Capital Budgeting and Improvement Process

Capital budgeting plays a vitally important role in the overall budgetary activities of a government. In some ways, it can be considered just as important, if not more, than the routine operations of a government because of the impact these activities have on long-term economic growth and development of an economy. The activities, commonly referred to as capital improvement activities, involve investments in physical assets such as roads, bridges, highways, land, buildings, vehicles, equipment, physical plants, and so forth. The level and quality of capital assets in a government and how well they are maintained indicate how well its economy is performing. In general, the better the condition of capital assets the stronger is the economy, and vice versa. Understanding the characteristics of a capital budget and, more importantly, the process that underlies these activities is important to understand what makes capital budgeting so unique and different from the operating budget and why it is necessary to have a separate capital budget, as most state and local governments do. The chapter has two-fold objectives: One, it provides a brief discussion of the characteristics of a capital budget, types of capital assets a government maintains, and the relationship between a capital budget and long-term planning. Two, it provides an at length discussion of the capital budget process which, like an operating budget, is complex, detailed, and often time consuming. The chapter concludes with a brief discussion of the impact a capital budget has on the operating budget.