory spending which is very different from one country to the other.
The disadvantages of top-down approach
There are disadvantages, which are associated with the top-down budgeting as it can translate long-range budgets into short range. There are also problems, which are associated with the scheduling of projects the sub-optimal way so as to meet all the strategic goals. The top management may have a very limited knowledge on the activities and project tasks specifics, which might end up damaging the anticipated results of the budgeting process.
The top-down approach can lead to a competition, which is not healthy as the whole process is usually a zero sum game where the loss in an area is a gain to another area. The subordinate managers in a company can have the feeling that they are not favored by this approach as they might tend to have the belief that the budget allocations to them are insufficient. This could further lead to competition among the lower-level management where each level tries to compete for funding to their operations.
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