Full Project – THE EFFECT OF BUDGET PADDING IN THE NIGERIAN ECONOMY, A TOOL FOR INFLATION

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CHAPTER 1

INTRODUCTION

1. Background of the study

A budget is a detailed financial plan that quantifies future expectations and actions relative to acquiring and using resources (Barro et al, 2007).

It is a method of communicating the goals of an organization to the appropriate managers in order to facilitate, coordinate and control various sections of the organization so the desired outcomes are achieved (Argyris, 1953).

According Abel and Andrew, (2005) Budget helps to aid the planning of actual operations by forcing managers to consider how the conditions might change and what steps should be taken now and by encouraging managers to consider problems before they arise. It also helps co-ordinate the activities of the organization by compelling managers to examine relationships between their own operation and those of other departments. Other essentials of budget include:

1. To control resources
2. To communicate plans to various responsibility centres managers.
3. To motivate managers to strive to achieve budget goals.
4. To evaluate the performance of managers
5. To provide visibility into the company’s performance
6. For accountability

In summary, the purpose of budgeting tools includes:

1. The tools provide a forecast of revenues and expenditures, that is, construct a model of how a business might perform financially if certain strategies, events and plans are carried out.
2. They enable the actual financial operation of the business to be measured against the forecast.
3. Lastly, they establish the cost constraint for a project, program, or operation.

But ‘’padding’’ a budget is slightly a different case from the above, thus padding the budget means making the budget proposal larger than the actual estimates for the project. This is done either by increasing a project’s expenses or decreasing its expected revenue. The goal of budget padding is to get an approval committee to grant an artificially high level of funding to the budget maker’s proposed project.

Simply put, budget padding means overestimating costs and or underestimating revenue, whereas the difference between the padded estimate and the realistic estimate is known as ‘’budgetary slack’’.

Budgetary slack is the inappropriate projection of lower revenues or higher expenses than is realistic or warranted during financial planning process for a project or business. Budgetary slack is considered an unethical business practice when intentional because it tends to give the false impression that the eventual performance of the associated business or project has turned out better than planned. (businessdictionary.com)

However, there is some contention over the exact definition of padding: some contend that inflating expenses to take expected inflation into account is ‘’responsible foresight’’ rather than padding, while others see any increase beyond current estimates as padding.

Most business organizations that practice budget padding, call it ‘’budget contingency’’. On this note, they purposely incorporate certain risk factors into the budgeting process to help a business better prepare for potential contingencies. They may also use budget contingencies method to their advantage for meeting performance goals. However, unduly using budget contingencies may over stretch a business’s resources and result in unrealistic projections.

Ordinarily, padding the budget is a practice that some people use in business when submitting a budget approval, to artificially inflate the proposed budget in order to give the project room to expand or to cover the unexpected costs. Many see budget padding as ‘’unethical’’, but its practitioners defend it on the grounds ‘’practicality’’. (www.ehow.com/info_7751901_padding-budget)

Budget padding on the table of private individuals and private business entities and enterprises have little or no negative or positive multiplier effect on the economy of the state, as it ends up only within their domains of operation, it hardly influences other individuals or business enterprises. It only impacts their niche economy, on this note; it remains on a microeconomic scale.

But budget padding on the table of a national economy, translates into a macroeconomic scale of operation, thus the multiplier effect cannot be overemphasized as it influences the domestic working economy, mostly causing inflation (demand pull inflation) as well as foreign economies (in terms of trade) on the grounds of foreign exchange.

Unlike private business enterprises, where budget padding may be advantageous to, as they purposely incorporate certain risk factors into the budgeting process to help the business prepare better for potential contingencies and may also use budget contingencies method for meeting their performance goals, padding the budget of a national economy is mostly disadvantageous, as it constitutes tools for inflation, (demand pull inflation) because it draws more liquid cash into the economy, and more money in the hands of people leads to increased demand over less supply, thus making suppliers to raise their prices, thereby achieving higher profit margins.

Padding the national budget however puts more money in the economy because the increased (false) monetary estimate of projects and or expenditures, away from the actual monetary estimates (known as the budgetary slack) floods the economy.

1.2. Statement of the problem

The issues associated with budget padding cannot be over emphasized, as it affects both microeconomic and macroeconomic (aggregate) units of an economy almost at all levels. Private enterprises budgets are handled by their managerial committees; however, even with private enterprises, unduly using budget contingencies (budget padding) may over stretch a business’s resources and result in unrealistic projections.

At the national level, the office of budget and national planning are saddled with the responsibility of preparing the budget, however, many see the integrity of the budget as a function of the integrity of the persons in the budget office, therefore should ‘’budget padding’’ be noticed in the national budget, the personal integrity and trust of the officers is been jeopardized. Many see budget padding as ‘’unethical’’.

Basically, budget padding is mostly associated with;

1.  Inflation: Padding a national budget constitutes tools for inflation, (demand pull inflation) because it draws more liquid cash into the economy, and more money in the hands of people leads to increased demand over less supply, thus making suppliers to raise their prices. Padding the national budget however puts more money in the economy because the increased (false) monetary estimate of projects and or expenditures, away from the actual monetary estimates (known as the budgetary slack) floods the economy.
2. Unrealistic projections and goals: Budget padding may over stretch a business’s resources, this mostly occurs because even the estimated figures are unreal, and the presence of the budgetary slack doesn’t allow for realistic projections and thus goals. This is mostly in private enterprises.
3. Many people consider budget padding as ‘’Unethical’’: People consider padding as not morally bad, and a padded budget as an unrealistic estimates of expenses and lacks integrity.

1.3 Research Questions

This research work is meant to address the following questions.

1. What is the effect of budget padding in the Nigerian economy?
2. How is budget padding a tool for inflation?
3. What are the consequences/aftermath effects of budget padding?
4. Why is budget padding an option in the Nigerian economy?

1.4 Research Objectives

Research objectives are actions that are going to be taken to analyze the ills or setbacks associated with budget padding.

1. To examine the extent of  effect of budget padding
2. To determine if budget padding has any positive effect
3. To determine if there is a way out of budget padding
4. To determine how budget padding constitutes a tool for inflation

1.5 Statement of Hypotheses

The hypotheses to be tested in the course of the study are as follows

Ho: Budget padding does not influences inflation

H1: Budget padding influences inflation

From the above hypothesis:

Ho is the null hypothesis

H1 is the alternative hypothesis

Both hypotheses are subject to test, therefore to be either accepted or rejected, depending on our result at the end of the day. If the null hypothesis is accepted, automatically, the alternative hypothesis is rejected, better still, if the alternative hypothesis is accepted, the null hypothesis is rejected.

1.6. Significance of the study

The vital component of any move towards macroeconomic stability and growth is an integrated effort towards price stability. In order to combat inadequacies in price stability mostly resulting from inflation, budget padding is to be checkmated.

Thus, this study is significant in the following ways:

1. It will reveal the effects of budget padding in a national economy, thus a deterrent for practitioners or national budget and planning office as against budget padding.
2. It will proffer solution on what to do should, budget padding be detected, and the way out of budget padding

1.7 Scope and limitations of the study

This research work is basically carried out to assess the effects of budget padding in the Nigerian economy. Despite the moral suasion and the fight against corruption campaign of the government, unethical practices are still been perpetrated as no meaningful turn has been made towards actualizing ethical practices amidst national officers. Therefore, this study examines the challenges and ills arising from budget padding on the table of a national economy.

Focus is placed more on the end results of budget padding – inflation, why must the budget be padded? How does budget padding constitutes a tool for inflation? Does it have any positive effect on the economy? If yes, what is it? If no, then what is the way out of budget padding? The effect of budget padding on the economy shall be investigated empirically with only available data. However, limitations and or restrictions are unavoidable because of inadequacies and changes in regimes of government and economic trends according to the political will at hand.

1.8. Organization of the study

This research project shall be structured into five chapters. The research shall commence by providing a background of the subject matter, justifying the need for chapter one. Chapter two shall present related literatures concerning budget padding and its effects. Chapter three shall outline the research methodology; it provides the background for the data analysis. Chapter four shall present the analysis of the data, highlighting the implications of the findings. Chapter five shall bring forth the concluding comments, the summary and recommendations based on findings during the research.

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Full Project – THE EFFECT OF BUDGET PADDING IN THE NIGERIAN ECONOMY, A TOOL FOR INFLATION