Analyzing Revenue, Expenditure, and Economic Base

Good, thorough, and effective budgeting requires that one not only has a good understanding of a government’s revenues and expenditures that make up the budget, but also the ability to analyze them. A proper analysis of government revenue and expenditure, regardless of the size of the budget or government, is a necessary first step toward developing a sound budget. A successful budget process therefore must start with an analysis of a government’s revenue, in particular the condition of the local and regional economy of which it is a part, the various sources from which it collects its revenues, revenue forecasts by funds, as well as by sources, and its capacity to generate revenues. Similarly, the process must include a detailed analysis of its expenditure, changes in expenditure growth, and the flexibility of the government to deal with its expenditure needs. In addition, it should include an analysis of a government’s economic base. Economic base deals with those activities that produce employment and income that are vital to the growth and development of an economy. Understanding the economic base and the factors that influence it is important to understand whether a government will have the ability to generate sufficient revenue to carry out its budgetary activities. In other words, a sound analysis would produce information that would help a government determine what specific measures it will need to take to improve its economic base, strengthen its revenue situation, and the effectiveness of its expenditures. This chapter provides an overview of how to analyze government revenue and expenditure, followed by an overview of how to analyze the economic base.