Bases for Resource Allocation Budgeting

Budgeting; Allocation of Public Resources
In 1940, V.O. Key laid out the basic budgeting problem that economists are yet to solve: ‘on what basis do we decide to allocate resources to one program and not another given the scarcity of resources?’ According to Keys, solutions to this problem lie in economic theory or an improved understanding of the institutional arrangements within which decisions for resource allocation are made (Fozzard, 2001). From these two perspectives, economists have proposed several guiding principles as the basis for resource allocation in the public sector. This text discusses five of these bases.
The Public Goods Basis
This basis assumes that the market is perfect and that the forces of demand and supply adjust accordingly to allocate public resources in an efficient manner without the need for public intervention (Fozzard, 2001). Public intervention would only be justified in the event of market failure, where the forces of demand and supply would result in an inefficient allocation of resources (Fozzard, 2001). The appropriate response from the public sector in the case of market failure will depend on the degree and type of market failure that the response seeks to correct (Fozzard, 2001).
The Marginal Utility Basis
Classical economists argue that an individual will seek to equalize the marginal utility gained from each unit of spending across the range of consumable goods and services (Premchand, 1989). The marginal utility basis argues that the public sector should allocate resources among activities using the same basis. In essence, resources in the public sector are to be distributed among different uses such that the marginal rate of satisfaction for all the uses is the same (Premchand, 1989). For instance, when allocating expenditure between poor relief and infrastructural projects, the allocation needs to be made in such a way that the last dollar devoted to each of the two activities yields the same real return (Premchand, 1989). Economists have, however, questioned the practicability of this approach. Governments produce thousands of goods and services and would need to construct a utility function encompassing all these goods and derive the marginal utilities at different levels of expenditure, which may be impractical (Fozzard, 2001).
Allocative Efficiency Basis and Cost-Benefit Analysis
This basis applies the normative principle of Pareto optimality (Fozzard, 2001). A Pareto optimal solution is one that makes everyone a winner - at least one individual is made better off and none is made worse off (Fozzard, 2001). It may not be practical to identify all winners and losers of a public policy. As such, a potential Pareto optimum allocation of resources is often applied. Under this solution, an intervention is considered acceptable if the amount by which some individuals gain exceeds that by which some individuals lose, leading to a net benefit, such that the winners can essentially compensate the losers for their loss (Fozzard, 2001). In this regard, resources need to be allocated in such a way that there is some redistribution of resources, resulting in a net benefit.
Citizens’ Preferences and Collective Decision Making
The citizens’ preferences basis advocates for the idea of allocating resources according to the revealed preferences of citizens (Milakovich & Gordon, 2013). In essence, the preferences of rational citizens are captured in their utility functions, and the government only needs to devise a way to reveal and aggregate these preferences to determine where to allocate public resources. One way to determine citizens’ preferences is through the price mechanism as determined by the forces of supply and demand (Milakovich & Gordon, 2013). This may, however, not be practical in the public sector, where citizens’ preferences are mostly revealed through voting arrangements and direct consultations (Milakovich & Gordon, 2013).
Equity, Incidence, and Targeting
This basis analyzes government interventions based on their ability to redistribute income, as measured by the net impact of taxation, as well as expenditure on consumption and household income among different groups (Fozzard, 2001). Resources are allocated based on the intervention’s distributional impact (Fozzard, 2001). The extent to which an intervention redistributes resources is assessed by analyzing the social distribution of the costs (taxation) and benefits (expenditures) of public interventions using benefit incidence analysis. The greatest resources are thus allocated to interventions with the highest distributional impact (Lane, 2000).
In my view, the equity basis is the most appropriate approach for allocating resources in the public sector. The approach is preferred because it considers the social distribution of benefits. In so doing, it provides a more accurate view of what social group benefits or loses from a given policy, and the extent of their gain or loss (Fozzard, 2001). The price of a commodity or intervention measures the private benefit that an individual attaches to the intervention. The price, therefore, does not take into consideration the social benefits of the intervention thereof (Lane, 2000). Thus, prices do not capture the actual costs and benefits and may not allocate resources efficiently.
References
Fozzard, A. (2001). The Basic Budgeting Problem: Approaches to Resource Allocation in the Public Sector and their Implications for Pro-Poor Budgeting. Overseas Development Institute. Retrieved from https://www.files.ethz.ch/isn/100340/wp147.pdf
Lane, J. (2000). The Public Sector: Concepts, Models and Approaches. Thousand Oaks, CA: Sage.
Milakovich, M. E., & Gordon, G. J. (2013). Public administration in America (11th ed.).Belmont, CA: Wadsworth Publishing.
Premchand, A. (1989). Purposes of Budget and Determinants of Public Expenditures. IMF. Retrieved from https://www.elibrary.imf.org/view/IMF071/02862-9780939934256/02862-9780939934256/ch02.xml?language=en&redirect=true