Have you ever been curious about why government budgeting is important? 

Before the start of a financial year, governments across the world would prepare a Budget. Through this Budget document, they lay out the anticipated revenues and how funds would be allocated. Before it can be applied, the budget prepared typically gets debated and voted upon by the legislature (e.g., Parliament, Congress, or Assembly). 

Funds are allocated towards different purposes. Broadly speaking, these funds can be divided into two types of government expenditure:

Types of Government Expenditure

  • Operational Expenditure (OpEx):

A government budget meant to pay for the salaries of the civil service, and the acquisition of products and services over the next year. This list includes allocations for road maintenance, hospitals, schools, public universities, the upkeep of government offices, the military as well as security forces.

  • Development Expenditure:

A type of government expenditure that involves new projects and programmes for the welfare of the country.

Needless to say, a budget is a key instrument used by the government to execute its economic policies and vision for the country. In this article, we’ll delve into the objectives of a government budget. We’ll also explain many of the important things you should know about government budgets.

Why Is Government Budgeting Important

1. Reallocation of Resources

The reallocation of resources is one of the primary rules in framing a government budget. The government must be responsible for distributing the allocations in the most efficient way to maximise the country’s progress throughout the year. A government budget usually involves allocating resources according to the country’s economic and public welfare priorities. Just like how we need to have responsible financial planning on our income and resources, the government must have a well-planned resource allocation to portray its administration capability. For instance, in the 2023 Malaysia Pre-Budget Statement, the government aimed to give the well-being of people and economic transformations priority for resource allocation to ensure longer-term, and more sustainable economic growth. This objective falls in line with many of the world’s top governments’ budgeting philosophy, as a happy population is typically a productive one.

2. Reducing Inequalities in Income and Wealth

Income and wealth inequalities are common components of any economic system. To reduce the income and wealth inequality gap, the government needs to implement long-term economic and social development policies on a year-on-year basis. This is where the importance of a government budget comes in. One of the ways to reduce income and wealth inequality is by adjusting the taxation system. This includes raising or reducing taxes for a specific income group, as well as reducing, increasing, adding, or removing tax benefits, breaks and incentives. An example of this is the tax deductibles on Employee Provision Fund (EPF) and Social Security (SOCSO) contributions. The government may also offer incidental direct assistance such as fuel subsidies and the Bantuan Keluarga Malaysia (BKM). By taxing the more abled and giving the underprivileged subsidies, the government redistributes income to raise the living standards gap between the people.

3. Economic Stability

Government budgets can also be used to provide economic stability for the country. What economic stability means is low, stable inflation and reasonably consistent production growth. For instance, the Government introduced grants, financial assistance, and subsidies for digitisation of small and medium enterprises in the early 2020s. When the economy gets too “hot”, it is prone to inflation. Governments may hold back on megaprojects and increase taxation to cool down the economy. Likewise, when the economy is stagnant, the government may introduce measures to encourage economic activities and growth.

In the late 2000s, governments across the world introduced their form of stimulus packages to buffer the impact of the 2007-2008 Financial Crisis. At the height of the COVID-19 pandemic, governments introduced similar measures to support their healthcare systems and economies in response to the lockdown measures. Following the post-COVID-19 recovery, governments are introducing fiscal tightening measures to curb inflation. The government will be able to flourish and economic stability by preventing inflation or deflation and lowering the large scale of fluctuations in economic prices such as by increasing the tax and minimising government expenditure.

4. Management of Public Enterprises

As public enterprises exist to serve the people, it is primarily managed by the state or central government. They are funded by the government, and the government is required to include the account of public enterprises in the government budget. Examples of these public enterprises include state housing, public transportation, hospitals and schools, security services, infrastructure management, and defence. How the government attempts to fund these public enterprises may impact the country’s economic growth and employment opportunities. This is also important to consider because governments are often among the largest employers. Thousands of nurses, doctors, soldiers, teachers, administrators, engineers, planners, surveyors, pharmacists, forest rangers, engineers, social workers, police officers, firefighters, and statisticians are on the government’s payroll. In Malaysia, some of these agencies include the Welfare Department, the Women Development Department, Nthe ational Population and Family Development Board, the National Welfare Foundation, the National Disaster Management Agency and Orang Asli Development Department. Thus, the importance of budgeting in the government simply cannot be understated when it comes to our public facilities.

5. Economic Growth

A country’s economic growth is often measured by its gross domestic product (GDP). It represents the total dollar value of all goods and services produced over a specific time period within a country. The government may complement or complete the economic activities of the private sector. This partnership could spur, or sustain, economic growth. For example, the government needs to properly plan the allocation of land in its territories. It would then build the roads and lease out lands to the appropriate developers. Upon completion, the private sector’s activities in what was once a barren or undeveloped area would create value for the population through job creation, services, and goods. Progress without government involvement may take a longer time. That is why free trade area zones and tax exemptions are created by the government to stimulate such activities. As a country’s economic growth involves the total rate of investment and savings, the government can manage the taxation of various industries through a budget.

6. Mitigating Economic Divide

The economic divide is one of the threats to a country’s economic stability and development. The mitigation of the economic divide can be minimised without slowing down economic growth by providing budget allocations for the targeted group of people to enhance economic mobility and reduce the economic divide gap among the people. For instance, the government should provide allocation for educational access and increase education quality as education is one of the major factors that contribute to increasing economic mobility. One of Malaysia’s government initiatives is the Peranti Siswa Keluarga Malaysia (PRSIS) aid. It provides tablet assistance to bridge the digital divide, especially for students from B40 backgrounds. In addition to that, the government made education as accessible as possible through scholarships, publicly-funded universities, grants to private educational institutions, as well as education loans like the National Higher Education Fund Corporation (PTPTN).

 

A Recap: The Importance and Objectives of a Government Budget

To sum up, a goverment budget outlines the government’s agenda and strategy in a fiscal year. A well-planned budget is of utmost importance for any government to ensure economic stability and growth, economic resilience and expansion of a country. Thus, governments need to project whether they will have enough money to complete their programme for the benefit of the country. 

If you want to find out more about how a government budget impacts your SME, you can read our article Budget 2024: Key Highlights for SMEs.