A basic budget analysis toolkit

Overview

Four budget analysis techniques used by analysts and presented in budget and policy documents.

Look at percentage shares, percentage changes, average annual percentage changes, and converting from nominal to real figures.

Each section: Outlines the purpose of a calculation; Gives relevant formula; Illustrates the use of the technique with an example.

Suggestions for graphical representation are made.

Use the Thai budget for practicing each technique.

1 - Percentage shares

Purpose: Percentage shares indicate relative priorities at one point in time.

How to calculate percentage shares:

%

1 - Percentage shares Purpose: Percentage shares indicate relative

priorities at one point in time.

How to calculate percentage shares:

100total

x

Exp

Exp

Fictitious example

The government spends $25 million on building new health clinics in rural areas.

Total health expenditure amounts to $489 million.

What share of the health budget is spent on the new clinics?

Answer…?

Fictitious example

%1.510040.05112474100489

25

Allocations from the 2002 health budget

General hospitals20%

Ministry of Health19%

Rural health clinics5%

Urban health clinics31%

Specialized hospitals25%

Graphical Representation: Pie Chart

Over to you for an exercise…

Let’s try this with real data from the 2004 Thai budget.

The Ministry of Defense got 80.7 billion Baht as its “budget appropriation” for the 2004 fiscal year. Total appropriations amounted to 1163.5 billion Baht.

What percentage share of total appropriations did the Ministry of Defense receive?

The answer is…

%9.61005.1163

7.80

2 – Percentage change

Purpose: Calculating percentage changes for different items in a budget gives you a good idea of how priorities are shifting between time periods, e.g. years.

If the percentage change of a particular expenditure item is less (more) than the percentage change of total expenditures, then the percentage share of that item in total spending will be lower (higher) than in the previous period.

How to calculate percentage change?

2 – Percentage change

How to calculate percentage change:

1001

12

Exp

ExpExp

Fictitious example

Parliament allocated $120 million for primary education in 2000 and $105 million in the following year.

What is the percentage change in primary education expenditures between 2000 and 2001?

Answer…?

Fictitious example Parliament allocated $120 million for primary

education in 2000 and $105 million in the following year. What is the percentage change in primary education expenditures between 2000 and 2001?

Answer:

%5.12100125.0100120

15100

120

120105

Graphical representation: bar chartWinners and losers from the 2001 education budget

Primary schools-12.5%

Secondary schools-10.0%

Universities and colleges40.0%

-20%

-10%

0%

10%

20%

30%

40%

50%

Per

cent

age

chan

ge b

etw

een

2000

and

200

1

Over to you for an exercise…

Let’s try this with real data from the Thai budget.

The Bank of Thailand reports that total capital expenditures amounted to 210.6 billion Baht in the 2002 fiscal year and 163.2 billion Baht in the 2003 fiscal year.

What was the percentage change?

The answer is…

%5.22100225.0

1006.210

4.47100

6.210

6.2102.163

3 – Average annual percentage change

Purpose: To get a better idea of the overall long-term trend in spending growth, we can take the average of the annual percentage changes over a period of time.

This ignores year-on-year fluctuations within the respective period.

How to calculate average annual percentage change:

3 – Average annual percentage change

Purpose: To get a better idea of the overall long-term trend in spending growth, we can take the average of the annual percentage changes over a period of time.

This ignores year-on-year fluctuations within the period. How to calculate average annual percentage change:

1001

1

n

t

nt

Exp

Exp

Fictitious example

The government spent $60 million on funding for certain cultural activities in 1999 (t), rising to $71 million in 2000 (t+1), $93 million in 2001 (t+2) and $103 million in 2002 (t+3) and $120 million in 2003 (t+4).

What is the average annual percentage change between 1999 and 2003?

Answer…?

Fictitious example

The government spent $60 million on funding for certain cultural activities in 1999 (t), rising to $71 million in 2000 (t+1), $93 million in 2001 (t+2) and $103 million in 2002 (t+3) and $120 million in 2003 (t+4). What is the average annual percentage change between 1999 and 2003?

Answer:

%9.18100)15002721.18920711

100]1)2[(100160

120 25.019992003

1

Over to you for an exercise…

Let’s try this with real data from the Thai budget.

The Bank of Thailand reports that total interest payments were 69 billion Baht in the 2002 fiscal year, 65.1 billion Baht in the 2003 fiscal year, and 70.2 billion Baht in the 2004 fiscal year.

What was the average annual percentage change?

The answer is…

%87.0

100)1(1.0086582

100]1)0173913.1[(

100169

2.70

5.0

20022004

1

Another exercise…

In FY 1998 the national government spent 126.3 billion Baht on “transport and communication”. It then spent 98.5 billion in FY 1999, 92.8 billion in FY 2000 and 77.7 billion in FY 2001.

What was the average annual percentage change?

The answer is…

%95.14

100)1(0.8504965

100]1)6152019.0[(

10013.126

7.77

33.0

19982001

1

And another exercise…

In FY 1998 the national government spent 61.1 billion Baht on “agriculture, forestry and fisheries”. In FY 2003 it spent 69.5 billion for the same function.

What was the average annual percentage change?

The answer is…

%61.2

100)1(1.0260977

100]1)1374795.1[(

10011.61

5.69

2.0

19982003

1

4 – Adjusting for inflation

Purpose: By converting a nominal amount into a real amount, we adjust for inflation.

Taking into account changes in prices gives us a better idea of purchasing power, i.e. how much can actually be bought with a certain sum of money compared with previous points in time.

How to calculate real amounts:1. Construct deflators2. Convert from nominal into real

Step one: constructing deflators

Year Deflator if base year is year 1 1 1 2 )1( 2

3 )1()1( 32

4 )1()1()1( 432

5 )1()1()1()1( 5432

t+n )1()...1()1( 21 nttt

NOTE: πt indicates the rate of inflation π in year t.

Fictitious example

Year Inflation Deflator with base year 1 1 0.12 1 2 0.15 1.15 3 0.08 242.108.115.1 4 0.06 1.3165206.108.115.1 5 0.05 1.38234605.106.108.115.1

Step two – convert from nominal to real

Divide the nominal expenditure amount for a given year by the deflator for that year:

t

t

Deflator

Exp

Fictitious example

Year Amount in $ million

Real amount if base year 1

1 234 2341

234

2 250 4.21715.1

250

3 270 4.217242.1

270

4 260 5.19731652.1

260

5 262 5.189382346.1

262

Graphical representation: line graph

Welfare spending is not keeping up with inflation

150

170

190

210

230

250

270

290

2001 2002 2003 2004 2005

Wel

fare

spe

ndin

g in

$ m

illio

n

Nominal Real

Over to you for an exercise… Let’s try this with real data from the Thai budget. We have already seen that total interest payments were 69

billion Baht in the 2002 fiscal year, 65.1 billion in FY 2003 and 70.2 billion in FY 2004.

The Bank of Thailand reports headline inflation of 0.7% for 2002 and 1.8% for 2003. It projects around 2.75% for 2004.

NB: The inflation figures are for calendar years, not fiscal years. The difference is likely to be small, but you should use consistent data for any analytical work. We pretend here that the data cover the same period.

What are real total interest payments between 2002 and 2004, taking 2002 as the base year?

The answer is…

Year Inflation rate Deflator 2002 0.007 1 2003 0.018 1+0.018=1.018 2004 0.0275 (1.018)(1+0.0275)=1.045995

… and …

Year Amount in billion Baht

Real amount

2002 69 691

69

2003 65.1 9.63018.1

1.65

2004 70.2 1.671.045995

2.70

And another exercise… In FY 1998 the national government spent 212.2

billion Baht on education, then 215.3 billion in FY 1999, 218.6 billion in FY 2000, 223.0 billion in FY 2001, and 223.1 billion in FY 2002.

Consumer price inflation was 8.08% (1998), 0.31% (1999), 1.55% (2000), 1.66 (2001), and 0.6% (2002).

What was expenditure on health in real terms between 1998 and 2002, taking 1998 as the base year?

The answer is…

Year Inflation Deflator with base year 1998 1998 0.0808 1 1999 0.0031 1.0031 2000 0.0155 1.0031 x 1.0155 = 1.0186481 2001 0.0166 1.0031 x 1.0155 x 1.0166 = 1.0355576 2002 0.006 1.0031 x 1.0155 x 1.0166 x 1.006 = 1.041771

… and …

Year Amount in billion Baht

Real amount if base year 1998

1998 212.2 2.2121

1.212

1999 215.3 6.2140031.1

3.215

2000 218.6 6.2140186481.1

6.218

2001 223.0 3.2150355576.1

223

2002 223.1 2.214041771.1

1.223

Deflators with a different base year…

Year Inflation Deflator with base year 3

1 0.12 0.80515308.115.1

1

2 0.15 0.92592608.115.1

15.1

3 0.08 108.115.1

08.115.1

4 0.06 06.108.115.1

06.108.115.1

5 0.05 113.108.115.1

05.106.108.115.1

… and converting from nominal to real

Year Amount in $ million

Real amount if base year 3

1 234 6.290805153.0

234

2 250 270925926.0

250

3 270 2701

270

4 260 3.24506.1

260

5 262 4.235113.1

262

More about deflators

Try to get a hold of deflators from the Finance Ministry or the Central Bank before you construct them yourself.

If you can’t find them in the budget documentation, call the Ministry/Bank!

The more commonly used deflator in budget analysis is the GDP deflator, more broadly based compared with deflators based on the Consumer/Retail Price Index or similar measures.

It’s correct to use either, but make sure you state which deflator you use for your analysis and where you got it from.

Concluding remarks

Congratulations! You have just reviewed four essential budget analysis techniques.

These types of analyses are only useful if you also provide an interpretation of your findings, i.e. what is the “story” that is revealed by the analysis?

Invest time in presenting your data in a straightforward and well designed way.

Never present data just for its own sake, without a good reason.

Spreadsheet programs can be used for any of these calculations and to present the data in the form of graphs or charts.