Capital Budgeting
Impact on Tax and User Charges Whether the project is financed from revenue within one year, or whether loans are made over a number of years, taxpayers will be directly affected. Not only will the tax base have to cope with the repayments, but as mentioned, it will also have to provide operating expenses and maintenance. Added to this will be the user charges or tariffs. The following will then be considered:
Total revenue
collected for the Operating Budget and Capital Budget
must =
Capital Cost, or Cost of repayments, PLUS
Operating Expenses
Budget Issues and Problems • Political consideration: In Switzerland no capital project can begin without a community voting for it. Should an authority wish to build a bridge, a vote is taken in the town which the bridge will directly benefit. Should the authorities wish to build a dam, citizens within a larger area are asked to vote. Without this system, the onus falls heavily on the shoulders of the political representative who should be in touch with the needs and demands of his constituents.
• With the purchase of equipment, machinery or with the construction of, say, a building, capital assets are created. Capital assets include items such as vehicles, buildings and office equipment. Sometimes it is difficult to classify items as capital assets or operating expenses – usually those items which last for longer than one year are seen as capital assets, although items such as a pen, which might last for years, are classified under operating expenses. Often it is the price of purchasing an item which determines its classification.
• Many major issues such as community needs, cost escalations, technological changes and advances, existence of similar projects, the need for prioritising according to seniority, etc. are only a few factors that need to be considered within the physical and financial programme.
• Volatile domestic economies could mean a drastic fluctuation in loan repayment amount – when a local currency weakens, as has been the case in South Africa, against the British Pound or against the USD, it makes the repayments of loans from abroad very much more expensive. This increase will therefore mean the need for a larger tax base.
Sources of Capital Finance
Central Government Both capital expenditure and operating expenditure are financed from the State Revenue Fund into which all taxes and other sources of revenue are paid.
Finance for capital projects may be financed from external loans or from internal revenue such as taxes, etc. The central government has, in a sense, only one source of finance – that is the State Revenue Fund into which all revenue and loans are paid. All capital and operating expenditure is funded from this one account, (Gildenhuys 1993:452). However this source should not be confused with external (loans) or internal (revenue from tax) sources.
Local Government
Internal Capital Sources Tax fund At local government level this might include property tax (see Module 5, p.87), user charges, nominal levies, fines and licenses. The tax fund is used to pay the annual instalment which is made up of interest and capital redemption on the loan itself.
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