THEORETICAL FOUNDATIONS REGARDING THE
IMPORTANCE, NECESSITY AND USAGE OF
MULTI-ANNUAL BUDGETS IN ROMANIA
Lăpăduşi Mihaela Loredana, Căruntu Constantin „Constantin Brâncuşi” University from Tg-Jiu, Faculty of Economics and
Business Administration, Victoriei Street no. 24, Tg-Jiu, Gorj, România, loredana@utgjiu.ro, caruntu_ctin@yahoo.com
Abstract
The material is intended to be an easy to read one, structured in a way to be a theoretical framework concerning the importance, necessity and usage of multi-annual budgets in Romania. The article puts particular emphasis on explaining the terminology specific to the domain regarding multi-annual budgeting, on principles and less on methodology, which once learned and applied, can lead to the improvement of the financing mechanisms through multi-annual budgets. Without constituting a monograph of the legislation in force, the article refers also to the legal regulation that will be applied. In Romania budgets are voted on annually, and this short time horizon has often been criticized that it would adversely affect the efficient management of expenditures. Decisions on resource allocation are taken without an overall vision, ignoring the implications of past decisions or set on a time horizon longer than one year. Most European countries have implemented in one form or another, multi-annual budgets, to counter the disadvantages of annual budgets. For the most part, universities that will apply multi-annual budgets will build a direct relationship related to expectations regarding the evolution of the activity, not with the objectives set by the university. In the case in which the expectations regarding the evolution of the university are not expressed in clearly stated objectives, and are not employed in developing budgets, the answers received by performing an efficiency analysis of the university, from the verification analysis of the projected and budgeted amounts, are very simple and do not give added value to the budget process.
Keywords: budgeting policy, multi-annual budgets, management, revenues and expenditures, forecasting, efficiency.
JEL Classification: H11, H61
Introduction
The budget is not only a financial document, but is also an important management tool, which in financial expression, assures the sizing of the objectives, expenses, actions that can be funded from revenues expected to be achieved, but also the evaluation of the results and their economic efficiency (Rachlin R., 2007).
The development and implementation of the budget in Romania will be a complex process subject mandatory rules and principles that ensure the discipline of forecasting, establishment and use of available funds.
Use of multiyear budgeting can improve long-term strategic option and can be removed while the effects of annual budgets that ignore the cost of future decisions relating to the identification of best options for management of financial resources. Compliance with the annual budget based on previous budget years financial levels could pose problems in case of major investments, which can not be supported by an annual budget.
The use of multi-annual budgets can improve the long-term strategic option and in the same time there can be removed the effects of annual budgets that ignore the cost of future decisions relating to the identification of best options for management of financial resources (Brookson S., 2001).
Compliance with the annual budget based on financial levels of previous years could pose problems in case of major investments, which can not be supported by an annual budget.
Body of the paper
1. Theoretical aspects concerning the multi- annual budget at the macroeconomic level
In Romania, the development and execution of the budget is governed by the law 500/2002 of public finances. According to it the established budgets in Romania are governed by the principle of uniqueness, reality, publicity, annually, balance and budget specialization (The public finance law, 2002).
Multi-annual budgeting is a necessity also in the financial relations between Romania and the European Union in order to ensure coordination of the national budget with the EU's multi-annual budget in order to achieve the highest possible degree of absorption of EU funds allocated to Romania. All programs funded by the EU are built on a multi-annual basis; the non-use of such a way of budgetary programming is a major disadvantage for Romania and a frequent critic of EU, the World Bank and IMF to our budgetary policy (Coşea M., 2004).
Through the law of fiscal-budgeting responsibility there are ruled principles that regard the establishment of the limits of multi-annual expenditures, in which the authorizing officers will have to fit and will limit budgetary rectifications, so often presently. Multi-annual budgeting will give continuity to national projects taking place on a longer period, through the allocation of funds already established. For investors, the law will create a perspective and predictability, so that they know which are the public projects and the expenditures employed by the Government in the investment area for a period of several years.
On April 15, 2010 the Law of fiscal-budgetary responsibility was enacted and has as main objectives (The law of fiscal-budgetary responsibility, 2010):
b) to establish a framework of principles and rules on which the Government provides budgetary and fiscal policy implementation that will lead to good financial management of resources,
c) efficient management of public finances to serve long-term public interest, ensuring economic prosperity and securing fiscal and budgetary policies in a sustainable framework.
The Romanian Government will define and carry out the fiscal-budgetary policy based on the following principles (The law of fiscal-budgetary responsibility, 2010):
1. Transparency principle regarding setting the objectives regarding tax and budget objectives and developing tax and budget policy
The Government and local public authorities are obliged to publish and maintain in debate at a reasonable time all necessary information that allow evaluation of the implementation of fiscal and budgetary policies, their outcomes and the state of the central and local public finances.
2. The stability principle
The Government is required to conduct the fiscal-budgetary policy in a manner to ensure its predictability over the medium term in order to maintain macroeconomic stability.
3. Fiscal responsibility principle
The Government is required to drive the fiscal-budgetary policy in a prudent way and managing resources and budgetary obligations as well as fiscal risks in a manner that ensures environmental sustainability of the fiscal position on medium and long term.
Sustainability of public finances requires that on medium and long term, the Government should have the possibility to manage risks and unexpected circumstances, without having to make significant adjustments in expenditures, revenues and budget deficit with bad effects from economic or social point of view.
4. Equity principle
The Government will conduct the fiscal-budgetary policy taking into account the potential financial impact on future generations and the impact on economic development in the medium and long term.
5. The principle of efficiency
The Government fiscal-budgetary policy will be based on efficient use of scarce public resources will be defined based on economic efficiency and the public investment allocation decisions, including those funded by grants from the European Union and other donors will be based inter alia on the economic assessment and also on the assessment of absorption capacity.
6. The principle of effective management of personnel expenses paid from public funds
The Fiscal-budgetary policy objectives are (The law of fiscal-budgetary responsibility, 2010):
a) maintaining debt at a sustainable level in the medium and long term,
b) having a general government budget balance close to zero over the economic cycle, while ensuring competitiveness of the country,
c) prudent management of resources and obligations of public sector and of fiscal-budgetary risks;
d) the maintenance of adequate level of budgetary resources in order to pay debt service,
e) ensuring the predictability of the level of rates and bases of taxation or taxation. The basic function of multiyear budgeting is to enhance the quality of annual budgeting. For example, in Sweden, the budget approved by Parliament continues to be annually and is used a multi-annual forecasting framework to consolidate annual budgets: each assignment has attached an explanation of the purpose and expected results, but also an additional set of information that shows how to develop it in the next five years (Văcărel I., 2009).
2. The multi-annual budget at a microeconomic level
In developing and implementing multi-annual budget is not just essentially only the document called budget, but also the activity of preparing and implementing it, called multi-annual budget. This should not be viewed by the company as an ongoing activity that takes place over a year, but as a forecasted activity for more than 2 years that will relate all areas and processes that characterize the firm (Văcărel I., 2009).
The development of the multi-annual budgets has to answer to budget requirements, quantitative and qualitative restrictions specific to the financial discipline.
Also at the micro level the development and implementation of multi-annual budget has some advantages:
it will represent for the firm a complex process subject to mandatory rules and principles that ensure the discipline of forecasting, establishment and use of available funds,
the basic requirements for multi-annual accounting will be clearly defined: -situating the budget and new initiatives that may contain in multi-annual terms, - ensuring that reliable people have the clear responsibility to realize correct forecasts and make known alternative numbers, leading to the introduction of a more realistic estimate of the costs from those who develop budget initiatives. applying this type of budget will lead to the maintenance of a financial stability of the company;
it will lead in time to the anticipation of the financial difficulties and policies development that will contribute to avoid or surpass them for maintaining financial stability. Among the advantages presented there a series of requirements concerning multi-annual budgets, as:
modern stationery, to provide timely financial information accompanying the technical, economic events from the current life of the company;
the other services from the structure of the organization must acquire the spirit and requirements of multi-year budgeting, accepting clear and complete records of expenditures and their contribution to achieving revenues and profit over a given period (e.g. 2 years, 3 years, 4 years);
establish responsibility centers to prepare multi-annual budget.
The development of the multi-annual budget uses financial forecasts as main instrument, and in this way, a company could generate future forecasts of the revenues and expenditures evolution for the next period, starting from a set of economic, political, juridical and social hypothesis.
3. Fundamental concepts regarding the use of multi-annual budgets in higher education
The role of higher education in the knowledge society is recognized both at EU level but also at its Member States level. From this level of education is expected a significant contribution in achieving the objectives enshrined in the Treaty of Lisbon regarding the growth, prosperity and social cohesion.” Education and Training 2010 ", the work program of the European Union, clearly stresses the importance of modernization of higher education institutions and reforms encouraged by the Bologna Process, aiming at creating a European Area for Higher Education (Ján Figel, 2008).
I n order to meet these expectations, the higher education has to answer some major challenges:
to reach a qualitative level that will pass the comparison test at international level;
to improve management and responsibility,
to improve financing and diversify the sources of financing.
These major purposes imply changes in higher education that have to pass in the top of priorities on the political agenda and in national strategies of the member states of the European Union.
The use of the multi-annual budget by a university can ensure the fiscal-budgetary discipline, the transparency and sustainability on long and medium term and the establishment of a framework of principles and rules that will ensure that the university implements a multi-annual budget in terms of a good financial management of resources.
We also believe that by applying multi-annual budgets at university level there should be taken into account three main objectives (Nicolescu O., 2007):
1. increasing competitiveness on medium and long term, 2. developing the university at European standards;
3. the improvement and efficient use of the financial, material and human resources.
analysis of past trends of revenues and expenditures from the budget structure and determinant factors, which will make possible the use of extrapolation techniques;
the increase of the degree of qualification of the personnel from the financial-accounting compartment in relation with the requirements of the practice of elaborating multi-annual budgets, since they involve the use of complex mathematical and economic models;
the usage of strategic planning, especially when the university uses financial planning tools for the first time in the development of the multi-annual budget. It will be needed more time to collect the data necessary for planning, development and testing the forecasting methodology,
the analysis of the limits of the forecasting techniques due to the high number of variables used and that will reduce the probability to estimate with an adequate degree of accuracy;
consolidating data and formulate hypothesis; estimates may need a series of historical data for long periods of time in order to obtain relevant results by regression analysis;
avoiding to ignore importance and the necessity of correlating past forecasts with proposed forecasts of expenses and revenues for the multi-annual forecasts, explaining and justifying the existing variations.
In our opinion a multi-annual budget elaborated by a university should represent a list of objectives that the university should perform in a certain time horizon. The objectives have to be arranged in a decreasing order of their priority determined according to a preestablished methodology applied with consistency and evaluated from the point of view of the project duration and of costs.
The complexity and consequently the process of developing the multi-annual budget depends on: the existing legal framework, institution size, organizational structure, information and IT systems, organizational culture, staff capacity, quality management, financial situation (Budget Book McGill University, 2010-2011).
The evaluation of the complexity of the planning process is necessary to establish a realistic timetable for implementation. A highly structured vertically university will have to consider designing an information system as flexible and efficient for elaborating multi-annual budgets, but also to allow sufficient time to the process so that it does not compromise its quality.
The use of a multi-annual budget by a university will create certain flexibility at the financial planning level in the institution, which will be reflected through (Nicolescu O., 2007):
extending the time horizon and ensuring the length of the investment projects from an accounting period to another;
anticipating problems related to the increase or decrease of revenues and expenses.
In the process of multi-annual budget through its own mechanisms, a university must meet a specific set of objectives and constraints specific to the university. The University should consider the following features on the stages of the multi-annual budget that can be represented by the following elements:
opposed to annual budgeting, which is generally balanced, the development of the multi-annual budget has as main feature a difference between expenditure s and revenues, because the methodology that will be applied by the university will a forecast based on current economic programs and assumptions. So, revenues and expenditures from the structure elements of the budget have different growth rates. mainly, a multi-annual forecast at a university would be an extension of the investment current programs or the realized estimations in comparison with those planned. This means that if actual conditions differ from assumptions used in forecasting, then the actual revenues and expenditures will differ from those estimated.
in developing the multi-annual budget a university will have to count on two main types of analysis: impact analysis that will quantify the future impact of current programs and policies and variance analysis, which refers to the identification of opportunities in terms of adjustment of revenues and expenditures in order to reduce differences between them.
In the process of financial planning proper to a multi-annual budget, a university will have to include a set of general activities as:
the analysis of historic revenues from past years and formulating assumptions based on revenues estimation;
the projection of revenues and expenses on period of 3 to 5 years, starting with the previous financial period;
the analysis of the data sets with realized expenses from previous years and the correlation of these levels with the events and economic and financial conditions; the estimation of the expenditures proposed for the next time period, divided into departments and investment projects underway or planned.
4. Conclusions
The application and use of multi-annual budgets allow the improvement of long-term planning in that way that a long-term spending plan would allow unused funds to be invested safely with a higher yield (Dincă G., 2003).
In conclusion, the use of multi-annual budgeting will bring many advantages and disadvantages, as follows:
advantages of the multi-annual budget:
helps on focusing the thinking regarding the university expenditures from the objective point of view, provided that the budget formulation process encourage the university to properly prioritize spending programs that will be carried out; dynamic multi-annual budget analysis is a practice that would ensure an effective administration of the university;
allows correlation of multi-annual income and expenditures with investment planning, debts, strategic plans and university development.
significantly strengthen budget credibility and predictability and allows a better reflection in the budget of the long term strategies;
contributes to the strengthening of the budgetary discipline and to the usage of additional revenues to reduce budget deficit;
represents the reconciliation of annual budget with economic and financial commitments;
allows the improvement of long term planning , a long-term spending plan allowing for the unused funds to be invested safely with a higher yield;
a multi-annual budget will demonstrate the necessity of long-term reserves. disadvantages of the multi-annual budget:
possible overestimation of future economic and financial results;
projected costs should not be regarded as some gained interests; this means that future revisions, in the case of decreased costs, would be difficult;
multi-annual budgets do not have to be established at their real value but at their nominal one; this happens because with the inflation increase, the projected costs would be automatically adjusted in line with the price increase;
certain income and expenditure may be difficult to predict over a period of several years;
a multi-annual budget format could reduce the flexibility to change the budget priorities
References
Brookson S., 2001, Cum să gestionăm bugetele, Ed. Rao Books, Bucureşti;
Dincă G., 2003, Schimbări în sistemul de finanţ are în învăţ ământul superior, Bucureşti;
Nicolescu O. (coordonator), 2007, Strategia universităţ ii. Metodologie şi studii de caz, Ed. Economică, Bucureşti;
Rachlin R., 2007, Sistemul complet de bugete ale firmei, Ed. BMT, Bucureşti;
Văcărel I., 2009, Bugetul pe programe multianual, concepţ ii, reglementări, rezultate, perspective, Ed. Expert, Bucureşti;
Coşea M., Construirea bugetului pe baze multianuale, Revista Piaţ a Financiară, Bucureşti, nr.10/2004;
2010-2011, Budget Book, McGill University, GD09‐51, McGill University, Montreal, Quebec, Canada H3A 2T5, at www.mcgill.ca;
