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4.2 Budgeting in a Public Body
What is a budget?
A budget is concerned with two key elements - what is to be produced (outputs and their relationship to outcomes) and at what cost (inputs). It can be defined in different ways:
- a plan quantified in monetary terms, prepared and approved prior to a defined period of time, usually showing planned services to be delivered, income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective.
- a management plan which shows the forecast resources required to achieve an agreed level of service activity.
How are budgets set?
The resources allocated to bodies by Scottish Ministers are determined as part of the Spending Review process. Spending reviews normally take place biennially with the last year of one Spending Review becoming the first year of the next. Thus Spending Review 2002 set plans for 2003-04, 2004-05 and 2005-06, while Spending Review 2004 revised plans for 2005-06 and set new plans for 2006-07 and 2007-08.
This process dovetails with the United Kingdom Spending Review which sets the overall Scottish budget for each Spending Review period. After deduction has been made for the costs of the Scotland Office plus the Scottish Parliamentary Corporate Body and Audit Scotland, the Executive has full discretion to decide how the Scottish budget should be divided between its various portfolios and programmes. Scottish Ministers' decisions on these allocations are underpinned by detailed material submitted by individual spending Ministers on the resources they consider necessary for the period under review and the outcomes that can be delivered. Adjustments to the budgets of bodies in the period between reviews may be considered by the Scottish Ministers on an ad-hoc basis. The grant-in-aid necessary to support the agreed budgets of bodies is authorised by the Scottish Parliament in the annual Budget Act.
Bodies will normally be expected to provide supporting material to the sponsor Department as part of the latter's contribution to both the Spending Review and the annual budgetary process. Wherever possible, this should be done as part of their own annual planning arrangements and they should therefore take all reasonable steps to harmonise the planning process with those of the Spending Review and annual budgetary process.
The starting point for the body's own budgeting process should be its Corporate Plan which sets out forward projections of resources required for each area of work. Setting a budget is not a one-off activity but part of an ongoing process of management, planning and control. A budget is normally drawn up for a 12-month period and represents the quantification of the first year in a public body's three year corporate plan. While terminology and detailed approach may vary, the corporate planning process should be broadly as follows:
Figure 4.1 The Feedback Loop
Aims and Objectives
The remit of a body is to achieve agreed objectives and to be formally held to account annually for performance and spending on behalf of the taxpayer. Aims and objectives are normally long run and stated in broad terms in a Corporate Plan.
Operational or Business Planning
The next planning level down involves devising plans or strategies to implement the aims and objectives at the operational level. This process should result in a defined set of activities, a set of realistic and measurable activity targets, outcomes and a statement of expected results.
Budgeting
Once decisions have been made about how the planned objectives are to be achieved, these can be expressed in financial terms. Planned expenditure/use of resources for the year is matched with expected income from grant-in-aid and other sources. Opportunities to make efficiency improvements that will release savings that can be re-invested back in to the delivery of services should be explored and built in to budgets.
Implementation
Ministers should write to public bodies at least annually setting out the policies and priorities which they wish them to pursue. Where a public body receives grant-in-aid, this is most commonly done through a grant-in-aid letter issued in advance of the financial year. The grant-in-aid letter confirms the resources that Ministers have allocated to the body and sets out the priority areas of work that Ministers wish the body to pursue.
Where a public body does not receive grant-in-aid, an equivalent letter should be received from the Minister covering the priority areas to be pursued. The letter should draw on material from the corporate plan and the Spending Review and any further instructions from Ministers.
Monitoring
Plans and budgets must be continuously monitored. Regular monitoring reports should be produced both for internal purposes and to meet the information needs of the Board and the sponsor Department.
Control
Any variations between actual spending/use of resources and performance, and planned spending/use of resources and performance must be investigated, and action taken to bring the plan and budget back under control or to change the planning assumptions, if appropriate. The results of the planning, monitoring and control process for one year should inform the process for the following year.
What process is involved?
There are a number of key stages in any budget setting process. Typically these are:
- agreement of the budget period ( i.e. the period of time for which the budget is to be prepared);
- agreement of the budget centres, the responsible managers and appropriate delegated authorities;
- arrangements for overseeing the preparation of the budget;
- publication and distribution of key budget policies and assumptions;
- preparation and distribution of guidelines for production of the budget;
- identification of key constraints;
- identification of potential efficiency savings;
- preparation of resource and capital budgets;
- presenting the budget to the appropriate channel for approval; and
- communicating the approved budgets to relevant managers/staff.
What is the role of the Board in the budget setting process?
Typically the Board of a public body will be responsible for the approval stages in the process, approving the Corporate Plan and possibly the Operational Plans as well, before submission to the sponsor Department. The Board should then receive regular financial reports (at least quarterly) showing expenditure/use of resources against planned budgets and progress towards financial targets including projected efficiency savings. Board members should provide the 'challenge function', carefully scrutinising plans and underlying assumptions.
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