Budgetary classification

The budgetary classification, in accordance with the provisions of the Act on public finances, is a system of signs that are used to describe the income, expenditures and revenues and expenses, occurring in the various units of the sector of public finances.

Income/resources that come from the European Union are classified by:

• section,
• chapter,
• paragraph.

Paragraph

It is a kind of income due to the origin or nature of any expenditure, its legal nature and purpose.

Section and chapter

Specifies the type of activity from the specific income or expenditure is derived.

The budgetary classification thanks to subdivisions and their connections, is a convenient instrument describing the funding, and is necessary for planning, and financial reporting. Also facilitates the surveys of revenue or expenditure on the public finance sector.

Usage

In the planning of public finance sector units. Thanks to the budgetary classification administration can plan income and expenditure limits on individual areas of activity, i.e. on the sections and appropriate chapters.

By paragraphs, sources of income are projected or possible limits of expenditure are set. Any amount of money described in budgetary classification becomes official norm for given period of planning. These norms, by virtue of their transfer to the annual financial plan, provides competence for the executing of planned activities and investments of local and state administration.

See also:

• Budgetary surplus

Examples of Budgetary classification

• The Government Budgetary Classification (GBC) is a system of codes used to classify government revenues and expenditures. GBC is used by the government to collect data on the financial activities of government entities and to monitor the overall financial position of the public sector. It is generally divided into two broad categories: revenue and expenditure.
• The Functional Classification (FC) is a system of codes used to classify the purpose of government spending. This classification is used to identify the type of activity being undertaken by the government and the source of funding. Examples of FC include government transfers, social protection, healthcare, education, public safety, defense, and other services.
• The Economic Classification (EC) is a system of codes used to classify government expenditures according to the type of economic activity they support. This classification is used to identify the type of activity being undertaken by the government and the source of funding. Examples of EC include investment in infrastructure, research and development, and other economic activities.
• The Institutional Classification (IC) is a system of codes used to classify government expenditures and revenues according to the organizational structure of the government. This classification is used to identify the type of activity being undertaken by the government and the source of funding. Examples of IC include central government, local government, and international organizations.
• The Administrative Classification (AC) is a system of codes used to classify government expenditures and revenues according to the administrative structure of the government. This classification is used to identify the type of activity being undertaken by the government and the source of funding. Examples of AC include personnel services, procurement, and other administrative activities.

Advantages of Budgetary classification

The advantages of budgetary classification are numerous, and include:

• Enhanced clarity and visibility: Budgetary classification provides a comprehensive overview of the public sector’s financial activities and helps to identify discrepancies between spending and revenues. This helps to improve the transparency and accountability of the public sector and helps to ensure that it is meeting its fiscal targets.
• Improved decision-making: By providing a detailed overview of the public sector’s financial activities, budgetary classification can help improve decision-making. It can provide a more accurate picture of the public sector’s finances and help to ensure that resources are allocated to the most effective uses.
• Improved efficiency: Budgetary classification can also help to improve efficiency by providing a more accurate and timely picture of the public sector’s financial activities. This can help to reduce wasteful spending and ensure that resources are being used in the most effective manner.
• Improved communication: Budgetary classification can also help to improve communication between the public sector and other stakeholders. It can help to ensure that all parties are aware of the public sector’s financial activities and can provide a platform for dialogue and collaboration.

Limitations of Budgetary classification

• One of the main limitations of the budgetary classification is that it does not take into account the differences between different types of income, expenditures, revenues and expenses.
• Another limitation is that the budgetary classification does not account for the cost of social services and infrastructure projects, which are often funded by the government.
• Additionally, the budgetary classification does not account for specific factors such as inflation, population growth and economic growth.
• Furthermore, the budgetary classification does not take into account external factors such as the political and economic environment in which the public sector is operating.
• Additionally, the budgetary classification does not account for the changing needs of the public sector or any new policies or regulations that may be introduced.
• Finally, the budgetary classification does not provide an in-depth analysis of the impact of government spending and taxation on the economy.

Other approaches related to Budgetary classification

The budgetary classification is not limited to just the Act on public finances. There are other approaches related to it, such as:

• The Economic Classification of the Functions of Government (ECFG) – This approach was developed by the United Nations in the 1950s and divides public expenditure into three categories: general public services (e.g. defense, public order, justice, etc.), economic affairs (e.g. agriculture, industry, etc.), and social affairs (e.g. education, health, etc.).
• The Program Classification System – This system was developed by the International Monetary Fund in the 1970s and classifies public expenditure according to the purpose of the expenditure, rather than its source. It divides public expenditure into six categories: government administration, economic affairs, education, health, social protection, and other.
• The Government Finance Statistics Classification System – This system was developed by the International Monetary Fund in the 1980s and is designed to provide a detailed classification of public sector activities. It divides public expenditure into four categories: general government, public corporations, social security funds, and other.

In summary, there are several different approaches to budgetary classification, each of which is designed to provide a better understanding of public expenditure.

Budgetary classification — recommended articles

Public tasks of local government — Public task — State administration — Charitable foundation — Public finances — Climate change adaptation instruments — Employers association — Policy makers — Functions of public finance

References

• Artis, M. J., & Buti, M. (2000). Close‐to‐Balance or in Surplus: A Policy‐Maker's Guide to the Implementation of the Stability and Growth Pact. JCMS: Journal of Common Market Studies, 38(4), 563-591.
• Barro, R. J. (1988). The Ricardian approach to budget deficits.