1. COST DRIVERS The budget is a plan that links government services with their financing. There are factors that powerfully influence the cost of providing services and thus impact the budget. These factors are often referred to as budget drivers. They include:

2. 1. Prices.. All the inputs required to provide services, including personnel, equipment, supplies etc., have prices associated with them. Wages or personnel costs are the prices associated with hiring the people needed. Equipment and supplies also have prices. Price changes change budgets.

3. General increases in all prices = inflation

4. Changes in the price of a particular item, in relation to all others = relative prices

5. Good budget planning accounts for both kinds of price changes.

6. Inflation: a fact of life nearly everywhere Failure to budget for inflation probably means a budget reduction, because this years amount of money generally cannot purchase the same goods and services that were purchased in the past year.

7. Inflation Adjustment? If the governments forecast projects inflation at 4 percent, we might simply increase an agencys budget by this amount automatically, if we believe that the agency was properly funded and that its costs will rise by about the same amount as general inflation.

8. Inflation Adjustment But we might also propose a special index for a sector. This might reflect relative prices for energy, housing, transport or health. These sectors might be growing in relative price or even decreasing in relative price. An example could be that a new natural gas field may start producing and lowering energy prices.

9. Particular Prices While inflation is a very important price factor, it must also be recognized that changes in particular prices can suddenly modify a budget. This happens when the price of a particular item (such as school text books or energy) represents a significant share of a spending units total costs.

10. Example A simple adjustment for inflation may not be sufficient for an organization, or a country, where fuel constitutes a large share of its overall costs. Forecasts can be subject to big errors. Fuel prices are quite volatile.

12. Fuel Costs The previous slide showed the start of steep rises in fuel costs in 2004 Today, those prices are over $67 per barrel and unstable These types of relative price changes will have a tremendous effect on the cost of public services

13. 2. Quantities. Quantity is the second major cost driver and simply refers to the amount of services provided.

14. Outputs Such as the number of children vaccinated Or the number of students Or the number of textbooks purchased Or the number of teachers hired

15. Inputs Such as the amount of vaccine needed Or the number of textbooks required for each student Or the number of students per class

16. Workload Always a quantity factor

17. Workload Determining how changes in workload relate to changes in costs and budgets is not always straightforward. Budget organizations may be able to absorb additional work at little or no additional cost. This may be because they are not currently using resources efficiently or because they have excess capacity, such as a new hospital with few patients and empty beds.

18. Unit costs Budget analysts often assume there is no excess capacity and that the cost of absorbing additional workload is equal to the number of additional work units multiplied by its unit cost. If unit cost information is not available, we often simply assume that an increase (or decrease) in workload will increase (or decrease) activity costs proportionately.

19. Examples We will need approximately 1 new grade school teacher for every 35 students that enroll. If 105 new students enroll, we will need 3 new teachers. But will a 10% increase in students result in a 10% increase in the cost of operating a school? Why?

20. Exceptions While some costs, like the number of teachers, classrooms and textbooks might be expected to increase proportionately with the number of students, other costs such as those for central administration may be relatively fixed. Making these kinds of adjustments will depend on the quality of information available and the good judgment of the analyst.

21. Good Judgment Makes Good Analysts Good judgment and experience is particularly important when information is weak. The experience or personal knowledge of an analyst can fill in the blanks in available data. Someone who has worked for years in education can make better estimates when school data is not known or verified.

22. Assumptions When we estimate the budget implication for changes in workload, we almost always assume that services will continue to be provided in the same way as they are currently. This current services assumption does not imply that the current way of doing things is good or even adequate. It can often be improved!

23. 3. Quality. Generally, we can think of quality as a predetermined standard. In government, such standards are most often applied to inputs, such as the student to teacher ratio.

24. Quality There is also increasing attention being given to quality as measured by the final results of a budget activity. For example, the percentage of school children who are considered to be properly educated could be determined by standard achievement tests.

25. More Quality = More Resources Increases in the quality of services will usually require additional resources. Improving student performance, for example, may require additional funds to reduce the student to teacher ratio by hiring more teachers. Improving computer courses may cost new equipment and specialized teachers.

26. Quality and Resources The important thing for a budget analyst is to think about exactly which additional resources will be required to achieve the desired change in quality: More computers? Better tests? Different kinds of teachers? New Textbooks? More hours in Class? More homework?

27. 4. Technology/Methodology What tools and methods do we use? We could buy people or computers. And the people may not work for government, but for a contractor with special teaching equipment. The computers could have unique teaching programs; or programs that we can buy from a store.

28. Methodology/Technology The process chosen will drive costs. For example, if we use distance learning, we will need many fewer classrooms, but we will also need specially trained instructors.

29. Methods/Technology Different methods or technology will normally change input costs and could also change the results we achieve. For example, distance learning methods may allow more students in several regions to take a course that was previously limited to one location. The results of the course will be different.

30. Summary Drivers = PricesQuantityQualityTechnology