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Wednesday, 11 May 2022

How an excel sheet, becomes a budget, then becomes the law of the land

Enterprise Explains: the state budget process: It’s that time of the year when the government looks to get its budget for the next fiscal year approved. The state budget is more than just the country’s income statement and balance sheet. It’s effectively a policy statement and a manifesto on how the government plans to run the country in the next fiscal year. As such, we felt it was crucial to give you a refresher on how the budget process works — from its initial draft and proposal to its implementation.

Reading the budget: The budget, which tracks spending for the fiscal year (running from 1 July to 30 June of the following year), is split into three classifications: Economic, functional, and administrative. The economic section tracks the state’s full revenues and expenses. The functional classification breaks down the budget into 10 operational sectors of the functions of state. These include general public service, defense and national security, public order and safety, economic affairs, environmental protection, housing and community amenities, health, youth and religious affairs, education, and social protection. Meanwhile, the administrative section covers budgets of individual ministries and agencies.

The big income generators: The biggest percentage of the state’s revenues come from taxes, income generated from government services, economic bodies (such as the Suez Canal), and state enterprises, as well grants from foreign partners. Paling by comparison is revenue from sales of securities (shares in state companies and bonds).

The heaviest sinks: These include civil service wages, subsidies, social benefits, public works and services, and loan payments.

When looking at the state budget, there are a number of key figures that are indicative of the state’s fiscal performance:

  • GDP growth: This looks at the country’s annual change in economic output, measuring how fast the economy is growing;
  • A budget deficit / surplus: This is the change between revenues and expenses. A deficit occurs when the state’s spending exceeds its revenues;
  • Primary surplus / deficit: This is similar to the budget’s overall surplus or deficit, except it does not count our debt service bill;
  • The public debt-to-GDP ratio tells us where the state’s debt stands in comparison to its GDP, which reflects the country’s ability to pay back what it owes;
  • The debt servicing bill: This refers to the annual interest and principal payments on the state’s debt. This has become one the most anticipated figures in the state’s budget to see if it continues being the single largest item in the budget.

Nothing is set in stone: Considering its reliance on FX and imports, Egypt is wildly affected by the global macro climate. And since Egypt’s account balance (how much we export vs how much we import) is a crucial element of the economy, it becomes important to note how much the state projects global prices of oil and food are expected to be in an upcoming fiscal year.

Overview of the timeline: Each year, the state budget goes through the same cycle of formulation, discussion and approval, execution and audit, which spans from September until December of the following year.

Drafting the budget: The Finance Ministry issues its budget circular, taking into account estimated revenues, allocations and expenditures for the year. This process begins around the second quarter of the fiscal year (September-November). The government’s various ministries and entities are then asked to formulate their required budgets and submit them to the Finance Ministry.

Internal discussions and approval: Next, the ministry issues its pre-budget statement, which it then sends to the cabinet for approval. Once that is given the greenlight, an executive budget proposal is submitted to the president.

Then it’s off to the legislative branch of gov’t: The draft budget is then sent to the House of Representatives for discussion and approval during its spring session, with the introduction usually taking place in late April or May. The budget is then looked at more thoroughly by the various committees of the House of Representatives, with each committee looking at the subset of the overall budget in which they’re specialized (e.g. The House Defense Committee will review the Defense Ministry’s budget, while the House Education Committee will look at proposed expenses for the Education and Higher Education ministries). The House may choose to call in ministers for public hearings on the budget. Then the bill goes into a plenary session for a vote of approval.

It is not unlikely that we see delays in this stage of the process, as various House committees could push back on key points of the budget. As with other pieces of legislation, they could push for amendments, which may see the budget (or portions of it) sent back to the government and then reintroduced. If the budget is not signed into law by 30 June (when the current fiscal year ends), a law rolling over the current fiscal year’s budget into next year is then passed. This will continue until the new budget gets approval and we begin working with it.

Getting it done: If it is approved in a House plenary session, it gets signed into law by the president. It is then published by FinMin.

Reporting: Earlier this year, President Abdel Fattah El Sisi signed into law the Unified Budget Act, which requires the government to present an annual medium-term budgetary and fiscal strategy to the House and set spending limits for each ministry. FinMin also publishes a simplified version of the state budget and its pre-budget statement for citizens which is set to be more accessible for the general public. You can check out the citizen’s budget for FY2020-2021 here (pdf).

Closing out the budget: Once the fiscal year, the House has to sign off on closing the budget prior to 30 June and approving the following year’s budget. If after the year is done, the government has gone over budget, the government then has to get sign off from parliament for a budget overdraft before the closing of the budget.

The audit phase: Four months after the fiscal year is done, state agencies and ministries work on their final accounts report, which includes their revenues and spending for the year. The year’s budget is then audited by the Accountability State Authority.

Want a more detailed guide on the budget? FinMin has you covered here (pdf).

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