Capital Budgeting
might question the burden placed upon them – taxpayers might still be paying for certain projects many years after they are completed – such as in the case of a dam, for example, or stadiums built for the World Cup (see Case Study, over the page).
However, the fact remains that those future taxpayers are also the beneficiaries of the service itself. There are considerations to be taken into account: • Interest rates rose from 6 % to 18 % in the period 1972-1988. Future generations might blame previous ones for locking them into heavy repayments – the future taxpayer might have to pay more tax in order to meet loan and interest repayments.
• It is possible that technology might change so quickly that large projects become outdated and either need further finance to be upgraded or they could also become obsolete (useless; often called a “white elephant”).
Stabilising Effect Allowing large projects to be financed by the operating budget means that tax base and tax rate might fluctuate drastically. Financing these projects from loans, spread over many years, means that the burden on taxpayers year by year is lessened. The loan repayments for a large project form only a small portion of the operating budget.
Greater Control A separate capital budget means that the focus on a project is greater – it is easy to make the correct decision and to control the construction and financing of such projects when they are budgeted for and detailed separately. It is more likely that construction will take place until completion – a heavy burden over one year might mean that a project might have to be cancelled urgently. The most important consideration is that a separate budget financed from loans prevents uncontrollable fluctuations in the tax base over the period of one year.
The Process of Capital Budgeting
Capital Development Programme A list of essential capital projects for a period of time is drawn up. Each project has a detailed explanation and a cost estimate. This list of essential or desirable projects is drawn up by experts such as engineers, town planners, architects, etc. Certain criteria are used to prioritise projects: • High priority for original construction or for essential extensions – the project must be completed; if it is cancelled there could be a loss of life or essential services.
• Desirable completion – either extensions to existing infrastructure or new projects which must enjoy priority because of the urgent benefit to the public.
• Useful completion – this should be undertaken as a service to the public, but cancellation will not severely affect the public interest.
• Dispensable completion – the project may be cancelled without harming public service. The capital development programme will list projects according to priority, with a capital budget of the first year representing the first phase of the programme. This is seen as the physical side of the capital budget, which details how much money is needed – next comes the financial input.
The Financial Analysis There are immediate (short-term) as well as long-term financial implications for taxpayers. It would be essential to make an estimate of how much money is available. When doing this it is important to consider the following: • There should be enough money for extensions; • New loans cannot be taken out if the tax base only just covers the repayments for existing loans. The possible growth in the tax base is also taken in account.
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